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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to _______________________
Commission file number 000-21615 .
BOSTON BIOMEDICA, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2652826
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 WEST STREET,
WEST BRIDGEWATER, MASSACHUSETTS 02379
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(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code (508) 580-1900
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OFTHE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated be reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at February 28, 1997 was $30,074,188. The aggregate market
value was computed by reference to the closing price as of that date. (For
purposes of calculating this amount only, all directors, executive officers and
greater than 10% shareholders of the Registrant are treated as affiliates.)
The number of shares outstanding of the Registrant's only class of
common stock as of February 28, 1997 was 4,378,157.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's definitive Proxy Statement for its 1997
annual meeting, are incorporated by reference into Part III of this Report, and
portions of the Registrants Registration Statement on Form S-1 (Registration No.
333-10759) are incorporated by reference into Part IV of this Report.
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PART I
ITEM 1. BUSINESS
The Company is a worldwide provider of proprietary quality control
products for use with in vitro diagnostic test kits ("test kits") for the
detection, analysis and monitoring of infectious diseases, including AIDS,
Hepatitis and Lyme Disease. These products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel, and to help ensure
the accuracy of test results. The Company's products are derived from human
plasma and serum using proprietary manufacturing processes. The Company believes
its Quality Control Panel products are viewed as the current industry standard
for the independent assessment of the performance of HIV and Hepatitis test
kits. The Company also manufactures diagnostic test kit components and provides
specialty laboratory services, including clinical trials. The Company's
customers include test kit manufacturers, regulatory agencies and end-users of
test kits such as blood banks, hospital laboratories and clinical reference
laboratories. Currently the Company's products are used in connection with the
detection of more than 15 infectious diseases, and its specialty laboratory
services are used in connection with the detection of over 100 such diseases.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (i) capitalize on
the emerging end-user market, (ii) develop new products and services, (iii)
enhance technical leadership, (iv) capitalize on complementary business
operations, and (v) pursue strategic acquisitions and alliances.
INDUSTRY OVERVIEW
Infectious Disease Test Kits and Testing Methods. Test kits contain in
one compact package all of the materials necessary to run a test for an
infectious disease. These include the disposable diagnostic components,
instructions, and reaction mixing vessels (generally 96-well plates or test
tubes) which are coated with the relevant infectious disease antigens,
antibodies or other materials. To perform the test, either a technician or a
specially designed instrument typically mixes the solutions from the test kit
with human blood specimens in a specific sequence according to the test kit
instructions. The mixture must then "incubate" for up to 18 hours, during which
time a series of biochemical reactions trigger signals (including color, light
and radioactive count) which indicate the presence or absence and amount of
specific markers of the particular disease in the specimen.
Test kits generally employ one of three methods for infectious disease
testing: microbiology, immunology or molecular biology. Traditional microbiology
tests use a growth medium that enables an organism, if present, to replicate and
be detected visually. Immunology tests detect the antigen or antibody, which is
an indicator (marker) of the pathogen (e.g., virus, bacterium, fungus or
parasite). Molecular diagnostic methods, such as the polymerase chain reaction
("PCR"), test for the presence of nucleic acids (DNA or RNA) which are specific
to a particular pathogen.
Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research laboratories worldwide and the Company believes that soon
they will be accepted for routine use in the clinical laboratory setting. The
Company believes that the advent of molecular diagnostic methods will complement
rather than diminish the need to test by microbiological and immunological
procedures, because different test methods reveal different information about a
disease state. The Company anticipates that as new test methods become more
widespread, they will account for a larger portion of the Company's business.
Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte (specificity), detect it the same way every time
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(reproducibility or precision), and detect it at the appropriate levels
(sensitivity). The major element of this quality control process is the
continuous evaluation of test kits by the testing of carefully characterized
samples that resemble the donor or patient samples routinely used with the test.
Quality control is used in both the infectious and non-infectious disease
markets, although currently it is not as prevalent among end-users of infectious
disease test kits.
The market for quality control products consists of three main customer
segments: (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.
COMPANY PRODUCTS AND SERVICES
OVERVIEW
The Company offers three product groups in infectious disease
diagnostics: Quality Control Panels, Accurun(TM) Run Controls and Diagnostic
Components. These products are used throughout the entire test kit life cycle,
from initial research and development, through the regulatory approval process
and test kit production, to training, troubleshooting and routine use by
end-users. The Company's Quality Control Panels, which combine human blood
specimens with comprehensive quantitative data useful for comparative analysis,
help ensure that test kits detect the correct analyte (specificity), detect it
the same way every time (reproducibility), and detect it at the appropriate
levels (sensitivity). The Company's Accurun(TM) Run Controls enable end-users of
test kits to confirm the validity of results by monitoring test performance,
thereby minimizing false negative test results and improving error detection. In
addition, the Company provides Diagnostic Components, which are custom processed
human plasma and serum products, to test kit manufacturers.
The Company's specialty clinical laboratory services include both
routine and sophisticated infectious disease testing in microbiology, immunology
and molecular biology. The Company seeks to focus its specialty laboratory
services in advanced areas of infectious disease testing, and provides contract
research and clinical trials for domestic and foreign test kit manufacturers.
PRODUCTS
The Company manufactures its products from human plasma and serum which
are obtained from nonprofit and commercial blood centers, primarily in the
United States. The Company has acquired and developed an inventory of
approximately 50,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
QUALITY CONTROL PANELS
Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a Data Sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control Products are designed for measuring overall test kit performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's Data Sheets, containing comprehensive quantitative data useful for
comparative analysis, are an integral part of its Quality Control Products.
These Data Sheets are created as the result of extensive testing of proposed
panel components in both the Company's laboratories and at major testing
laboratories on behalf of the Company in the United States and Europe, including
national public health laboratories, research and clinical laboratories and
regulatory agencies. These laboratories are selected based on their expertise in
performing the appropriate tests on a large scale in an actual clinical setting;
this testing process provides the Company's customers with the benefit that the
Quality Control Panels they purchase from the Company have undergone rigorous
testing in actual clinical settings. In addition, the Company provides
information on its Data Sheets on the reactivity of panel components in all FDA
licensed test
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kits and all leading European test kits for the target pathogen, as well as for
all other appropriate markers of this pathogen. For example, the Company's HIV
panel Data Sheets include anti-HIV by IFA, ELISA and western blot; HIV antigen
by ELISA; and HIV RNA by several molecular diagnostic procedures. The Company's
Data Sheets require significant time and scientific expertise to prepare. The
following table describes the types of Quality Control Panel products currently
offered by the Company.
QUALITY CONTROL PANEL PRODUCTS
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PRODUCT LINE DESCRIPTION USE CUSTOMERS
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Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit
single individual overra specific sensitivity of competing manufacturers and
time period showing conversion manufacturers' test kits, regulators.
from negative to positive for enabling the user to assess the
markers of an infectious sensitivity of a test in
disease.- detecting a developing
antigen/antibody.
- -------------------------------- ----------------------------------- --------------------------------- ---------------------
Performance Panels A set of 10 to 50 serum and Determine test kit performance Test kit
plasma samples collected from against all expected levels of manufacturers and
many different individuals and reactivities in the evaluation regulators.
characterized for the presence or of new, modified and improved
absence of a particular disease test methods.
marker.
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Sensitivity Panels Precise dilutions of human plasma Evaluate the low-end analytical Test kit
or serum human plasma or serum sensitivity of a test kit. manufacturers
containing a known amount of an
infectious disease marker as
calibrated against international
standards.
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Qualification Panels Dilutions of human plasma or Demonstrate the consistent Clinical reference
serum manifesting a full range of lot-to-lot performance of test laboratories, blood
reactivities in test kits for a kits, troubleshoot problems, banks, and hospital
specific marker. evaluate proficiency, and train laboratories
laboratory technicians.
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OEM Panels Custom-designed Qualification Train laboratory personnel on Custom designed
Panels for regulators and test new test kits or equipment. with test kit
kit manufacturers for manufacturers and
distribution to customers or for regulators as an
internal use. end-user product or
for internal use.
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The Company first introduced Quality Control Panels in 1987. The
Company currently offers a broad range of Quality Control Panels that address a
variety of needs of manufacturers and regulators of test kits as well as blood
banks, hospitals, clinical laboratories and other end-users. Prices for the
Company's quality control seroconversion, performance and sensitivity panels
range from $450 to $2,000 each, and its qualification and OEM panels range from
$100 to $200 per panel.
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Seroconversion and Performance Panels are comprised of unique
and rare plasma specimens obtained from individuals during the short period of
time when the markers for a particular disease are converting from negative to
positive. As a result, the quantity of any such panel is limited, so that the
Company must replace these panels as they sell out with another panel comprised
of different specimens equally unique and rare. The Company believes that its
inventory and relationships with blood centers affords it a competitive
advantage in acquiring such plasma for replacement panels and developing new
products to meet market demand. There can be no assurance that the Company will
be able to continue to obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis B and C, Lyme Disease and ToRCH (Toxoplasma, rubella,
cytomegalovirus and herpes simplex virus). New introductions this year include
molecular Performance Panels for HBV and HCV, qualification panels for HIV, HBV
and HCV, and additional Seroconversion Panels for HIV, HBV, and HCV.
ACCURUN(TM) RUN CONTROLS
End-users of test kits utilize Run Controls to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. Run controls consist of one or more
specimens of known reactivity that are tested together with donor or patient
samples in an assay to determine whether the assay is performing within the
manufacturer's specifications. Clinical laboratories generally process their
patient specimens in a batch processing mode, and typically include 25 to 100
specimens to be tested in each batch (a "run"). Large laboratories may perform
several runs per day, while smaller laboratories may perform only a single run
each day, or sometimes only several runs per week. A clinical laboratory using a
Run Control will place the Run Control product in a testing well or test-tube,
normally used for a specimen, and will test it in the same manner that it tests
the donor or patient specimens. It will then compare the results generated to an
acceptable range, determined by the user, to measure whether the other specimens
are being accurately tested. The Run Control result must be within the
acceptable range to be considered valid. This is often tracked visually using a
Levey-Jennings chart. Depending upon a particular laboratory's quality control
practices, it may use several Run Controls on each run or it may simply use a
Run Control in a single run at the beginning and end of the day.
The Company's Accurun(TM) family of products is targeted at the
emerging market of end-users of infectious disease test kits. The Company
believes that it offers the most comprehensive line of Run Controls in the
industry, and that its Accurun(TM) products, in combination with its Quality
Control Panel products, provide an extensive line of products for quality
assurance in infectious disease testing. The Company intends to continue to
expand its line of Accurun(TM) products, thereby providing its customers with
the convenience and cost effectiveness of a single supplier for independent run
controls.
The Company introduced its first four Accurun(TM) Run Control products
in the fourth quarter of 1993 and has since developed and released for sale an
additional 25 Accurun(TM) products. A limited number of these products are
available for diagnostic purposes; the others currently are limited to research
use. Current Accurun(TM) Run Control products range in price from $15 to $45 per
milliliter and are described in the following table.
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ACCURUN(TM) RUN CONTROLS
- ------------------------------- -------------------------------- ---------------------- ------------------------------
PRODUCT LINE DESCRIPTION CURRENT NUMBER OF PRIMARY CUSTOMERS
PRODUCTS
- ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)1-99 Multi-marker Run Control 4 Blood Banks
for immunological tests
- ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)100-199 Single-marker Run Control 18 Hospitals and clinical
for immunological tests reference laboratories
- ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)200-299 Multi-marker Run Control 1 Research and specialty
for molecular tests laboratories
- ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)300-399 Single-marker Run Control 3 Research and specialty
for immunological tests laboratories
- ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)800-899 Negative Run Control for 3 All laboratories
immunological and molecular
tests
- ------------------------------- -------------------------------- ---------------------- ------------------------------
The Company has received 510(k) clearance from the FDA to market its
Accurun 1(R) line, for diagnostic purposes, and intends to apply for such
clearance for the remainder of its Accurun(TM) products. All of the Company's
Accurun Run Controls will require FDA premarket clearance or approval prior to
being marketed for diagnostic use. An application for clearance for diagnostic
use for one additional Accurun(TM) product has been submitted by the Company to
the FDA, and the Company anticipates that applications for approximately 16
additional Accurun(TM) products will be prepared and submitted to the FDA by the
end of 1997. Failure to obtain, or delays in obtaining, such clearance or
approval would adversely affect the Company's strategy of capitalizing on the
end-user market.
DIAGNOSTIC COMPONENTS
Diagnostic Components are the individual materials supplied to
infectious disease test kit manufacturers and combined (often after further
processing by the manufacturer) with other materials to become the various fluid
components of the manufacturer's test kit. The Company supplies Diagnostic
Components in four product lines: Normal Human Plasma, Normal Human Serum,
Basematrix, and Characterized Disease State Serum and Plasma. Normal Human
Plasma and Serum are both the clear liquid portion of blood which contains
proteins, antibodies, hormones and other substances, except that the Serum
product has had the clotting factors removed. Basematrix, the Company's
proprietary processed serum product that has been chemically converted from
plasma, is designed to be a highly-stable, lower cost substitute for most Normal
Human Serum and Plasma applications. Characterized Disease State Serum and
Plasma are collected from specific blood donors pre-selected because of the
presence or absence of a particular disease marker. The Company often customizes
its Diagnostic Components by further processing the raw material to meet the
specifications of the test kit manufacturer. The Company's Diagnostic Components
range in price from $0.25 to $60 per milliliter, with the majority selling
between $0.50 and $5 per milliliter.
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SERVICES
The Company seeks to focus its specialty laboratory services in both
the clinical reference laboratory testing and advanced research areas. The
Company concentrates its services in those areas of infectious disease testing
which are complementary to its quality control and diagnostic products
businesses.
Specialty Clinical Laboratory Testing. The Company operates an
independent specialty clinical laboratory which performs both routine and
sophisticated infectious disease testing in microbiology, immunology and
molecular biology, with special emphasis in AIDS, Viral Hepatitis and Lyme
Disease. The Company's specialty clinical laboratory combines traditional
microbiology, advanced immunology, and current molecular diagnostic techniques,
such as PCR, to detect and identify microorganisms, their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA). Customers include
physicians, clinics, hospitals and other clinical/research laboratories.
Contract Research. The Company offers a variety of contract research
services in molecular biology, cell biology and immunology to governmental
agencies, diagnostic test kit manufacturers and biomedical researchers.
Molecular biology services include DNA sequencing, recombinant DNA support,
probe labeling and custom PCR assays. Cell biology and immunology services
include sterility testing, virus infectivity assays, cultivations of virus or
bacteria from clinical specimens, preparation of viral or bacterial antigens or
nucleic acids, and production of antibodies. The Company is currently providing
research services for assessment of the efficiency of candidate HIV vaccines in
a monkey model system under two separate contracts with the National Institute
for Allergy and Infectious Disease ("NIAID"), a part of the National Institutes
of Health ("NIH"). Each of these contracts has a two year term which expires in
September 1997. In addition, since 1983, the Company, through its BTRL
subsidiary, has provided blood processing and repository services for the
National Cancer Institute ("NCI"), also a part of the NIH. The repository stores
over 2,000,000 specimens and processes or ships up to several thousand specimens
per week in support of various NIH cancer and virus research programs. A new one
year NCI repository contract was signed in February 1997 which includes four one
year renewal options exercisable by NCI. The total value of the contract in the
first year is $916,000, and including all options, is $4.8 million. There can be
no assurance that any of these options will be exercised.
Clinical Trials. The Company conducts clinical trials for domestic and
foreign test kit manufacturers. Test kit manufacturers must conduct such trials
to collect data for submission to the United States FDA and other regulatory
agencies. By providing this service, the Company is able to maintain close
contact with test kit manufacturers and regulators, and is able to evaluate new
technologies in various stages of development. The Company believes that the
reputation of its laboratory and scientific staff, its large number of Quality
Control Panels, and its inventory of characterized serum and plasma specimens
assist the Company in marketing its clinical trial services to its customers.
The Company has performed clinical trials for a number of United States and
foreign test kit manufacturers seeking to obtain FDA approval for their
infectious disease test kits.
Drug Screening Program. As a subcontractor for an NIH AIDS grant held
by the University of North Carolina at Chapel Hill, the Company has established
an anti-HIV drug screening program to test a large number of natural products
(largely plant derivatives) to determine whether they inhibit HIV replication in
an in vitro assay system. These in vitro assays are also offered as a service to
researchers and pharmaceutical companies who wish to test various candidate
anti-viral agents for anti-HIV activity.
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RESEARCH AND DEVELOPMENT
The Company's research and development effort is focused on the
development of (i) new and improved Quality Control Products for the emerging
end-user market, (ii) new products for existing customers, (iii) Diagnostic
Components for use with test kits for both new test methodologies and new
diseases, and (iv) infectious disease testing services using PCR and other
amplification assays for AIDS, Viral Hepatitis, Lyme Disease and Chlamydia,
among others. The Company has approximately 20 full or part-time employees
dedicated to its research and development effort. For 1996 the Company increased
spending on research and development as a percentage of revenues compared to
1995 and expects to continue to increase such expenditures as a percentage of
revenues for the next several years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations." The
Company's research scientists work closely with sales, marketing and
manufacturing personnel to identify and prioritize the development of new
products and services.
The Company's product development activities center on the
identification and characterization of materials for the manufacture of new
Quality Control Products and the replacement of sold-out products. During 1996,
the Company introduced 30 new Seroconversion, Performance and Sensitivity Panel
products as well as 25 new Accurun(TM) Run Controls; in addition, during 1996,
the Company released six Qualification Panel products. The Company is developing
new Quality Control Products for use with molecular diagnostic tests for HIV,
HCV and HBV. Recently the Company expanded its Quality Control Product line
beyond the retrovirus and Viral Hepatitis diagnostics area to include sexually
transmitted diseases (e.g., Syphilis), tick-borne diseases (e.g., Lyme Disease),
and respiratory and other infections (e.g., Tuberculosis) and is continuing to
develop new Quality Control Products for these and other diseases. The Company
has increased the number of Quality Control Products it offers from
approximately 20 in 1990 to approximately 191 products in 1996.
The Company is also developing new and improved infectious disease
specialty tests for Lyme Disease and other tick-borne diseases for use in its
specialty laboratory business. The Company is also pursuing new applications of
PCR technology to infectious disease diagnostics, such as amplification assays
for the pathogens of AIDS, Viral Hepatitis, Lyme Disease and Chlamydia, and for
the direct detection of other infectious agents in blood, tissues and other body
fluids.
From time to time in the past, the Company has funded a portion of its
research and development activities from grants provided by various agencies and
departments of the U.S. government. See "-- Services."
STRATEGIC ALLIANCES
University of North Carolina at Chapel Hill. The Company is directly
supporting a drug discovery program at UNC, in which a full-time research
scientist is working to develop synthetic derivatives of anti-HIV compounds that
have been discovered pursuant to the Company's joint collaboration with UNC.
This research scientist is also working to introduce modifications to these
derivatives that would make them more soluble, less toxic, or otherwise enhance
their anti-viral properties. UNC has licensed to the Company exclusive worldwide
rights to three series of patent applications filed by the Company and UNC with
respect to three classes of anti-HIV compounds. Two such compounds have
exhibited therapeutic indices in in vitro test model systems in excess of those
recorded for AZT under comparable test conditions. The Company is expending
approximately $100,000 per year for research and development relating to these
compounds. In addition, under this license, the Company will also have the
rights to any new anti-HIV compounds or derivatives developed in the course of
this sponsored research, provided the Company obtains certain regulatory
approvals from the FDA. See "-- Services."
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Ajinomoto Co., Inc. The Company entered into an agreement with
Ajinomoto Co., Inc. in October 1995 pursuant to which the Company is performing
research regarding among other things, whether tests for certain amino acids in
plasma can be used to determine a person's immune status, particularly in
chronic fatigue syndrome. This project is funded by Ajinomoto and has a three
year budget of approximately $1,000,000. Discoveries and inventions arising from
the research will be owned by Ajinomoto, but the Company has the right of first
refusal to obtain certain exclusive licenses from Ajinomoto of any patented
technology arising from the research. The Company is entitled to certain
royalties based upon a percentage of sales of products arising out of the
research. This agreement expires in September 1998.
BioSeq, Inc. In October 1996, the Company entered into a strategic
alliance with BioSeq, Inc. an early stage biotechnology company that is
developing a technology that may, through the use of pressure, be able to more
precisely control chemical reactions. The Company believes that this technology
may be useful for sequencing, synthesizing and characterizing nucleic acids and
proteins, which may then allow for the more precise identification of infectious
disease agents. See also Note 4 to the Company's Notes to Consolidated Financial
Statements in Item 8 hereunder regarding the Company's investment in BioSeq,
Inc.
SALES AND MARKETING
The Company's sales and marketing efforts are directed by a Senior Vice
President of Sales and Marketing who supervises 18 sales people and four other
full-time sales and marketing employees.
The Company's marketing strategy is focused upon addressing the needs
of its customers in the infectious disease testing market throughout the entire
test kit life-cycle, from initial research and development, through the
regulatory approval process and test kit production, to training,
troubleshooting and routine use by end-users such as clinical laboratories,
hospitals and blood banks.
The Company recently has begun to focus its sales and marketing efforts
on the emerging end-user market for quality control products for infectious
disease test kits. To promote this objective, the Company has implemented a
major marketing platform, known as "Total Quality System" ("TQS"). TQS is a
package of Quality Control Products, including the Company's Accurun(TM) Run
Controls, which is designed to provide test kit end-users with the products
needed in an overall quality assurance program. These products enable
laboratories to evaluate each of the key elements involved in the testing
process: the test kit, laboratory equipment and laboratory personnel. The
Company believes that TQS effectively addresses the need for end-users to ensure
the accuracy of their test results. The Company intends to continue to expand
its sales and marketing activities with respect to its Accurun(TM) line of Run
Control products.
The Company's products are currently sold through a combination of
telephone, mail, third party distributors and limited direct sales efforts.
Domestically, products are sold through an in-house tele-sales group consisting
of seven sales representatives, two sales managers and one customer service
representative. Internationally, the Company distributes its products both
directly and through 18 independent distributors located in Japan, Australia,
South America, Southeast Asia, Israel and Europe. The Company's international
sales manager oversees the Company's foreign distributors. Export sales,
including sales to distributors, for the years ended December 31, 1994, 1995,
and 1996 were $2.3 million, $3.1 million, and $3.9 million, respectively.
The Company's Specialty Clinical Laboratory Testing services are
marketed primarily through a direct domestic sales force consisting of seven
sales representatives managed by a sales director. The sales representatives are
located throughout the eastern and mid-western United States. They are supported
internally by a client services representative.
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The Company emphasizes high quality products and services, technical
knowledge, and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers and
prospective customers about its products through a series of detailed marketing
brochures, technical bulletins and pamphlets, press releases and direct mail
pieces. These materials are supplemented by advertising campaigns in major
industry publications, technical presentations, and exhibitions at local,
national and international trade shows and expositions.
CUSTOMERS
The Company's customers for Quality Control Products and Diagnostic
Components comprise three major groups: (i) international diagnostics and
pharmaceutical manufacturing companies, such as Abbott Diagnostics, Behring,
Boehringer Mannheim, Chiron, Fujirebio, Hoffman LaRoche, Ortho Diagnostics
(Johnson and Johnson), Sanofi Diagnostics and Sorin Biomedica; (ii) regulatory
agencies such as the United States FDA, the British Public Health Laboratory
Service, the French Institut National de la Transfusion Sanguine, and the German
Paul Ehrlich Institute; and (iii) end-users of diagnostic test kits, such as
hospital clinical laboratories, public health laboratories and blood banks,
including the Swiss Red Cross, United Blood Services and Kaiser Permanente. The
Company's Specialty Clinical Laboratory Testing services are sold to hospital
and clinical laboratories, blood banks, researchers and other health care
providers. The Company's Contract Research services are typically offered under
contracts to governmental agencies, diagnostic test kit manufacturers and
biomedical researchers.
The Company does not have long-term contracts with its customers for
Quality Control Products and Diagnostic Components. The Company's products are
sold to its customers pursuant to purchase orders for discrete purchases.
Although the Company believes that its relationships with these customers are
satisfactory, termination of the Company's relationship with any one of such
customers could have a material adverse effect on the Company.
During the fiscal years 1994, 1995 and 1996, sales to the Company's
three largest customers accounted for an aggregate of approximately 20% of the
Company's net sales, although the customers were not identical in each period
and no one customer accounted for more than 10% of net sales.
MANUFACTURING AND OPERATIONS
The Company manufactures and assembles substantially all of its
products at its facility in West Bridgewater, Massachusetts. Raw materials are
acquired from a variety of vendors and through a program of donor recruitment,
donor screening, product collection, product characterization and donor
management. All important materials have multiple sources of supply.
The Company also operates a specialty clinical laboratory in New
Britain, Connecticut and a research and development laboratory in Rockville,
Maryland. See "Item 2 -- PROPERTIES."
COMPETITION
The market for the Company's products and services is highly
competitive. Many of the Company's competitors are larger than the Company and
have greater financial, research, manufacturing, and marketing resources.
Important competitive factors for the Company's products include product
quality, price, ease of use, customer service and reputation. In a broader
sense, industry competition is based upon scientific and technical capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel, and the availability of patent protection. To the extent that the
Company's products and services do not reflect technological advances, the
Company's ability to compete in those products and services could be adversely
affected.
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In the area of Quality Control Products, the Company competes in the
United States primarily with NABI (formerly North American Biologicals, Inc.) in
Run Controls and Quality Control Panel products, and Dade International and
Blackhawk Biosystems Inc. in Run Controls. In Europe, the Netherlands Red Cross
has recently begun offering several Run Control and panel products. The Company
believes that all three of these competitors currently offer a more limited line
of products than the Company, although there can be no assurance these companies
will not expand their product lines.
In the Diagnostic Components area, the Company competes against
integrated plasma collection and processing companies such as Serologicals, Inc.
and NABI, as well as smaller, independent plasma collection centers and brokers
of plasma products. In the Diagnostic Components area, the Company competes on
the basis of quality, breadth of product line, technical expertise and
reputation.
In the Specialty Clinical Laboratory Testing services portion of the
Company's business, it competes with large national reference laboratories, such
as LabCorp of America, Corning Clinical Laboratories and SmithKline Beecham
Clinical Laboratories, as well as several independent regional laboratories,
hospital laboratories, government contract laboratories and large research
institutions. The Company believes that by focusing on the specialty clinical
laboratory market, it is able to offer its customers a higher value-added
service on the more complex diagnostic tests than the larger national reference
laboratories.
INTELLECTUAL PROPERTY
None of the Company's Quality Control Products or Diagnostic Components
have been patented. The Company has decided to hold as trade secrets current
technology used to prepare Basematrix and other blood-based products. The
Company relies primarily on a combination of trade secrets and non-disclosure
and confidentiality agreements, and in certain limited circumstances, patents,
to establish and protect its proprietary rights in its technology and products.
There can be no assurance that others will not independently develop or
otherwise acquire the same, similar or more advanced trade secrets and know-how.
The Company has two United States patents and, jointly with UNC, has
filed three series of United States and foreign patent applications relating to
compounds, pharmaceutical compositions and therapeutic methods in connection
with the Company's drug discovery program at UNC.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. There can be no
assurance, however, that other parties will not assert infringement claims in
the future.
GOVERNMENT REGULATION
The manufacture and distribution of medical devices, including products
manufactured by the Company that are intended for in vitro diagnostic use, are
subject to extensive government regulation in the United States and in other
countries.
In the United States, the Food, Drug, and Cosmetic Act ("FDCA")
prohibits the marketing of in vitro diagnostic products until they have been
cleared or approved by the FDA, a process that is time-consuming, expensive, and
uncertain. In vitro diagnostic products must be the subject of either a
premarket notification clearance (a "510(k)") or an approved premarket approval
application ("PMA"). With respect to devices reviewed through the 510(k)
process, a Company may not market a device for diagnostic use until an order is
issued by FDA finding the product to be substantially equivalent to a legally
marketed device. A 510(k) submission may involve the presentation of a
substantial volume of data, including clinical data, and may require a
substantial period of review. With respect to devices reviewed through the PMA
process, a Company may not market a device until FDA has approved a PMA
application, which must be supported by extensive data, including preclinical
and clinical trial data, literature, and manufacturing information to prove the
safety and effectiveness of the device.
-11-
The Company's Accurun Run Controls, when marketed for diagnostic use,
have been classified by the FDA as medical devices. The Accurun 1(R)
Multi-Marker Run Control, which include eight analytes, has been cleared through
the 510(k) process. The Company expects that, in the future, most of its
products that need FDA premarket review also will be reviewed through the 510(k)
process. The FDA could, however, require that some products be reviewed through
the PMA process, which generally involves a longer review period and the
submission of more information to FDA. There can be no assurance that the
Company will obtain regulatory approvals on a timely basis, if at all. Failure
to obtain regulatory approvals in a timely fashion or at all could have a
material adverse effect on the Company.
All of the Company's Quality Control Products, with the exception of
Accurun 1(R), are marketed "for research use only," which do not require FDA
premarket clearance or approval, and not for diagnostic uses, which do require
FDA premarket clearance or approval. The labeling of these products limits their
use to research. It is possible, however, that some purchasers of these products
may use them for diagnostic purposes despite the Company's intended use. In
these circumstances, the FDA could allege that these products should have been
cleared or approved by the FDA prior to marketing, and initiate enforcement
action against the Company, which could have a material adverse effect on the
Company.
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to, good
manufacturing practices ("GMP") regulations governing testing, control, and
documentation; and reporting of adverse experiences with the use of the device.
Ongoing compliance with GMP and other applicable regulatory requirements is
monitored through periodic inspections. FDA regulations require agency clearance
or approval for certain changes if they do or could affect the safety and
effectiveness of the device, including, for example, new indications for use,
labeling changes or changes in design or manufacturing methods. In addition,
both before and after clearance or approval, medical devices are subject to
certain export and import requirements under the FDCA. Product labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. Products may be promoted by the
Company only for their approved use. Failure to comply with these and other
regulatory requirements can result, among other consequences, in failure to
obtain premarket approvals, withdrawal of approvals, total or partial suspension
of product distribution, injunctions, civil penalties, recall or seizures of
products and criminal prosecution.
The Company believes that its Quality Control Panels are not regulated
by the FDA because they are not intended for diagnostic purposes. The Company
believes that its Diagnostic Components, which are components of in vitro
diagnostic products, may be subject to certain regulatory requirements under the
FDCA and other laws administered by the FDA, but do not require that the Company
obtain a premarket approval or clearance. There can be no assurance, however,
that the FDA would agree or that the FDA will not adopt a different
interpretation of the FDCA or other laws it administers, which could have a
material adverse effect on the Company.
Laws and regulations affecting some of the Company's products are in
effect in many of the countries in which the Company markets or intends to
market its products. These requirements vary from country to country. Member
states of the European Economic Area (which is composed of the European Union
members and the European Free Trade Association members) are in the process of
adopting various product and services "Directives" to address essential health,
safety, and environmental requirements associated with the subject products and
services. The "Directives" cover both quality system requirements (ISO Series
9000 Standards) and product and marketing related requirements. In addition,
some jurisdictions have requirements related to marketing of the Company's
products. There can be no assurance that the Company will be able to obtain any
regulatory approvals required to market its products on a timely basis, or at
all. Delays in receipt of, or failure to receive such approvals, or the failure
to comply with regulatory requirements in these countries or states could lead
to compliance
-12-
action, which could have a material adverse effect on the Company's business,
financial condition, or results of operations.
The Company's service-related business (clinical trials, infectious
disease testing, and contract research) is subject to other national and local
requirements. The Company's facilities are subject to review, inspection,
licensure or accreditation by some states, national professional organizations
(College of American Pathologists), and other national regulatory agencies
(Health Care Financing Administration). Studies to evaluate the safety or
effectiveness of FDA regulated products (primarily human and animal drugs or
biologics) must also be conducted in conformance with relevant FDA requirements,
including Good Laboratory Practice ("GLP") regulations, investigational new drug
or device regulations, Institutional Review Board ("IRB") regulations and
informed consent regulations.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
prohibits laboratories from performing in vitro tests for the purpose of
providing information for the diagnosis, prevention or treatment of any disease
or impairment of, or the assessment of, the health of human beings unless there
is in effect for such laboratories a certificate issued by the U.S. Department
of Health and Human Services ("HHS") applicable to the category of examination
or procedure performed.
The Company currently holds permits issued by HHS (CLIA license),
Centers for Disease Control and Prevention (Importation of Etiological Agents or
Vectors of Human Diseases), the U.S. Department of Agriculture (Importation and
Transportation of Controlled Materials and Organisms and Vectors) and the U.S.
Nuclear Regulatory Commission (in vitro testing with byproduct material under
general license, covering the use of certain radioimmunoassay test methods).
The Company is also subject to government regulation under the Clean
Water Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Atomic Energy Act, and other national, state and local
restrictions relating to the use and disposal of biohazardous, radioactive and
other hazardous substances and wastes. The Company is an exempt small quantity
generator of hazardous waste and has a U.S. Environmental Protection Agency
identification number. The Company is also registered with the U.S. Nuclear
Regulatory Commission for use of certain radioactive materials. The Company is
also subject to various state regulatory requirements governing the handling of
and disposal of biohazardous, radioactive and hazardous wastes. The Company has
never been a party to any environmental proceeding.
Internationally, some of the Company's products are subject to
additional regulatory requirements, which vary significantly from country to
country. Each country in which the Company's products and services are offered
must be evaluated independently to determine the country's particular
requirements. In foreign countries, the Company's distributors are generally
responsible for obtaining any required government consents.
EMPLOYEES
As of December 31, 1996 the Company employed 191 persons, all of whom
were located in the United States. Eighty of these persons were employed in West
Bridgewater, Massachusetts, 62 in New Britain, Connecticut, and 49 at the
Rockville, Maryland site. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that it has a satisfactory
relationship with its employees.
-13-
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Registrant as of December 31, 1996:
NAME AGE POSITION
---- --- --------
Richard T. Schumacher 46 President; Chief Executive Officer and
Chairman of the Board
Kevin W. Quinlan 46 Senior Vice President, Finance; Chief
Financial Officer; Treasurer and Director
Patricia E. Garrett, Ph.D. 53 Senior Vice President, Regulatory Affairs
& Strategic Programs
Mark M. Manak, Ph.D. 45 Senior Vice President, Research and
Development
Richard C. Tilton, Ph.D. 60 Senior Vice President, Specialty
Laboratory Services
Barry M. Warren 49 Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. 52 Vice President of Operations
Mr. Schumacher, the founder of the Company, has been the President
since 1986, and Chief Executive Officer and Chairman since 1992. Mr. Schumacher
served as the Director of Infectious Disease Services for Clinical Science
Laboratory, a New England-based medical reference laboratory, from 1986 to 1988.
From 1972 to 1985, Mr. Schumacher was employed by the Center for Blood Research,
a nonprofit medical research institute associated with Harvard Medical School.
Mr. Schumacher received a B.S. in zoology from the University of New Hampshire.
Mr. Quinlan, a Director of the Company since 1986, has been Senior Vice
President, Finance, Treasurer, and Chief Financial Officer since January 1993.
From 1990 to December 1992, he was the Chief Financial Officer of ParcTec, Inc.
a New York-based leasing company. Mr. Quinlan served as Vice President and
Assistant Treasurer of American Finance Group, Inc. from 1981 to 1989 and was
employed by Coopers & Lybrand from 1975 to 1980. Mr. Quinlan is a certified
public accountant and received a M.S. in accounting from Northeastern University
and a B.S. in economics from the University of New Hampshire.
Dr. Garrett has been Senior Vice President, Regulatory Affairs &
Strategic Programs since 1988. From 1980 to 1987, Dr. Garrett served as the
Technical Director of the Chemistry Laboratory, Department of Laboratory
Medicine at the Lahey Clinic Medical Center. Dr. Garrett earned her Ph.D. from
the University of Colorado and was a postdoctoral research associate at Harvard
University, Oregon State University, Massachusetts Institute of Technology and
the University of British Columbia.
Dr. Manak has served as Senior Vice President, Research and Development
since 1992. From 1980 to 1992, he served as Senior Research Scientist, Molecular
Biology, of Biotech Research Laboratories. Dr. Manak received his Ph.D. in
biochemistry from the University of Connecticut and completed postdoctoral
research work in biochemistry/virology at Johns Hopkins University.
Dr. Tilton has served as Senior Vice President, Specialty Laboratory
Services since the Company's acquisition of BBI Clinical Laboratories, Inc.
("BBICL") in 1993 and was one of the founders of BBICL, where he served as
President from 1989 to 1993. Dr. Tilton has 25 years of experience in university
hospital clinical microbiology laboratories and is board certified in medical
and public health microbiology. Dr. Tilton received his Ph.D. in microbiology
from the University of Massachusetts.
Mr. Warren has served as Senior Vice President, Sales & Marketing since
1993. From 1985 to 1993, Mr. Warren served as Group Director of Marketing of
Organon Teknika, a manufacturer of
-14-
infectious disease reagents. Mr. Warren received an M.A. in political science
from Loyola University of Chicago and a B.A. from Loyola University.
Dr. DiPaolo has been Vice President of Operations since 1993. Prior to
joining the Company, Dr. DiPaolo served as Vice President and General Manager of
the Biomedical Products Division of Collaborative Research, a medical research
products company from 1986 to 1989. From 1975 to 1986 he was employed by DuPont
New England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo received his
Ph.D. in biochemistry from Massachusetts Institute of Technology and later
completed postdoctoral research at the Eunice Shriver Center in Waltham,
Massachusetts.
Officers are elected by, and serve at the pleasure of, the Board of
Directors.
ITEM 2. PROPERTIES.
The Company's corporate offices and manufacturing facilities are
located in a two story, 22,500 square foot building in West Bridgewater,
Massachusetts. The Company owns and operates this building. The Company is
currently expanding the manufacturing capacity by approximately 7,500 square
feet, and believes that following these renovations, its facility in West
Bridgewater will be sufficient to meet its foreseeable needs.
The Company leases its laboratory facilities in Rockville, Maryland and
New Britain, Connecticut. The Rockville facility contains 21,000 square feet and
is occupied under a five-year lease that is due to expire on June 30, 1997. The
Company is currently considering extending the lease for an additional period,
as well as relocating its laboratory. The New Britain facility has 15,000 square
feet, most of which is dedicated to laboratory space. The lease is for five
years and is due to expire on July 30, 2000; the Company has an option to renew
for an additional five years.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or
its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1996 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
The Company completed an initial public offering of its Common Stock,
$.01 par value, (the "Common Stock") on October 31, 1996. The Common Stock is
listed on the NASDAQ National Market under the symbol "BBII". For the period
from October 31, 1996 through December 31, 1996, the high and low closing prices
of the Company's Common Stock on NASDAQ were 8 1/2 and 6 3/4, respectively.
As of December 31, 1996, there were 20,000,000 shares of Common Stock
authorized of which 4,378,157 shares of Common Stock were outstanding, held of
record by approximately 166 stockholders.
The Company has not declared or paid any dividends on its Common Stock.
Payment of dividends on Common Stock is restricted under the Company's loan
agreement with its bank.
-15-
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data for each of the fiscal years in the four
year period ended December 31, 1996, and the balance sheet data as of December
31, 1993, 1994, 1995 and 1996, have been derived from the consolidated financial
statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The statement of income data of the Company for the
fiscal year ended December 31, 1992 and the balance sheet data as of December
31, 1992 have been derived from consolidated financial statements of the Company
which have been audited by other independent public accountants. This data
should be read in conjunction with "Item 8"--"Consolidated Financial Statements
and Supplementary Data", and "Item 7"--"Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
(2)(3) (1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
REVENUE:
Product sales $ 8,470 $6,622 $5,982 $3,942 $2,955
Services
7,039 5,649 4,741 5,215 1,680
-------- -------- -------- -------- --------
Total revenue 15,509 12,271 10,723 9,157 4,635
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 4,252 3,564 3,194 2,088 1,638
Cost of services 4,856 4,168 3,416 3,965 1,443
Research and development 797 375 469 279 222
Selling and marketing 2,188 1,340 1,192 894 353
General and administrative 2,401 2,316 2,047 1,619 745
-------- -------- -------- -------- -------
Total operating costs and expenses 14,494 11,763 10,318 8,845 4,401
-------- -------- -------- -------- --------
Income from operations 1,015 508 405 312 234
Interest expense, net 213 336 244 179 113
-------- -------- -------- -------- --------
Income before income taxes and 802 172 161 133 121
extraordinary item
Provision for income taxes (321) (69) (64) (41) (45)
-------- -------- -------- -------- --------
Income before extraordinary item 481 103 97 92 76
Extraordinary item-gain on elimination of debt,
net of income taxes -- -- -- 50 --
-------- -------- -------- -------- --------
Net income $ 481 $ 103 $ $ 142 $ 76
97
-------- -------- -------- -------- --------
Net income per share(4) $ 0.14 $ 0.04 $ 0.04 $ 0.06 $ 0.04
Weighted average common and common equivalent
shares outstanding(4) 3,340 3,151 2,587 2,438 2,160
DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Working capital(5) $12,836 $4,829 $4,686 $ 3,612 $2,457
Total assets 19,798 9,928 8,076 6,870 4,828
Long term debt, less current 41 4,216 3,180 2,381 1,760
maturities(5)
Total stockholders' equity 16,290 3,187 3,041 2,762 1,837
Dividends -- -- -- -- --
- ------------------
(1) Effective July 1, 1992, the Company acquired through its BTRL subsidiary the
net assets of a division of Cambridge Biotech Corporation for $762,000 which
increased 1992 revenues by $1,450,000.
(2) On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note in connection with the 1992 purchase of BTRL at a
substantial discount from the balance due, resulting in an extraordinary
gain of $50,000 net taxes of $33,000. The 1993 net income per share before
such extraordinary gain was $0.04.
(3) Effective January 1, 1993, the Company acquired the net assets of North
American Laboratory Group Ltd., Inc. for $425,000, which increased 1993
revenues by $2,019,000.
(4) The effect of the common stock equivalents on net income per share has been
excluded from the calculation for years ended December 31, 1992 through 1994
as its inclusion was antidilutive.
(5) The Company's demand line of credit with outstanding amounts of $1,091,000
and $1,895,000 as of December 31, 1992 and 1993, respectively, has been
presented as part of long-term debt (and excluded from current liabilities
in calculating working capital) for 1992 and 1993 to be consistent with its
reclassification to long-term debt in 1994, 1995 and 1996 due to a
modification of its maturity date.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company generates revenue from products and services provided to
the in vitro diagnostic infectious disease industry. Products consist of three
groups: Quality Control Panels, Accurun(TM) Run Controls and Diagnostic
Components. Services consist of Specialty Clinical Laboratory Testing, Contract
Research, Clinical Trials and Drug Screening. In the three full years since the
Company's acquisition of Biotech Research Laboratories ("BTRL") and BBI Clinical
Laboratories, Inc. ("BBICL"), the Company has experienced a shift in revenue mix
towards increased product sales, as product revenue as a percentage of total
revenue increased from 43.1% in 1993 to 54.6% in 1996, with a corresponding
decrease in the percentage of total revenue provided by services.
The Company's gross profit margin increased from 33.9% in 1993 to 41.3%
in 1996 principally as a result of the increased percentage of higher margin
product revenues. Within products, the Company's Quality Control Products
(Accurun(TM) Run Controls and Quality Control Panels) have higher margins than
the Company's Diagnostic Components. Within services, Contract Research gross
margins are lower than other services. However, such contracts enable the
Company to maintain certain scientific staff and capability that it might
otherwise not be able to afford. The Company intends to continue to concentrate
on the growth in sales of its Quality Control Products.
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, including customer
purchasing patterns, primarily driven by end-of-year expenditures, and seasonal
demand during the summer months for certain laboratory testing services. In
particular, the Company's sales of its Quality Control Products and Diagnostic
Components typically have been highest in the fourth quarter and lowest in the
first quarter of each fiscal year, whereas Specialty Clinical Laboratory Testing
has generally reached a seasonal peak during the third quarter, coinciding with
the peak incidence of Lyme Disease. Research Contracts are generally for large
dollar amounts spread over a one or two year period, and upon completion,
frequently do not have renewal phases. As a result they can cause large
fluctuations in revenue and net income. In addition to staff dedicated to
internal research and development, certain of the Company's technical staff work
on both Contract Research for customers and Company sponsored research and
development. The allocation of certain technical staff to such projects depends
on the volume of Contract Research. As a result, research and development
expenditures fluctuate due to increases or decreases in Contract Research.
To develop new Quality Control Products and support increased sales,
the Company hired additional research and development staff in the second half
of 1995 and sales and marketing staff in 1996. The Company intends to continue
to add staff to these departments. This should cause both research and
development and selling and marketing expenses to increase as a percentage of
revenue in 1997, compared to 1996. General and administrative expenses are not
expected to increase at the same rate, as the Company has already incurred
significant infrastructure expenses.
The Company does not have any foreign operations. However, the Company
does have significant export sales to agents under distribution agreements, as
well as directly to test kit manufacturers. All sales are denominated in U.S.
dollars. Export sales for the years ended December 31, 1994, 1995, and 1996 were
$2.3 million, $3.1 million, and $3.9 million, respectively. The Company expects
that export sales will continue to be a significant source of revenue and
operating income.
-17-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total revenue represented by certain items reflected in the Company's
consolidated statements of operations:
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Revenue:
Products 54.6% 54.0% 55.8%
Services 45.4 46.0 44.2
---- ---- ----
Total revenue 100.0 100.0 100.0
Gross profit 41.3 37.0 38.4
Operating expenses:
Research and development 5.1 3.1 4.4
Selling and marketing 14.1 10.9 11.1
General and administrative 15.5 18.9 19.1
---- ---- ----
Total operating expenses 34.7 32.9 34.6
---- ---- ----
Income from operations 6.5 4.1 3.8
Interest expense 1.4 2.7 2.3
--- --- ---
Income before income taxes 5.1 1.4 1.5
Net income 3.1 0.8 0.9
=== === ===
Product gross profit 49.8% 46.2% 46.6%
Services gross profit 31.0% 26.2% 28.0%
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenue increased 26.4%, or $3,239,000, to $15,509,000 in 1996
from $12,271,000 in 1995. The increase in revenues was the result of a 27.9%
increase in product revenues of $1,848,000 to $8,470,000 from $6,622,000, and a
24.6% increase in service revenues of $1,390,000 to $7,039,000 from $5,649,000
in 1995. The increase in product revenue was attributable to an increase in the
volume of sales of Quality Control Products, particularly Accurun. The increase
in service revenue was primarily the result of increased volume of specialty
clinical laboratory testing and a favorable mix shift towards higher priced
molecular testing, and the impact of two new research contracts. This was
partially offset by lower volume of clinical trial services.
Gross profit increased 41.0%, or $1,862,000, to $6,400,599 for 1996
from $4,539,000 in 1995. Products gross profit increased 38.0%, or $1,160,000,
to $4,217,000 in 1996 from $3,057,000 in 1995 as the products sales increase was
positively impacted by an increase in products gross profit margin (to 49.8% in
1996 from 46.2%). The products gross margin increase was a result of a favorable
mix shift towards Accurun sales. Services gross profit increased 47.3%, or
$701,000, to $2,183,000 in 1996 from $1,481,000 in 1995 as the testing volume
increased at a faster rate than laboratory headcount increased, and thereby
caused the services gross profit margin to increase to 31.0% in 1996 from 26.2%
in 1995.
Research and development expenditures increased 112.1%, or $421,000, to
$797,000 in 1996 from $376,000 in 1995. The increase resulted from increased
costs of personnel hired in the second half of 1995 to step-up the rate of new
product introductions, and increased research project expenditures. Development
projects included Accurun(TM), molecular and immunological Run Controls,
specialized molecular assays, and expenditures related to the Company's drug
discovery program.
Selling and marketing expenses increased 63.3%, or $848,000, to
$2,188,000 in 1996 from $1,340,000 in 1995. The increase was attributable
primarily to additional sales and marketing staff and overhead; increased
advertising, promotion, trade show and travel expenses due to the commencement
of the Company's "Total Quality System" (TQS) marketing campaign; and costs
associated with participation by the Company's Specialty Clinical Laboratory in
the Roche Diagnostics' Amplicor( Access program in connection with Roche's
launch of their new FDA approved HIV PCR test kit. The
-18-
Amplicor( kit is primarily used to monitor the HIV viral load (level) in
patients prior to and during drug therapy.
General and administrative costs increased 3.7%, or $85,000, to
$2,401,000 in 1996 from $2,316,000 in 1995. This increase was attributable
primarily to additional staffing in support of revenue growth and higher reserve
provisions for doubtful accounts associated with the increased volume of revenue
related to testing in situations in which payment to the Company depends on
collecting from the patient rather than a healthcare institution.
Net interest expense decreased 36.6%, or $123,000, to $213,000 in 1996
from $336,000 in 1995, as the proceeds from the Company's initial public
offering were used to pay down almost all debt in early November, and the
remaining amount invested in short term, investment grade securities.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenue increased 14.4%, or $1,548,000, to $12,271,000 in 1995
from $10,723,000 in 1994. The increase in revenues was the result of a 10.7%
increase in product revenues of $640,000 to $6,622,000 from $5,981,000, and a
19.1% increase in service revenues of $908,000 to $5,649,000 from $4,741,000 in
1995 compared to 1994. The increase in product revenue was attributable to an
increase in prices at the beginning of 1995 and an increase in the volume of
sales of Quality Control Products and Basematrix (part of the Diagnostic
Components group), which increase was partially offset by the absence of
revenues in 1995 from two OEM Quality Control Panel contracts which were
completed in 1994. The Company also reduced emphasis on certain lower margin
Diagnostic Components as it focused more effort on sales of its proprietary
Basematrix product, which carries a higher margin. During 1995, the Company
reorganized its sales and marketing department and believes that this had an
adverse effect on sales growth for the period. The increase in service revenue
was primarily the result of increased specialty clinical laboratory testing, two
new research contracts and increased clinical trial services, particularly in
the area of HIV.
Gross profit increased 10.4%, or $426,000, to $4,539,000 for 1995 from
$4,113,000 in 1994. Products gross profit increased 9.7%, or $270,000, to
$3,057,000 in 1995 from $2,787,000 in 1994 as the products sales increase was
offset by a small decrease in products gross profit margin (to 46.2% in 1995
from 46.6%). The products gross margin decrease was a result of a small increase
in material handling personnel costs. Services gross profit increased 11.8%, or
$156,000, to $1,481,000 in 1995 from $1,326,000 in 1994 as the sales increase
was offset by a decrease in services gross profit margin to 26.2% in 1995 from
28.0% in 1994. Services gross margin declined primarily as a result of increased
personnel costs in the specialty clinical laboratory and an increase in contract
research activities, which carry a lower margin.
Research and development expenditures decreased 20.0%, or $94,000, to
$376,000 in 1995 from $469,000 in 1994. The decrease resulted from certain
technical staff being utilized for Company sponsored research and development in
1994 and Contract Research in 1995. Development projects included Accurun(TM),
molecular and immunological Run Controls, specialized molecular assays, and the
development of a second generation Lyme Disease western blot test kit for
internal use by the Company's specialty testing laboratory.
Selling and marketing expenses increased 12.4%, or $148,000, to
$1,340,000 in 1995 from $1,192,000 in 1994. The increase was primarily
attributable to additional sales and marketing staff and overhead, partially
offset by lower trade show and travel expenses as the Company realized greater
benefits from its distributor network.
General and administrative costs increased 13.1%, or $269,000, to
$2,316,000 in 1995 from $2,047,000 in 1994. This increase was primarily
attributable to additional staffing in support of revenue growth and higher
reserve provisions for doubtful accounts associated with the increased volume of
revenue related to testing in situations where payment to the Company depends on
collecting from the patient rather than a healthcare institution. These
increases were partially offset by lower professional
-19-
fees. Also included in general and administrative expense was approximately
$60,000 of nonrecurring costs associated with the move of the specialty testing
laboratory into a larger, custom-designed facility.
Interest expense increased 37.8%, or $92,000, to $336,000 in 1995 from
$244,000 in 1994, as the Company funded its working capital needs primarily
through increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1996 the Company's Common Stock commenced trading on the
NASDAQ as a result of its initial public offering of its common stock ("IPO"),
selling 1,600,000 shares at $8.50 per share. Net proceeds received after
underwriting discounts, commissions and offering costs was approximately
$11,633,000. On November 5, 1996, the Company repaid substantially all of its
outstanding bank debt which totaled approximately $3.9 million.
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and sales of equity. With the repayment of
debt from the IPO proceeds, the Company expects its cash flow and cash position
to meet existing operational needs, although amounts repaid on its Revolving
Line of Credit Agreement (the "Revolver") will be available for reborrowing as
needed.
Net cash provided by operations for 1996 was $1,460,000 as compared to
cash used in operations of $29,000 in 1995. This increase in cash flow was
primarily attributable to an increase in net income, improved working capital
position, and an increase in deferred revenue from a payment of $306,000 under a
research contract for future clinical trial services. Cash flow used in
operations in 1994 was $554,000 as working capital needs due to sales growth
exceeded cash generated from net income adjusted by non cash expenses.
Cash used in investing activities for 1996, 1995 and 1994 amounted to
$1,412,000, $1,320,000, and $405,000, respectively. In addition to equipment
purchases in 1996, the Company purchased common stock in BioSeq, Inc. for
$732,500 which represents an ownership position of approximately 14% in BioSeq,
Inc. The increased use of cash in 1995 compared to 1994 was the result of the
purchase of the Company's West Bridgewater facility.
During 1996, net cash generated from common stock issued, including the
IPO, approximated $12,600,000. This was used to pay down net debt of $4,577,000.
Net cash provided by borrowings for 1995 and 1994 amounted to $1,240,000 and
$846,000, and net proceeds from the sale of Common Stock for the same periods
amounted to $176,000 and $170,000, respectively. The proceeds of such debt were
used for working capital, to acquire the West Bridgewater property and to
purchase capital equipment.
In 1996, 1995 and 1994 capital expenditures amounted to $669,000,
$1,316,000, and $405,000, respectively. In 1995, $806,000 of the Company's
capital expenditures related to the purchase of the West Bridgewater facility.
On April 26, 1996 the Company entered into a new five year distribution
agreement with Kyowa Medex, Co., Ltd., a foreign distributor, extending a six
year old relationship. Simultaneously, Kyowa Medex, Co., Ltd. purchased 117,647
shares of the Company's Common Stock at a price of $8.50 per share.
The Company anticipates capital expenditures to increase over the near
term as it expects to use approximately $1.0 million from the IPO proceeds to
expand its manufacturing capacity in West Bridgewater during 1997, of which
approximately $500,000 will be spent on building expansion and approximately
$500,000 will be spent on equipment. The Company expects to make a final
investment in BioSeq in 1997 of $750,000 which will increase its ownership
position to 19.9%. This final payment is mandated if BioSeq attains certain
technical milestones by July 31, 1997, and at the Company's option by December
31, 1997 if such milestones are not achieved. The Company believes that existing
cash balances, the borrowing capacity available under the Revolver, and cash
generated from operations are sufficient to fund operations and anticipated
capital expenditures for the foreseeable future. Except for purchase orders in
connection with the manufacturing expansion, and the BioSeq investment described
above, there were no material financial commitments for capital expenditures as
of December 31, 1996.
-20-
In March 1997, the Company entered into an Asset Purchase Agreement
with Source Scientific, Inc. to acquire substantially all of their assets. Also
in March, the Company entered into a new line of credit agreement with its bank
replacing the Revolver. See Note 12 to the Company's Notes to Consolidated
Financial Statements in Item 8 hereunder.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128
("SFAS 128"), "Earnings per Share", which requires the presentation of basic and
diluted earning per share (EPS). Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Basic EPS replaces
primary EPS. Diluted EPS is computed similarly to fully diluted EPS under the
existing rules. The Company will adopt SFAS 128 as of December 15, 1997 and upon
adoption, will restate all prior period EPS data presented. The Company has not
yet quantified what the impact of SFAS 128 will be on EPS.
FORWARD - LOOKING INFORMATION
The Annual Report on Form 10-K contains forward-looking statements
concerning the Company's financial performance and business operations. The
Company wishes to caution readers of this Annual Report on Form 10-K that actual
results might differ materially from those projected in the forward-looking
statements contained herein.
Factors which might cause actual results to differ materially from
those projected in the forward-looking statements contained herein include the
following: inability of the Company to develop the end user market for quality
control products; inability of the Company to integrate the business of Source
Scientific, Inc. into the Company's business; inability of the Company to grow
the sales of Source Scientific, Inc. to the extent anticipated; inability of
Source Scientific, Inc. to repay the $650,000 loan made by the Company; a
material adverse change in the business, financial condition or prospects of
BioSeq, Inc., an early stage biotechnology company in which the Company has made
a significant investment; inability of the Company to obtain an adequate supply
of the unique and rare specimens of plasma and serum necessary for certain of
its products; significant reductions in purchases by any of the Company's major
customers; and the potential insufficiency of Company resources, including human
resources, plant and equipment and management systems, to accommodate any future
growth. Certain of these and other factors which might cause actual results to
differ materially from those projected are more fully set forth under the
caption "Risk Factors" in the Company's Registration Statement on Form S-1 (SEC
File No. 333-10759).
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
1996 1995
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,082,642 $ 11,463
Accounts receivable, less allowances of $352,058 in 1996 and
$142,372 in 1995 3,415,994 3,075,870
Inventories (Note 2) 4,180,334 3,676,851
Prepaid expense and other 239,950 254,199
Deferred income taxes (Note 7) 283,200 110,766
-------------- --------------
Total current assets 16,202,120 7,129,149
-------------- --------------
Property and equipment, net (Note 3) 2,699,158 2,614,982
OTHER ASSETS:
Long term investment (Note 4) 732,500 -
Goodwill and other intangibles, net (Note 1) 95,302 100,820
Notes receivable and other 69,234 83,422
-------------- --------------
897,036 184,242
-------------- --------------
TOTAL ASSETS $ 19,798,314 $ 9,928,373
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt (Note 6) $ 12,820 $ 436,509
Accounts payable 991,839 745,216
Accrued compensation 840,666 395,755
Accrued income taxes 427,140 36,582
Other accrued expenses 264,262 303,820
Deferred revenue 829,477 523,401
-------------- --------------
Total current liabilities 3,366,204 2,441,283
-------------- --------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 6) 40,948 4,215,501
Deferred income taxes (Note 7) 101,580 84,641
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 10):
Common stock, $.01 par value; authorized 20,000,000 shares in
1996 and 1995; issued and outstanding 4,378,157 in 1996 and issued
2,640,417 in 1995 43,782 26,404
Additional paid-in capital 15,258,656 2,798,620
Retained earnings 987,144 505,924
-------------- --------------
16,289,582 3,330,948
Less treasury stock, at cost-80,000 shares in 1995 and none in 1996 - (144,000)
-------------- --------------
Total stockholders' equity 16,289,582 3,186,948
-------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 19,798,314 $ 9,928,373
============== ==============
The accompanying notes are an integral part of these consolidated financial statements
-22-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
REVENUE:
Product sales $ 8,469,890 $ 6,621,631 $ 5,981,378
Services 7,039,406 5,649,099 4,741,376
-------------- ------------- -------------
Total revenue 15,509,296 12,270,730 10,722,754
COSTS AND EXPENSES:
Cost of product sales 4,252,068 3,564,241 3,194,217
Cost of services 4,856,630 4,167,625 3,415,777
Research and development 796,805 375,712 469,358
Selling and marketing 2,188,152 1,339,792 1,191,573
General and administrative 2,400,681 2,315,814 2,047,256
-------------- ------------- -------------
Total operating costs and expenses 14,494,336 11,763,184 10,318,181
Income from operations 1,014,960 507,546 404,573
Interest expense, net 212,969 335,899 243,694
-------------- ------------- -------------
Income before income taxes 801,991 171,647 160,879
Provision for income taxes (Note 7) (320,771) (68,657) (64,351)
-------------- ------------- -------------
Net income $ 481,220 $ 102,990 $ 96,528
============== ============= =============
Net income per share $ 0.14 $ 0.04 $ 0.04
============== ============= =============
Weighted average common and common
equivalent shares outstanding 3,340,236 3,151,477 2,587,137
The accompanying notes are an integral part of these consolidated financial statements
-23-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
------------------------
Additional Total
$.01 Par Paid-In Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
------------ ---------- -------------- ------------ ----------- ---------------
BALANCE, December 31, 1993 2,525,028 $ 25,250 $ 2,430,100 $ 306,406 - $ 2,761,756
Issuance of common stock 29,862 299 139,403 139,702
Stock options and warrants exercised 23,975 240 30,197 30,437
Tax benefit of stock options exercised 12,800 12,800
Net income 96,528 96,528
------------ ---------- -------------- ------------ ----------- ---------------
BALANCE, December 31, 1994 2,578,865 25,789 2,612,500 402,934 - 3,041,223
Issuance of common stock 8,535 85 58,160 58,245
Stock options and warrants exercised 47,200 472 117,068 117,540
Conversion of note payable 5,817 58 9,542 9,600
Treasury stock purchased - 80,000 shares (144,000) (144,000)
Tax benefit of stock options exercised 1,350 1,350
Net income 102,990 102,990
------------ ---------- -------------- ------------ ----------- ---------------
BALANCE, December 31, 1995 2,640,417 26,404 2,798,620 505,924 (144,000) 3,186,948
Issuance of common stock, net of
issuance costs 1,637,647 16,377 12,371,469 144,000 12,531,846
Stock options and warrants exercised 85,760 858 67,210 68,068
Conversion of note payable 14,333 143 21,357 21,500
Net income 481,220 481,220
------------ ---------- -------------- ------------ ----------- ---------------
BALANCE, December 31, 1996 4,378,157 $ 43,782 $ 15,258,656 $ 987,144 - $ 16,289,582
============ ========== ============== ============ =========== ===============
The accompanying notes are an integral part of these consolidated financial statements
-24-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 481,220 $ 102,990 $ 96,528
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 600,495 441,356 360,512
Provision for doubtful accounts 247,080 181,084 102,099
Deferred rent (87,152) (45,792) 5,908
Deferred income taxes (155,495) (61,765) (42,798)
Tax benefit of stock options exercised - 1,350 12,800
Changes in operating assets and liabilities:
Accounts receivable (587,204) (997,112) (529,157)
Note receivable and other assets 14,188 (61,343) (3,720)
Inventories (503,483) (67,335) (567,420)
Prepaid expenses 14,249 (98,082) (3,500)
Accounts payable 246,623 (42,190) (86,130)
Accrued compensation and other expenses 883,063 94,126 100,767
Deferred revenue 306,076 523,401 -
------------- ------------ -------------
Net cash provided by (used in) operating activities 1,459,660 (29,312) (554,111)
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for additions to property and equipment (669,154) (1,316,217) (404,639)
Purchase of intangible assets (9,999) (4,000) -
Purchase of long term investment (732,500) - -
------------- ------------ -------------
Net cash used in investing activities (1,411,653) (1,320,217) (404,639)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 226,300 1,517,867 1,734,425
Repayments of long-term debt (4,803,042) (277,789) (887,989)
Proceeds of common stock issued 13,581,315 175,785 170,139
Offering costs associated with common stock issued (981,401) - -
Purchase of treasury stock - (144,000) -
------------- ------------ -------------
Net cash provided by financing activities 8,023,172 1,271,863 1,016,575
------------- ------------ -------------
INCREASE (DECREASE) IN CASH: 8,071,179 (77,666) 57,825
Cash, beginning of year 11,463 89,129 31,304
------------- ------------ -------------
Cash, end of year $ 8,082,642 $ 11,463 $ 89,129
============= ============ =============
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Conversion of note payable to common stock $ 21,500 $ 9,600 -
Noncash exercise of warrants to stockholder $ 180,650 - -
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 85,460 $ 168,994 $ 33,718
Interest paid $ 300,587 $ 331,495 $ 254,133
The accompanying notes are an integral part of these consolidated financial statements
-25-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the
"Company") provide infectious disease diagnostic products, contract research and
specialty infectious disease testing services to the in-vitro diagnostic
industry, government agencies, blood banks, hospitals and other health care
providers worldwide. The Company is subject to risks common to companies in the
Biotechnology industry, including but not limited to, development by the Company
or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
Significant accounting policies followed in the preparation of these
consolidated financial statements are as follows:
(I) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BBI and
its wholly-owned subsidiaries, Biotech Research Laboratories, Inc. ("BTRL") and
BBI Clinical Laboratories, Inc. ("BBICL"). All significant intercompany accounts
and transactions have been eliminated in the consolidation. Certain amounts
included in the prior year's financial statements may have been reclassified to
conform to the current presentation.
(II) USE OF ESTIMATES
To prepare the financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In particular, the Company records reserves for estimates
regarding the collectability of accounts receivable as well as the net
realizable value of its inventory. Actual results could differ from the
estimates and assumptions used by management.
(III) REVENUE RECOGNITION
Product revenues are recognized as sales upon shipment of the products
or, for specific orders at the request of the customer, on a bill and hold basis
after completion of manufacture. All bill and hold transactions meet specified
revenue recognition criteria which include normal billing, credit and payment
terms, and transfer to the customers of all risks and rewards of ownership.
Accounts receivable as of December 31, 1996 and 1995 include bill and hold
receivables of $23,000 and $179,000, respectively.
The Company periodically enters into barter transactions whereby the
Company exchanges inventory for testing services. Revenue on these transactions
are recognized when both the products have been shipped and the testing services
have been completed and are recorded at the estimated fair market value of the
inventory based upon standard Company prices. The revenue recognized on these
transactions for the years ended December 31, 1996, 1995 and 1994 was $244,000,
$213,000, and $192,000, respectively.
Services are recognized as revenue upon completion of tests for
specialty laboratory services.
Revenue under long-term contracts, including funded research and
development contracts, is recorded under the percentage of completion method,
wherein costs plus profit is recorded as service revenue and billed monthly as
the work is performed. Certain customers make advance payments that are deferred
until revenue recognition is appropriate. Unbilled amounts for fee retainage are
included in accounts receivable at December 31, 1996 and 1995, and are
immaterial. When the current contract estimates indicate a loss, provision is
made for the total anticipated loss. The Company does not believe there are any
material collectability issues associated with these receivables.
Total revenue related to funded research and development contracts was
approximately $1,126,000, $728,000, and $660,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Total contract costs associated with
these agreements were approximately $975,000, $575,000 and $511,000 for the
years ended December 1996, 1995 and 1994, respectively.
-26-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(IV) CASH AND CASH EQUIVALENTS
The Company's policy is to invest available cash in short-term,
investment grade, interest bearing obligations, including money market funds,
municipal notes, and bank and corporate debt instruments. Securities purchased
with initial maturities of three months or less, are valued at cost plus accrued
interest, which approximates market, and classified as cash equivalents. At
December 31, 1996 the Company's cash equivalents consisted of $6,091,120
invested in a money market fund and a banker's acceptance of $1,991,522.
(V) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(VI) INVENTORIES
Inventories are stated at the lower of average cost or net realizable
value and include material, labor and manufacturing overhead.
(VII) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is recognized using accelerated and straight-line
methods, allocating the cost of the assets over their estimated useful lives
ranging from five years to ten years for certain manufacturing and laboratory
equipment, five years for office equipment and management information systems,
three years for automobiles and fifteen years for the building. Upon retirement
or sale, the cost and related accumulated depreciation of the asset are removed
from the books. Any resulting gain or loss is credited or charged to income.
(VIII) GOODWILL AND INTANGIBLES
Goodwill results from excess of the purchase prices over the acquired
net assets of BTRL and BBICL and is amortized on a straight line basis over ten
years. Other intangibles primarily consist of patents, licenses, and
intellectual property rights and are amortized over four to ten years.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that an impairment loss be recognized for
long-lived assets and certain identified intangibles when the carrying amount of
these assets may not be recoverable. The Company has adopted SFAS 121 effective
in 1996 and the adoption did not have a material impact on the financial
statements.
(IX) INCOME TAXES
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes arise from temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance is provided for net
deferred tax assets if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. Tax credits are recognized when realized using the flow through method
of accounting.
(X) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents, and
accounts receivable. The Company places its cash in federally chartered banks,
each of which is insured up to $100,000 by the Federal Deposit Insurance
Corporation. The Company limits credit risk in cash equivalents by investing
only in short term, investment grade securities including money market funds
restricted to such securities. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales (see also Note 5). The Company does not require collateral
from its customers. To reduce risk, the Company routinely assesses the financial
strength of its customers and, as a consequence, believes that its trade
accounts receivable credit risk exposure is limited.
-27-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(XI) DEFERRED REVENUE
Deferred revenue consists of payments received from customers in
advance of services performed.
(XII) COMPUTATION OF NET INCOME PER SHARE
Net income per common share is computed based upon the weighted average
number of common shares and common equivalent shares (using the treasury stock
method) outstanding after certain adjustments described below. Common equivalent
shares consist of common stock options and warrants outstanding. In accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve month period prior
to the initial filing of the Company's S-1 Registration Statement (August 23,
1996) have been included in the calculation as if they were outstanding for all
periods using the treasury stock method and an initial public offering price of
$8.50 per share. Fully diluted net income per common share is not presented as
it does not differ from primary earnings per share.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement No. 128
("SFAS 128"), "Earnings per Share", which requires the presentation of basic and
diluted earning per share (EPS). Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Basic EPS replaces
primary EPS. Diluted EPS is computed similarly to fully diluted EPS under the
existing rules. The Company will adopt SFAS 128 as of December 15, 1997 and upon
adoption, will restate all prior period EPS data presented. The Company has not
yet quantified what the impact of SFAS 128 will be on EPS.
(2) INVENTORIES
The Company purchases human plasma and serum from various private and
commercial blood banks. Upon receipt, such purchases generally undergo
comprehensive testing, and associated costs are included in the value of raw
materials. Most plasma is manufactured into Basematrix and other diagnostic
components to customer specifications. Plasma and serum with the desired
antibodies or antigens are sold or manufactured into Quality Control Panels,
Accurun(TM) run controls, and reagents ("Finished Goods"). Panels and reagents
are unique to specific donors and/or collection periods, and require substantial
time to characterize and manufacture due to stringent technical specifications.
Panels play an important role in diagnostic test kit development, licensure and
quality control. Panels are manufactured in quantities sufficient to meet
expected user demand which may exceed one year. Inventory balances at December
31, 1996 and 1995 consist of the following:
1996 1995
-------------- --------------
Raw materials $ 1,359,569 $ 1,298,131
Work-in-process 697,749 565,667
Finished goods 2,123,016 1,813,053
-------------- --------------
$ 4,180,334 $ 3,676,851
============== ==============
-28-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 consist of the
following:
1996 1995
-------------- --------------
Laboratory equipment $ 1,751,737 $ 1,630,872
Management information systems 1,247,190 834,768
Office equipment 394,957 332,496
Automobiles 196,663 178,465
Leasehold improvements 122,419 108,892
Land, building and improvements 956,386 941,175
-------------- --------------
4,669,352 4,026,668
Less accumulated depreciation 1,970,194 1,411,686
-------------- --------------
Net book value $ 2,699,158 $ 2,614,982
============== ==============
Depreciation expense for the years ended December 31, 1996 and 1995 was
approximately $585,500, and $425,700, respectively.
(4) LONG TERM INVESTMENT
In October 1996, the Company entered into a License Agreement, Purchase
Agreement, Stockholders' Agreement and Warrant Agreement with BioSeq, Inc.
("BioSeq") a privately held, technology based development stage company.
The Company has agreed to purchase convertible preferred stock
equivalent to approximately 19% of the capital stock of BioSeq for an aggregate
of $1,482,500 in three installments. Of the $1,482,500, $210,000 was invested at
the date of the agreements and $522,500 was invested in November 1996. The
Company must make the remaining $750,000 installment if BioSeq attains certain
technical milestones by July 31, 1997. If such milestones are not attained by
BioSeq by July 31, 1997, the Company will still have the option to make the
remaining $750,000 investment until December 31, 1997. Under the operative
documents, the Company has price anti-dilution protection, pre-emptive rights
and the right to board representation. In addition, the Company was granted
warrants to acquire additional shares of common stock of BioSeq for additional
consideration under certain conditions, provided that this right is not
exercisable to the extent it would cause the Company's ownership to equal or
exceed 20%. The Company is accounting for its investment in BioSeq on the cost
basis in accordance with the provisions of APB 18 since its cumulative
investment is and must remain less that 20% of the equity of BioSeq and the
Company does not exert significant influence or control. Due to the uncertainty
of technology based development stage enterprises and in accordance with the
provisions of SFAS 121, the Company will perform a periodic analysis of the
investment to determine whether the carrying value of its investment in BioSeq
has been impaired. If so determined, the Company would adjust the carrying value
of its investment by taking a charge to earnings.
Upon the earlier of payment of the final installment of the Company's
aggregate $1,482,500 investment and December 31, 1997, the Company will be
granted a worldwide right to use the BioSeq technology relating to sequencing
and analysis services. The License will be exclusive until BioSeq commences
selling on a commercial basis the equipment used in the DNA sequencing and
analysis process, at which time the License will become non-exclusive. The
License provides that the Company will pay BioSeq royalties ranging from five
percent to ten percent of net revenues arising out of the services performed by
the Company with the licensed technology. The Company will account for the
royalty as a cost of revenue as the revenues are earned.
-29-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) REVENUE FROM SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company performs contract research and certain other services under
contracts, subcontracts and grants from United States Government Agencies,
primarily the National Institutes of Health ("NIH"). Revenue from such
contracts, subcontracts and grants was approximately $1,920,000 in 1996,
$1,628,000 in 1995 and $1,677,000 in 1994.
Export sales accounted for approximately $3,914,000, or 25% of
consolidated revenue in 1996; $3,104,000, or 25% in 1995; and $2,279,000, or 21%
in 1994.
(6) LONG TERM DEBT
The Company's revolving line of credit ("Revolver") has a due date of
June 30, 1998 and bears interest at prime plus 1/2%. Borrowings under the
Revolver are limited to 80% of eligible accounts receivable plus the lesser of
40% of inventory or $1,500,000. The Company had $3,500,000 available under it's
Revolver as of December 31, 1996. Amounts outstanding under the Revolver, if
any, are collateralized by all of the Company's assets and a $2 million life
insurance policy of an officer/stockholder. The Revolver contains covenants
regarding the Company's debt-to-equity ratio and certain minimum debt service
coverage ratios. The Revolver further provides for restrictions on the payment
of dividends, limitations on the acquisition of property and equipment,
limitations on additional borrowings, and certain minimum stock ownership levels
by the officer/stockholder referred to above.
In December 1995, the Company purchased its corporate headquarters and
manufacturing facility in West Bridgewater, MA from its former landlord at a
price of $806,800 including closing costs, and borrowed $750,000 from its bank
to finance the purchase. This mortgage on this property was repaid in December
1996 from proceeds of the Company's initial public offering of common stock. See
also Note 3.
During 1996, convertible debt in the amount of $21,500 was converted
into 14,333 shares of common stock at a price of $1.50 per share. During 1995,
convertible debt in the amount of $9,600 was converted into 5,817 shares of
common stock at a price of $1.65 per share.
The Company prepaid substantially all debt out of the proceeds of its
initial public offering. At December 31, 1996 and 1995, the Company had the
following debt outstanding:
1996 1995
------------ -------------
Revolving line of credit agreement due June 30, 1998. $ - $ 2,784,307
Four notes payable to one bank which had interest rates from 8.22% to 9.25%, and
due dates from October 1998 through December 2000. Collateralized by all the
assets of the Company. - 995,445
Note payable to a bank, due in 84 fixed payments of principal and interest of
$11,729, bearing interest fixed at 8.30% for the first five years, and floating at
prime plus 1.0% for the remaining term. Collateralized by a mortgage and all
of the assets of the Company. - 750,000
Subordinated convertible note payable, which was converted by the holder into
common stock at $1.50 per share. - 21,500
Other installment note payable with an interest rate of 9.75% and due August 2001.
Collateralized by office and laboratory equipment and furniture. 53,768 100,758
------------ -------------
Total long term debt 53,768 4,652,010
Less: current maturities (12,820) (436,509)
------------ -------------
$ 40,948 $ 4,215,501
============ =============
Debt maturities beyond current are $14,128 in 1998, $15,569 in 1999, and $11,251
in 2000.
-30-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INCOME TAXES
The Company's effective tax rate does not significantly differ from the
federal and state income tax statutory rates. The components of the provision
for income taxes are as follows:
1996 1995 1994
------------ ------------ -----------
Current expense: federal and state $ 476,206 $ 130,422 $ 91,242
Deferred (benefit) expense: federal and state (155,495) (61,765) (26,891)
------------ ------------ -----------
Total $ 320,711 $ 68,657 $ 64,351
============ ============ ===========
Significant items making up deferred tax liabilities and deferred tax
assets are as follows:
1996 1995
------------- -------------
Current deferred taxes:
Inventory $ 87,158 -
Accounts receivable allowance 115,548 $ 56,863
Other accruals 80,494 53,903
------------- -------------
Total deferred tax assets 283,200 110,766
Long term deferred taxes:
Accelerated tax depreciation (176,015) (207,361)
Goodwill 13,551 (22,795)
Tax credits - 106,710
State net operating loss carryforwards 60,884 38,805
------------- -------------
Total deferred tax liabilities (101,580) (84,641)
------------- -------------
Total net deferred tax (liabilities) assets $ 181,620 $ 26,125
============= =============
As of December 31, 1996, the state net operating loss carryforwards
expire at various dates beginning in 1999 through 2007.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, laboratory, and research
facilities under operating leases with various terms through July 2000. All the
real estate leases include renewal options at increasing levels of rent.
One of the facility leases includes scheduled base rent increases over
the term of the lease. The amount of base rent payments is being charged to
expense on the straight-line method over the term of the lease. As of December
31, 1996 and 1995, the Company has recorded a liability of $53,900 and $141,100,
respectively, included in accrued expenses to reflect the excess of rent expense
over cash payments since inception of the lease. In addition to base rent, the
Company pays a monthly allocation of the operating expenses and real estate
taxes for the above facilities.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$365,700, $477,600, and $549,700, respectively. At December 31, 1996, the
remaining fixed lease commitment was as follows:
Year Ended Amount
-------------- ----------
1997 254,600
1998 117,300
1999 124,800
2000 79,700
--------
$576,400
--------
Commencing in February 1995, the Company committed under a sponsored
research agreement with a university to fund a research scientist at a cost of
$13,125 per quarter for three years which costs are charged to research and
development expense. In return, the Company has exclusive rights to any anti-HIV
compounds or derivatives developed in the course of this research, provided the
Company obtains certain regulatory approvals from the FDA.
-31-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) RETIREMENT PLAN
In January 1993, the Company adopted a retirement savings plan for its
employees, which has been qualified under Section 401(k) of the Code. Eligible
employees are permitted to contribute to the plan through payroll deductions
within statutory limitations and subject to any limitations included in the
plan. To date, the Company has made no contributions to the plan.
(10) STOCKHOLDERS' EQUITY
COMMON STOCK
On October 31, 1996, the Company commenced trading on the Nasdaq
National Market as a result of the initial public offering of its common stock
("IPO"), raising net proceeds of $11,633,000 from the sale of 1,600,000 shares
at $8.50 per share.
On April 26, 1996, the Company entered into a Stock Purchase Agreement
and Exclusive Distributor Agreement for five years with a foreign distributor.
Pursuant to the Stock Purchase Agreement, the Company issued 117,647 shares of
redeemable common stock at a price per share of $8.50, for which it received net
proceeds of $898,503. Issuance costs were $101,497. Completion of the IPO
terminated the redemption feature. The distributor is restricted from selling
these securities for a one-year period after completion of the IPO. The Company
issued the 80,000 shares of Treasury Stock in connection with this transaction.
On August 8, 1996 the Board of Directors approved a 1-for-2 reverse
stock split and an increase in authorized common shares to 20,000,000, and
authorized 1,000,000 shares of preferred stock (par value $.01), which were
approved by the stockholders on September 10, 1996. The stock split has been
retroactively reflected in the accompanying financial statements and notes for
all periods presented.
OPTIONS AND WARRANTS
The Company has two stock option plans which are administered by a
committee of the Board of Directors who determines the employees and affiliated
persons to receive options and the number and option price of shares covered by
each such option. Options granted under both plans may be either incentive stock
options or non-qualified stock options. In general, for incentive stock options,
the option price shall not be less than the fair market value at the time the
option is granted. Generally, options become exercisable at the rate of 25% at
the end of each of the four years following the anniversary of the grant.
Options issued expire ten years from the date of grant, or 30 days from the date
of termination or affiliation.
At December 31, 1996, 897,600 shares have been reserved for
non-qualified stock options, of which 98,875 are available for future grants. At
December 31, 1996, 750,000 shares have been reserved for incentive stock
options, of which 574,462 are available for future grants.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for the plans. Accordingly, no compensation cost has been recognized
for the plans. Had compensation cost for the plans been determined on the fair
value at the grant dates for awards under the plans in 1996 and 1995 using the
minimum value method consistent with SFAS No. 123 for grants prior to the IPO,
the Company's net income would have been reduced by $77,500 or $0.02 per share
in 1996, and by $23,300 or $0.01 per share in 1995. In computing these pro forma
amounts the Company has assumed a risk-free interest rate equal to approximately
6.18%, no dividends, and expected average option life of approximately five
years. There were no options granted subsequent to the IPO. SFAS 123 does not
apply to awards prior to 1995, and additional awards in future years are
anticipated. The average fair value of options granted during 1996 and 1995 is
estimated as $1.93 and $1.59, respectively, on the date of the grant.
The Company has issued warrants in connection with certain debt
financings. As of December 31, 1996, 120,000 shares of Common Stock have been
reserved for issuance pursuant to the exercise of such warrants at a weighted
average exercise price of $2.50 per share.
-32-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY - (CONTINUED)
The Company has reserved shares of its authorized but unissued common
stock for the following:
Stock Options Warrants
--------------------------------------------------------------------
Weighted Weighted Total
Average price Average price ----------------------------
Shares per share Shares per share Shares Exercisable
---------------- --------------- -------------- --------------- --------------- -----------
Balance outstanding, December 31, 1993 881,850 2.14 306,138 2.66 1,187,988 712,163
Granted - - - - -
Exercised (19,375) 0.68 (4,600) 3.75 (23,975)
Expired (81,525) 2.69 - - (81,525)
---------------- -------------- ---------------
Balance outstanding, December 31, 1994 780,950 2.12 301,538 2.73 1,082,488 827,576
Granted 73,187 6.00 - - 73,187
Exercised (6,000) 1.88 (41,200) 2.58 (47,200)
Expired (47,850) 2.64 - - (47,850)
---------------- -------------- ---------------
Balance outstanding, December 31, 1995 800,287 2.45 260,338 2.85 1,060,625 879,038
Granted 140,600 7.27 - - 140,600
Exercised (1,500) 4.50 (84,260) 2.88 (85,760)
Expired (21,500) 6.05 (56,078) 3.54 (77,578)
================ ============== ===============
Balance outstanding, December 31, 1996 917,887 3.10 120,000 2.50 1,037,887 839,272
================ ============== ===============
The following table summarizes information concerning options outstanding and exercisable as of December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------- ---------------------------------
Range of Exercise Prices Weighted Weighted Weighted
Average Number of Average Number of Average
Remaining Life Options Exercise Price Options Exercise Price
-----------------------------------------------------------------------------------------
$0.25 - $1.65 3.49 359,500 1.21 359,500 1.21
$2.50 - $4.50 5.59 359,600 2.98 328,538 2.89
$6.00 - $8.50 9.40 198,787 6.86 31,234 6.00
=============== ================
917,887 719,272
=============== ================
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited (Amounts in thousands, except for per share data)
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---------- ---------- ---------- ----------
Total revenue $ 3,084 $ 3,844 $ 4,015 $ 4,566
Gross profit 1,051 1,621 1,752 1,976
Net income (loss) (97) 179 163 236
Income (loss) per share (0.04) 0.06 0.05 0.06
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---------- ---------- ---------- ----------
Total revenue $ 2,728 $ 2,837 $ 2,896 $ 3,810
Gross profit 853 1,105 1,107 1,474
Net income (loss) (39) 3 (19) 159
Income (loss) per share (0.01) 0.00 (0.01) 0.05
-33-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) SUBSEQUENT EVENTS
SOURCE SCIENTIFIC ACQUISITION
On March 26, 1997 the Company entered into an Asset Purchase Agreement
to acquire substantially all of the assets and business and assume selected
liabilities of Source Scientific, Inc. ("Source") for $2.1 million in cash. A
substantial majority of this purchase price will be allocated to goodwill and
other intangibles Goodwill is expected to be amortized over 10 years. Source is
a developer and manufacturer of a broad line of clinical instrumentation and
biomedical devices for the worldwide in vitro diagnostic industry. The Company
has advanced Source $650,000 in the form of senior secured demand notes to fund
working capital, product development and other operational needs. The notes bear
interest of 15%. The Company expects to make additional advances prior to
closing. The proposed acquisition is subject to standard conditions, including
Source shareholder approval and will be recorded in accordance with purchase
accounting.
NEW LOAN AGREEMENT
Effective March 28, 1997, the Company terminated its Revolver and
entered into a $7.5 million uncollateralized revolving line of credit ("New
Line") with its bank. The New Line matures on June 30, 1999; bears interest at
the Company's option based on either base rate, LIBOR plus 1.75%, or overnight
money market rate plus 1.75%; and carries a facility fee of .25% per annum,
payable quarterly. The New Line contains covenants regarding the Company's ratio
of total liabilities-to-equity, minimum tangible net worth, and minimum debt
service coverage ratio. The New Line further provides for restrictions on the
payment of dividends, and limitations on additional borrowings.
(13) SUPPLEMENTARY PRO FORMA EARNINGS PER SHARE - (UNAUDITED)
If the Offering had been completed on January 1, 1995, a portion of the
proceeds would have been used to retire all debt outstanding at that time, and
all debt incurred in 1995 and 1996 would not have been needed. Based on the
foregoing, supplemental pro forma net earnings per share of common stock would
have been $.19 and $.09 for the years ended December 31, 1996 and 1995,
respectively. Such net earnings per share of common stock are based on 3,544,183
and 3,626,391 shares of common stock respectively, consisting of 3,069,269 and
3,151,477 shares of common stock and common stock equivalents plus 474,914
shares assumed to be issued at $8.50 per share as if the Offering had occurred
on January 1, 1995 to retire indebtedness outstanding during 1995.
-34-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
We have audited the accompanying consolidated balance sheets of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1997, except as to
Note 12, for which the date is
March 28, 1997
-35-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference to
the information under Part I, Item 1 - Business under the caption "Executive
Officers of the Registrant" at page 14 of this Report, and to the information in
the Registrant's definitive Proxy Statement which is expected to be filed by the
Registrant within 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement which is expected
to be filed by the Registrant within 120 days after the close of its fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement which is expected
to be filed by the Registrant within 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement which is expected
to be filed by the Registrant within 120 days after the close of its fiscal
year.
-36-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................................22
Consolidated Statements of Income for the three years ended December 31, 1996......................23
Consolidated Statements of Changes in Stockholders' Equity for the three years ended
December 31, 1996.................................................................24
Consolidated Statements of Cash Flows for the three years ended December 31, 1996..................25
Notes to Consolidated Financial Statements.........................................................26
Report of Independent Accountants..................................................................35
(A) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule II-Valuation and Qualifying Accounts......................................................42
Report of Independent Accountants..................................................................43
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial Statements.
(A) 3. EXHIBITS:
Exhibit No.
3.1 Amended and Restated Articles of Organization of the Company**
3.2 Amended and Restated Bylaws of the Company**
4.1 Specimen Certificate for Shares of the Company's Common Stock**
4.2 Description of Capital Stock (contained in the Restated Articles of Organization of the Company
filed as Exhibit 3.1) **
10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems, Inc. and the Company**
10.2 Exclusive License Agreement, dated December 6, 1994, between the University of North Carolina at
Chapel Hill and the Company**
10.3 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No.
1-AI55273) **
10.4 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No.
1-AI-55277) **
10.5 Contract, dated March 1, 1993, between National Cancer Institute and the Company **
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company**
10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland Facility between Cambridge Biotech
Corporation and the Company**
10.8 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility between MB Associates
and the Company**
10.9 Worcester County Institution for Savings Warrant dated December 1, 1995 (No. 1) **
10.10 Worcester County Institution for Savings Warrant dated July 26, 1993 (No. 2) **
10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G Diagnostics Limited Partnership I and
the Company, as amended**
-37-
10.12 Purchase and Sale Agreement, dated December 11, 1995, for 375 West Street Property between James
Leonard, Trustee, C.W.B. Trust and the Company**
10.13 Purchase and Sale Agreement, dated December 20, 1995, for 80 Manley Street Property between the
Company and Donald M. Leonard, Trustee, Live Oak Realty Trust**
10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex Co., Ltd. and the Company**
10.15 1987 Non-Qualified Stock Option Plan**++
10.16 Employee Stock Option Plan**++
10.17 Underwriters Warrants, each dated November 4, 1996, between the Company and each of Oscar Grus &
Son Incorporated and Kaufman Bros., L.P. **
10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.22 Stockholders' Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.24.1 Commercial Loan Agreement, dated as of March 28, 1997, between
The First National Bank of Boston and the Company
10.25 Asset Purchase Agreement, dated March 26, 1997 between Source Scientific, Inc. and the Company
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
27 Financial Data Schedule
- ------------------------
++ Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby
incorporated by reference.
(B) REPORTS ON FORM 8-K.
The Registrant did not file any Current Reports on Form 8-K
during the quarter ended December 31, 1996.
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 1997 Boston Biomedica, Inc.
By: /s/ Richard T. Schumacher
-------------------------
Richard T. Schumacher
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLES DATE
---------- ------ ----
/s/ Richard T. Schumacher President, Chief Executive Officer, March 28, 1997
---------------------------------- and Chairman of the Board
Richard T. Schumacher (Principal Executive Officer)
/s/ Kevin W. Quinlan Senior Vice President, Finance; March 28, 1997
----------------------------------- Chief Financial Officer; Treasurer
Kevin W. Quinlan and Director
(Principal Accounting Officer)
/s/ Calvin A. Saravis Director March 28, 1997
-----------------------------------
Calvin A. Saravis
/s/ Henry A. Malkasian Sr. Director March 28, 1997
-----------------------------------
Henry A. Malkasian Sr.
/s/ Francis E. Capitanio Director March 28, 1997
-----------------------------------
Francis E. Capitanio
-39-
EXHIBIT INDEX
Exhibit No. Reference
3.1 Amended and Restated Articles of Organization of the Company A**
3.2 Amended and Restated Bylaws of the Company A**
4.1 Specimen Certificate for Shares of the Company's Common Stock A**
4.2 Description of Capital Stock (contained in the Restated Articles of A**
Organization of the Company filed as Exhibit 3.1)
10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems, Inc. and A**
the Company
10.2 Exclusive License Agreement, dated December 6, 1994, between the University of A**
North Carolina at Chapel Hill and the Company
10.3 Contract, dated September 30, 1995, between the National Institutes of Health A**
and the Company (No. 1-AI55273)
10.4 Contract, dated September 30, 1995, between the National Institutes of Health A**
and the Company (No. 1-AI-55277)
10.5 Contract, dated March 1, 1993, between National Cancer Institute and the Company A**
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company A**
10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland Facility between A**
Cambridge Biotech Corporation and the Company
10.8 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility A**
between MB Associates and the Company
10.9 Worcester County Institution for Savings Warrant dated December 1, 1995 (No. 1) A**
10.10 Worcester County Institution for Savings Warrant dated July 26, 1993 (No. 2) A**
10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G Diagnostics Limited A**
Partnership I and the Company, as amended
10.12 Purchase and Sale Agreement, dated December 11, 1995, for 375 West Street A**
Property between James Leonard, Trustee, C.W.B. Trust and the Company
10.13 Purchase and Sale Agreement, dated December 20, 1995, for 80 Manley Street A**
Property between the Company and Donald M. Leonard, Trustee, Live Oak Realty
Trust
10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex Co., Ltd. A**
and the Company
10.15 1987 Non-Qualified Stock Option Plan* A**
10.16 Employee Stock Option Plan* A**
10.17 Underwriters Warrants, each dated November 4, 1996, between
the Company and B** each of Oscar Grus & Son Incorporated and
Kaufman Bros., L.P.
-40-
10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company A**
10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company A**
10.22 Stockholders' Agreement, dated October 7, 1996, between BioSeq, Inc. and the A**
Company
10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company A**
10.24.1 Commercial Loan Agreement, as of dated March 28, 1997, between
The First Filed herewith National Bank of Boston and the
Company
10.25 Asset Purchase Agreement, dated March 26, 1997 between Source Scientific, Inc. Filed herewith
and the Company
11.1 Statement re: Computation of Per Share Earnings Filed herewith
21.1 Subsidiaries of the Company Filed herewith
27 Financial Data Schedule Filed herewith
- ------------------------
A Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-10759)(the "Registration Statement"). The
number set forth herein is the number of the Exhibit in said registration
statement.
B Incorporated by reference to the Registration Statement, where the
Exhibit was filed as Exhibit No. 10.17 and contained in Exhibit 1.1.
* Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby
incorporated by reference.
-41-
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Recoveries
Balance at for Accounts Uncollectible Balace at
Beginning Additions to Previously Accounts End of
Allowance for Doubtful Accounts of Period Allowance Written Off Written Off PPeriod
------------------------------------------------------------------------------------
1996 $ 142,372 $ 429,677 $ 62,753 $(282,744) $ 352,058
1995 94,723 181,084 - (133,435) 142,372
1994 43,956 102,099 - (51,332) 94,723
-42-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
In connection with our audits of the consolidated financial statements
of Boston Biomedica, Inc. and Subsidiaries, as of December 31, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996, which
financial statements are included in this Annual Report on Form 10-K, we have
also audited the consolidated financial statement schedule listed in Item 14
herein.
In our opinion, this consolidated financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1997
-43-