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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A No. 1
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(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, 2000, or
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 .
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BOSTON BIOMEDICA, INC.
(Exact Name of Registrant as Specified in its Charter)
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Massachusetts
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(State or other Jurisdiction of Incorporation or Organization)
375 West Street,
West Bridgewater, Massachusetts
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(Address of Principal Executive Offices)
02379-1040
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(zip code)
04-2652826
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(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code: (508) 580-1900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark 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 by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of the voting common stock held by
non-affiliates of the registrant at February 28, 2001 was $6,799,889, based on
the closing price of the common stock as quoted on the Nasdaq National Market on
that date.
As of March 12, 2001 there were 6,454,841 shares of the registrant's common
stock outstanding.
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PART I
ITEM 1. BUSINESS
Boston Biomedica, Inc. and its wholly-owned subsidiaries (together, "the
Company"), provide products and services for the detection and treatment of
infectious diseases such as AIDS and Viral Hepatitis. As of March 1, 2001, the
Company had three business units, which are comparable to operating segments
(the terms "business units" and "operating segments" are used herein
interchangeably):
(1) BBI Diagnostics, an ISO 9001 certified manufacturer of quality control
and other diagnostic products used to increase the accuracy of in
vitro diagnostic tests;
(2) BBI Biotech Research Laboratories, the research and development arm
of the Company which supplements its support for the other BBI
business units with research contracts and repository services
primarily for agencies of the United States government; and
(3) BBI Source Scientific, an ISO 9001 and EN 46001 certified
manufacturer of laboratory and medical instruments.
In addition, the Company is conducting research and development in the area
of Pressure Cycling Technology ("PCT") with the goals of introducing new
solutions for a number of healthcare issues, including: inactivation of
pathogens in human plasma, extraction of nucleic acids, food safety, and
genomics.
In late 2000, the Company elected to exit the clinical laboratory segment
of the business and accordingly, in February 2001, the Company sold certain
assets of BBI Clinical Laboratories, a wholly-owned subsidiary, to a third
party. The Company intends to complete its' exit from this segment of the
business by the end of 2001.
The Company was organized in Massachusetts in 1978, and commenced
significant operations in 1986.
In July 1999, the Company announced a major reorganization and the
formation of a corporate function. Pursuant to this reorganization a Senior Vice
President and General Manager was appointed for each business unit, reporting to
the President & Chief Operating Officer. The responsibility of the General
Manager is to achieve the agreed upon goals and plan of the business unit. The
primary focus of corporate is to oversee the business units and guide them
according to the strategic direction of the Company.
In September 1999, the Company moved its research and development
activities in PCT from leased laboratory space in Woburn, Massachusetts to its
BBI Biotech facility in Gaithersburg, Maryland. This was done to allow the
scientific team working on PCT to have easy and open access to the molecular and
cellular biology capabilities at BBI Biotech, as well as to reduce operating
costs and promote efficiencies.
In October 1999, the Company formed a new, wholly-owned subsidiary, Panacos
Pharmaceuticals, Inc., ("Panacos"), a Delaware corporation. All of the Company's
technology related to its drug discovery and vaccine programs, consisting
primarily of patents and related sponsored research agreements, were transferred
to Panacos effective January 2000. In accordance with its strategic plans,
Panacos obtained additional equity financing from third party investors in
November 2000 in order to obtain the substantial amount of capital required to
progress to more advanced stages of drug development including human clinical
trials. As of December 31, 2000, the Company owns approximately 30.5% of the
equity of Panacos via nonvoting shares.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (1) capitalize on
both the emerging end-user market for quality control products, molecular
testing market, (2) develop new products and services, (3) enhance technical
leadership, (4) capitalize on complementary business operations, and (5) pursue
strategic acquisitions and alliances.
2
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 materials include disposable diagnostic components, instructions,
and reaction mixing vessels (generally 96-well plates or test tubes) that are
coated with the relevant infectious disease antigens, antibodies or other
materials. To perform the test, typically either a technician or a specially
designed instrument 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 or radioactive
count), that 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) that 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 and clinical laboratories worldwide. 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
("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
groups: (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
Through its business unit BBI Diagnostics, the Company offers a broad array
of "Diagnostic Products," for in vitro diagnostic use, consisting of Quality
Control Panels, Accurun(R) Run Controls and Diagnostic Components, all used in
connection with infectious disease testing. Diagnostic 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
are as specific, reproducible, and sensitive as possible. The Company's
Accurun(R) 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.
3
Through its wholly-owned subsidiary, BBI Source Scientific, Inc., ("BBI
Source"), the Company designs, manufactures and markets "Laboratory
Instruments", consisting of readers and washers and other small medical devices.
These instruments are used in hospitals and clinics, and in research,
environmental and food testing laboratories. Utilizing a common hardware
technology platform, these instruments are used in connection with the
performance of an in-vitro diagnostics test, including reading the test result.
BBI Biotech Research Laboratories, Inc., ("BBI Biotech"), another
wholly-owned subsidiary, is the R&D "arm" of the Company, helping to develop new
products and services for the other business units. BBI Biotech seeks to obtain
government grants and other research support wherever possible to help fund the
cost of this R&D. In addition, BBI Biotech provides repository services for the
United States government, and other commercial services for laboratories and
test kit manufacturers.
During each of the last three fiscal years, each of the Company's operating
segments contributed at least 15% of the Company's consolidated revenue, with
the exception of BBI Source in fiscal 2000 and 1999 and the "Other" segment in
fiscal 2000, 1999 and 1998. The Company's Consolidated Financial Statements set
forth in Item 8 of this report provide financial information relating to each of
the Company's operating segments.
Diagnostic Products
The Company manufactures its Diagnostic Products from human plasma and
serum that are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 20,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
Within the Diagnostic Products class are two groups: Quality Control Products,
consisting of Quality Control Panels and Accurun(R) Run Controls, and Diagnostic
Components.
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 Panels are designed for measuring overall test kit performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's data sheets, which contain comprehensive quantitative data useful for
comparative analysis, are an integral part of its Quality Control Panels. 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 laboratory 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 laboratory settings. In addition, the Company
provides information on its data sheets on the reactivity of panel components in
all FDA licensed test 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:
4
Quality Control Panels
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Product Line Description Use Customers
------------------------- --------------------------------------- -------------------------------- -------------------------------
Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit manufacturers and
single individual over a specific sensitivity of competing regulators.
time period showing conversion from manufacturers' test kits,
negative to positive for markers of enabling the user to assess
an infectious disease. the sensitivity of a test in
detecting a developing
antigen/antibody.
------------------------- --------------------------------------- -------------------------------- -------------------------------
Performance Panels A set of 10 to 50 serum and plasma Determine test kit performance Test kit manufacturers and
samples collected from many different against all expected levels of regulators.
individuals and characterized for the reactivities in the evaluation
presence or absence of a particular of new, modified and improved
disease marker. test methods.
------------------------- --------------------------------------- -------------------------------- -------------------------------
Sensitivity Panels Precise dilutions of human plasma or Evaluate the low-end Test kit manufacturers.
serum human plasma or serum analytical sensitivity of a
containing a known amount of an test kit.
infectious disease marker as
calibrated against international
standards.
------------------------- --------------------------------------- -------------------------------- -------------------------------
Qualification Panels Dilutions of human plasma or serum Demonstrate the consistent Clinical reference
manifesting a full range of lot-to-lot performance of test laboratories, blood banks,
reactivities in test kits for a kits, troubleshoot problems, and hospital laboratories.
specific marker. evaluate proficiency, and
train laboratory technicians.
------------------------- --------------------------------------- -------------------------------- -------------------------------
OEM Panels Custom-designed Qualification Panels Train laboratory personnel on Custom designed with test kit
for regulators and test kit new test kits or equipment. manufacturers and regulators
manufacturers for distribution to as an end-user product or for
customers or for internal use. internal use.
------------------------- --------------------------------------- -------------------------------- -------------------------------
Verification Panels Verification Panels contain naturally Verify accuracy and ensure Clinical reference
occurring undiluted samples at that reagents perform to laboratories, blood banks,
varying titers. expectation: also used to hospital laboratories.
troubleshoot system problems
and to document problem
resolution.
------------------------- --------------------------------------- -------------------------------- -------------------------------
5
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, OEM, and verification panels
generally range from $100 to $200 per panel.
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 from a different individual, 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. However, the Company cannot be
certain that it will be able to continue to obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis (A, B and C), Lyme Disease and ToRCH (Toxoplasma,
rubella, cytomegalovirus and herpes simplex virus).
Accurun(R) Run Controls
End-users of test kits use run controls to monitor test performance, and
minimizing false negative test results and improving error detection. Run
controls consist of one or more specimens of known reactivity that are tested
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 for the run control,
determined by the user, to measure whether the other, unknown 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 what is known
as 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 AccuChart(TM) tracking and charting software, used as part of
a laboratory's quality assurance program, runs on a personal computer and is
designed to provide the data tracking capability needed to document laboratory
performance.
The Company's Accurun(R) 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(R) 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(R) 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(R) Run Control products in
the fourth quarter of 1993 and has since developed and released for sale an
additional 50 Accurun(R) products. Five products have been discontinued, for a
total of 49 Run Controls available as of December 31, 2000. The majority of
these products are available for diagnostic purposes; the others currently are
limited to research use. Current Accurun(R) Run Control products generally range
in price from $5 to $60 per milliliter. All of the Company's Accurun(R) Run
Controls for diagnostic use require either FDA premarket clearance (a 510(k)) or
validation studies (if the products are exempt from FDA submission requirements
under the FDA Modernization Act of 1997), prior to being marketed for diagnostic
use. As of March 1, 2001, a total of 14 products in the Accurun 1(R) line and 27
single analyte Accurun(R) controls have either received 510(k) clearance or have
been validated.
6
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 and 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.
Laboratory Instruments
BBI Source, the Laboratory Instrumentation operating segment, designs,
manufactures and markets laboratory instruments and other small medical devices
used in hospitals and clinics and in research, environmental and food testing
laboratories. These instruments are generally sold on a private-label or OEM
basis for other companies utilizing a common hardware technology platform. The
instruments manufactured by the Company use advanced optical detection methods
(luminescence, fluorescence, reflectance, photometry), robotics, fluidics, and
unique software, all of which are desired by customers reselling or supplying
state-of-the-art instrumentation systems to laboratories worldwide in various
applications.
Most of the Laboratory Instrumentation products currently being offered
have been commercialized since 1985 and were primarily developed in conjunction
with in vitro diagnostics test kit manufacturers. BBI Source hopes to attract
development partners for new prototype products. Management believes that these
products address important market segments in biomedical and clinical diagnostic
testing and in environmental monitoring and food testing research. The BBI
Source product line currently includes the following:
MicroChem(R) and MicroChemII(R) Photometers. A compact, low-cost,
photometer designed for immunoassay and general chemistry applications.
ChemStat(R) Automated Photometer. A high-speed, automated photometer with a
sample capacity of 95 tubes and a read rate of one sample per second. This
product is suited for high-volume processing.
EXECWASH(R) Washing System. An automated immunoassay washing system that
can be quickly configured by the user to wash different solid-phase assay
formats by a proprietary manifold design. The EXEC-WASH is fully compatible with
a variety of other Company products, such as the ChemStat and the E/LUMINA II
Luminescence Analyzer.
Protocol Design Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(R) Windows and serves
as the master programming center for EXEC-WASH systems to create fluid handling
protocols.
Verif-EYE(R) A reflectance reader for rapid, reliable results for use in
research and development or process inspection and verification.
Services
The Company seeks to focus its specialty laboratory services in the
advanced biomedical research area. The Company concentrates its services in
those areas of infectious disease testing which are complementary to its quality
control and diagnostic products businesses.
7
Contract Research and Services
The BBI Biotech operating segment offers a variety of research services in
molecular biology, cell biology and immunology to governmental agencies,
diagnostic test kit manufacturers and biomedical researchers. Molecular biology
services include DNA extractions and sequencing, recombinant DNA support, probe
labeling, performing tests for researchers, and development of custom nucleic
acid amplification 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 and custom
western blot assays.
The Company currently provides contract research services under several
contracts and grants. These services are primarily related to infectious disease
diagnostics, in support of the products and services that the Company wishes to
develop. Current contracts include the following: clinical trials support for
candidate HIV vaccines, identification and DNA sequencing of human genes
involved in neurological disorders, development of PCR based assays for
Babesiosis and Transfusion Transmitted Virus, and microtiter plate assays for
HIV-1 genotyping. Additional assays under development include PCR based assays
for Parvovirus B19, Hepatitis B virus and Erhichiosis.
Blood Processing and Repository Services
Since 1983, BBI Biotech has provided blood processing and repository
services for the National Cancer Institute ("NCI"), also a part of the National
Institutes of Health ("NIH"). The repository stores over 8,000,000 specimens and
processes or ships up to several thousand specimens per week in support of
various NIH cancer and virus research programs. In 1997, BBI Biotech was awarded
a five-year (including renewal options) NCI repository contract with aggregate
payments of up to $5.2 million. In 1998, BBI Biotech received a six-year $4.7
million repository contract (including five one-year extension options) with the
National Heart, Lung and Blood Institute of the NIH. In 1999, it received a
seven-year, $9.6 million repository contract with the National Institute of
Allergy and Infectious Disease. In 2000, BBI Biotech was awarded a one-year
$854,000 subcontract by New England Research Institutes, Inc. to provide
repository and related specimen processing and testing services for the
Hepatitis C Antiviral Long-term Treatment against Cirrhosis (HALT-C) Trial, a
clinical trial funded by the National Institutes of Diabetes and Digestive and
Kidney Diseases (NIDDK), an institute of the NIH. BBI Biotech is currently
focusing on developing a research and development program to extend the life and
maintain the quality of specimens that are stored at ultra-low temperatures as
well as expanding the Company's repository customer base to include more
industry clients. To date all renewal options under these contracts have been
approved, although the Company cannot be certain that any subsequent options
will be exercised.
Other Services
Clinical Trials. The Company from time to time conducts clinical trials for
domestic and foreign test kit and device manufacturers. Manufacturers must
collect data for submission to the United States FDA and other countries'
regulatory agencies, and these manufacturers contract with organizations such as
the Company to perform this work. By providing this service, the Company is able
to maintain close contact with test kit and device 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 and device manufacturers seeking to obtain
FDA approval for their infectious disease test kits and medical devices.
Laboratory Instrumentation Services. BBI Source offers services to design,
develop, manufacture and distribute laboratory instruments to companies seeking
to market biomedical products manufactured under government-approved
manufacturing practices. These services range in complexity from consulting to
full system development and distribution.
8
After-sales Service. BBI Source also provides after-sales service.
Management believes that after-sales service is a major marketing advantage in
many of the Company's markets, since many of the Company's customers do not
maintain their own full service departments. Servi-Trak(R), a proprietary
software program, is a key element of this after-sales service. The Company's
service department is located at BBI Source's facility in Garden Grove,
California. The Company utilizes an independent third party contractor located
in Giessen, Germany, to provide a fully functional European service and support
center.
Research and Development
The Company's research and development effort subsequent to December 31,
2000 is focused on (i) the development of new and improved Quality Control
Products (Panels and Accurun(R)) for the emerging end-user market and the in
vitro diagnostics market, (ii) the design and development of new laboratory
instruments and mechanical and optical detection techniques, emphasizing its
Verif-EYE reflectance reader, and (iii) the development of pressure cycling
technology ("PCT") for nucleic acid purification and pathogen inactivation. The
Company has approximately 20 full or part-time employees involved in its
research and development effort associated with continuing operations as of
December 31, 2000. As announced in 1998, at the time of its acquisition of
BioSeq, Inc., the Company continues to invest significantly in research and
development both in whole dollars and as a percentage of revenue in 2000, 1999
and 1998. 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, manufacturing, regulatory and
finance personnel to identify and prioritize the development of new products and
services. Whenever it can, the Company seeks to fund its research and
development activities from grants provided by various agencies and departments
of the United States government. See also "Contract Research and Services."
Quality Control Products
In the area of Quality Control Products, the Company's product development
activities center on the identification and characterization of materials for
the manufacture of new products and the replacement of sold-out products. During
2000, the Company introduced 11 new Seroconversion, Performance, and Sensitivity
Panel products, and 4 new Accurun(R) Run Controls. The Company is developing new
Quality Control Products for use with both immunological and molecular
diagnostic tests for subtypes and variants of HIV, HCV and HBV, and a variety of
controls targeted for leading instrument platforms. The Company has increased
the number of Quality Control Products it offers from approximately 20 products
in 1990 to more than 200 in 2000.
Laboratory Instruments
The Company's product development activities related to laboratory
instruments are centered on additional configurations of a "reflectance" reader
to produce objective results from rapid in vitro diagnostic tests as well as an
updated version of the MicroPhotometer (MicroChemII). In addition, the Company
continues to work on applications for existing products to broaden their
utilization.
Pressure Cycling Technology
BBI BioSeq, a wholly-owned subsidiary of the Company, owns patent pending
technology based on PCT. PCT research is primarily focused in two areas: (1)
nucleic acid extraction and purification from target pathogens in connection
with sample preparation for PCR or other molecular testing; and (2) pathogen
inactivation of blood plasma intended for transfusion or for further
fractionation into transfusion products. See Note 2 to the Company's Notes to
Consolidated Financial Statements in Item 8 hereunder for further details
related to the 1998 acquisition of BioSeq, Inc.
9
Sales and Marketing
The Company's sales and marketing efforts are organized by business unit
consistent with the unit's business objectives, and coordinated via frequent
planning with senior management. Overall, the Company employs approximately 24
people in sales, marketing, and customer service functions associated with
continuing operations as of December 31, 2000. The Company's overall marketing
strategy is to focus on the needs of its customers in two broad areas: (i) the
quality and accuracy of test results in the in vitro diagnostic industry, and
(ii) products and services in support of infectious disease researchers.
The strategy for Diagnostic Products is to focus on customer needs 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 end-user
portion of this market is promoted under the marketing platform, known as "Total
Quality System" ("TQS"). TQS is a package of Quality Control Products, including
the Company's Accurun(R) Run Controls and AccuChart Quality Control Software,
that 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(R) line of run control products. In
addition, the Company continues to expand the Accurun(R) product line to support
the high growth nucleic acid testing market, and to capitalize on the worldwide
implementation of new technology to improve the safety of blood products.
The Company's Diagnostic Products are currently sold through a combination
of telephone, mail, third party distributors and direct sales efforts.
Domestically, Diagnostic Products are sold through a direct sales force led by a
Director of Sales and Marketing. The sales force consists of two sales group
managers and 12 sales representatives. Internationally, the Company distributes
its Diagnostic Products both directly and through 22 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. The Company's Laboratory Instruments are sold through a direct
domestic and international sales force consisting of one director and one sales
representative.
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 occasional advertising in industry
publications, technical presentations, and exhibitions at local, national and
international trade shows and expositions. In 1999 the Company introduced a new
product information library on its web site (www.bbii.com) allowing customers,
field sales personnel and international distributors immediate access to
detailed product information and marketing literature.
Seasonality
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, primarily customer
purchasing patterns, driven by end-of-year expenditures, and seasonal demand. In
particular, the Company's sales of its off-the-shelf Diagnostic Products
typically have been highest in the fourth quarter and lowest in the first
quarter of each fiscal year, whereas OEM product sales may peak in any quarter
of the year, depending on the customer's underlying production cycle for their
product. Research Contracts are generally for large dollar amounts spread over
one to five-year periods, and upon completion, frequently do not have renewal
phases. As a result, these contracts 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 performed.
10
Customers
The Company's customers for Diagnostic Products consist of four major
groups: (1) international diagnostics and pharmaceutical manufacturing
companies, such as Abbott Diagnostics, Bayer, bioMerieux, Biorad, Chiron,
Dade-Behring, DiaSorin, Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson &
Johnson), and Sanofi Diagnostics; (2) 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, (3)
national and international proficiency providers such as the College of American
Pathologists and the European Union Concerted Action for Quality Control and (4)
end-users of diagnostic test kits, such as hospital and independent clinical
laboratories, including Quest Diagnostics, Specialty Laboratories, public health
laboratories and blood banks, including the American Red Cross, Swiss Red Cross,
and United Blood Services.
The Company's customers for Laboratory Instruments consist of international
diagnostic and pharmaceutical manufacturing companies and are generally sold on
an OEM basis, for use by hospitals, and clinical and research laboratories. In
addition, Laboratory Instruments are sold directly to environmental and food
testing laboratories, and wineries. Customers include Hitachi Chemical
Diagnostics, Beckman/Hybritech Inc., Vicam, and Toray Fuji Bionics Inc. The
Company's customers for contract research include various agencies of the
National Institutes of Health (NIH) such as the National Institute of Allergies
and Infectious Disease ("NIAIDS"), the National Cancer Institute ("NCI"), and
the National Heart Lung and Blood Institute ("NHLBI").
The Company does not have long-term contracts with its customers for
Diagnostic Products, which are generally sold pursuant to purchase orders for
discrete purchases. Laboratory Instruments are generally sold on an OEM basis
under short-term contracts with monthly delivery dates. The Company believes
that its relationships with customers are satisfactory.
The Company's Consolidated Financial Statements, including the Notes
thereto, set forth in Item 8 of this report provide information relating to the
Company's foreign and domestic sales.
During the fiscal years 2000, 1999, and 1998, sales (from continuing
operations) to the Company's three largest customers accounted for an aggregate
of approximately 20%, 24% and 24%, respectively, of the Company's net sales,
although the customers were not identical in each period. During the fiscal
years 2000, 1999, and 1998, the combined revenues from all branches of the
National Institutes of Health, a United States Government agency, accounted for
approximately 30%, 23% and 18%, respectively, of total consolidated revenues
from continuing operations of the Company. While the Company believes that the
loss of any one of these customers would have an adverse effect on the Company's
results, this risk is partially mitigated by the diversity of its customer base
within the in vitro diagnostics industry and the different diseases and
instrument platforms on which they focus.
Manufacturing and Operations
The Company manufactures and assembles Diagnostic Products at its facility
in West Bridgewater, Massachusetts. Raw materials (primarily plasma and serum)
are acquired from a variety of vendors and through a program of donor
recruitment, screening, management, and plasma/serum collection and
characterization. Laboratory instruments are manufactured and assembled at the
Company's facility in Garden Grove, California. All important raw materials and
sub-assemblies are acquired from a variety of vendors with multiple sources of
supply.
The Company operates its research and development laboratory (including
PCT) in Gaithersburg, Maryland and a repository facility in Frederick, Maryland.
See "Item 2 -- PROPERTIES."
11
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 its current and future markets could be adversely affected.
In the area of Quality Control Products, the Company competes in the United
States with NABI (formerly North American Biologicals, Inc.) in run controls and
quality control panel products, with Acrometrix, Dade International, Bio-Rad
Laboratories, Inc., and Blackhawk Biosystems Inc. in run controls, and with a
number of smaller, privately-held companies in quality control panels. In
Europe, in addition to the above, the Dutch Red Cross offers several run control
and panel products. The Company believes that all of these competitors currently
offer a less diverse line of panel and run control products than the Company,
although the Company cannot be certain that these companies will not expand
their product lines.
In the Diagnostic Components area, the Company competes with 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.
The laboratory instrument manufacturing industry is diverse and highly
competitive. The Company believes its technology base, reputation for
reliability, systems integration and service capabilities provide it with a
competitive advantage over its competitors which include: Dynatech Corp,
Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado Medtech, Inc.) and SeaMed, as well as numerous, smaller companies,
such as Awareness Technology Inc.
BBI Biotech competes primarily with BioReliance Corporation and several
universities for research and development contracts and with McKesson
Bioservices, Inc., for repository services.
Intellectual Property
The Company holds as trade secrets current technology used to prepare
Basematrix and other blood-based products. None of the Company's Diagnostic
Components has been patented. The Company relies primarily on a combination of
trade secrets and non-disclosure and confidentiality agreements to establish and
protect its proprietary rights in these products and related technology. The
Company cannot be certain that others will not independently develop or
otherwise acquire the same, similar or more advanced trade secrets and know-how.
BBI Source has also relied on trade secrets and proprietary know-how for
its Laboratory Instruments which it protects in part by entering into
confidentiality agreements with persons or parties deemed appropriate by
management. In addition, the Company currently has six issued United States
patents, covering significant aspects of the Company's core instrument
technology and techniques, as well as several electronic and mechanical designs
employed in the Company's products. These patents expire between 2006 and 2013.
The Company has four patents issued and several pending patent applications
for its Pressure Cycling Technology. Several of these have been followed up with
foreign applications, and the Company expects to file additional foreign
applications in 2000 relating to Pressure Cycling Technology. These patents
expire between 2015 and 2018.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. However, the Company
cannot be certain that other parties will not assert infringement claims in the
future.
12
BBI(R), Accurun(R), MicroChem(R), MicroChemII(R), Chemstat(R), EXECWASH(R)
and Verif-EYE(R) are registered trademarks of the Company. The Company's
registered trademarks currently have expiration dates ranging from 2004 to 2008
and the Company may renew such registrations prior to expiration.
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 most 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 the FDA finding the product to be substantially equivalent to an
existing FDA cleared, and 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 the 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.
The Company's Accurun(R) Run Controls, when marketed for blood donor
screening or diagnostic use, have been classified by the FDA as medical devices
that until 1998 required clearance under the 510(k) process. In 1998, new rules
took effect that exempted unassayed controls intended for use in diagnostic
testing from the requirement for a 510(k) submission. BBI may now label these
products "For In Vitro Diagnostic Use" if they are validated according to the
Company's protocols and manufactured according to cGMP (current Good
Manufacturing Practices, which is FDA guidance for manufacturing processes for
medical devices). The FDA still requires 510(k) clearance for assayed controls,
and controls intended for use in blood screening. The FDA could, in addition,
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.
The Company cannot be certain that it 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.
As of March 1, 2001, a total of 14 products in the Accurun 1(R) line and 27
single analyte Accurun(R) Run controls have either received 510(k) clearance or
have been validated according to the Company's protocols and are manufactured
according to cGMP. Certain of the Company's Accurun(R) Run Controls are
currently marketed "for research use only." 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, or validated prior to
marketing, and initiate enforcement action against the Company, which could have
a material adverse effect on the Company. The FDA has issued a Draft Policy
Compliance Guideline, which, if it takes effect as currently issued, will
strictly limit the sale of products labeled "for research use only." The Company
is monitoring this situation, and will adapt its policies as required.
BBI Source generally obtains 510(k) and CE approval for all laboratory
instrumentation designed and manufactured in its Garden Grove facility.
The Company is registered as a medical device manufacturer with the FDA for
its Diagnostic Products and Laboratory Instruments and files changes/listings of
its products semi-annually. The Company's facilities in West Bridgewater,
Massachusetts for Diagnostic Products and Garden Grove, California for
Laboratory Instruments are FDA Good Manufacturing Practices (FDA/GMP)
facilities. The Company must maintain high standards of quality in
manufacturing, testing and documentation, and implement strict cGMP/quality
system requirement guidelines governing reagent and instrument manufacturing.
13
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to cGMP/quality
system requirements, regulations governing testing, control, and documentation
and reporting of adverse experiences with the use of the device. The FDA
monitors ongoing compliance with cGMP/quality system requirements and other
applicable regulatory requirements by conducting periodic inspections. FDA
regulations require FDA 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. The Company cannot be certain,
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.
The Company's Diagnostic Products and Laboratory Instruments business units
are both ISO9001 certified, with registration by TUV Rheinland for the
Diagnostic Products unit and British Standard Institute for the Laboratory
Instruments unit. The Laboratory Instrument group is also certified to EN46001,
a set of supplementary requirements applicable to their products.
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 members of the European Union and
the European Free Trade Association) are in the process of adopting various
product and service "Directives" to address essential health, safety, and
environmental requirements associated with the products and services. These
"Directives" cover both quality system requirements (ISO Series 9000 Standards
and the EN46001 Requirements) and product and marketing related requirements. In
addition, some jurisdictions have requirements related to marketing of the
Company's products. The Company cannot be certain that it 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 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
(such as the College of American Pathologists), and other national regulatory
agencies (such as the 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") and Good
Manufacturing Practice ("GMP") regulations, investigational new drug or device
regulations, Institutional Review Board ("IRB") regulations and informed consent
regulations.
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 US Department of Agriculture (Importation and
Transportation of Controlled Materials and Organisms and Vectors) and the
Maryland State and US Nuclear Regulatory Commission (in vitro testing with
by-product material under general license, covering the use of certain
radioimmunoassay test methods and Radioactive Materials).
14
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 US Environmental Protection Agency
identification number. The Company is also registered with the US 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, 2000 the Company employed 259 persons, all of whom were
located in the United States. Of these, 100 persons were employed by the West
Bridgewater, Massachusetts company, 68 by the New Britain, Connecticut company
(a discontinued operation as of December 31, 2000), 69 at its two Maryland
facilities, and 22 by the Garden Grove, California company. 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.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
executive officers of the Company as of December 31, 2000:
Name Age Position
Richard T. Schumacher 50 Chief Executive Officer and Chairman of the Board
Kevin W. Quinlan 50 President and Chief Operating Officer; and Director
William R. Prather, R.Ph, M.D 53 Senior Vice President, Finance and Business Development,
Treasurer and Director
Patricia E. Garrett, Ph.D 57 Senior Vice President - Strategic Programs
Mark M. Manak, Ph.D 49 Senior Vice President and General Manager of BBI Biotech
David F. Petersen 54 Senior Vice President and General Manager of BBI Source
Richard C. Tilton, Ph. D 64 Senior Vice President, Science and Technology
Kathleen W. Benjamin 44 Vice President, Human Resources
Richard D'Allessandro 54 Vice President, Information Technology
Mr. Schumacher, the Founder of the Company, has been the Chief Executive
Officer and Chairman since 1992 and served as President from 1986 to August
1999. 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 served as President
and Chief Operating Officer since August 1999. From January 1993 to August 1999,
he served as Senior Vice President, Finance, Chief Financial Officer and
Treasurer. 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.
15
Dr. Prather, a Director of the Company since 1999, has been Senior Vice
President, Finance and Business Development since July 1999. From January 1999
to August 1999, Dr. Prather served as Senior Vice President, Business
Development. Prior to joining the Company, Dr. Prather was the Senior Health
Care Analyst for the investment banking firm, Cruttenden Roth, Inc., from 1995
to 1998. From 1992 to 1995 he was the Senior Analyst in Health Care for Manning
and Napier Advisors. Dr. Prather earned a B.S. in Pharmacy and an MD at the
University of Missouri - Kansas City and completed a Clinical Research Geriatric
Fellowship at Harvard Medical School. Dr. Prather is a Director of Primed
International, a medical device company and a member of the Advisory Board of
the Canadian Medical Discovery Fund, Inc., a fund of MDS Capital Corp.
Dr. Garrett is presently Senior Vice President - Strategic Programs, and
has served as Senior Vice President and General Manager of BBI Clinical
Laboratories since August 1999. From 1988 to August 1999, she served as Senior
Vice President, Regulatory Affairs & Strategic Programs. 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 and General Manager of BBI
Biotech since August 1999. From 1992 to 1999 he served as Senior Vice President,
Research and Development. From 1980 to 1992, he served as Director of Molecular
Biology and Director of Contracts and Services 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.
Mr. Petersen has served as Senior Vice President and General Manager of BBI
Source since August 1999. From May 1998 to August 1999, he was Vice President,
BBI Source Scientific. Mr. Petersen has 25 years of experience in operations
management and materials planning including 10 years as Senior Director of
Operations for Source Scientific. Before joining Source Scientific in 1988, he
was the Manager of Manufacturing for Matrix Instruments from 1985 to 1988 and
previously was Manager of Production and Inventory Control for Farr Company,
Inc. from 1977 to 1985. He is certified in production and inventory management
(CPIM) by the American Production and Inventory Control Society (APICS). He is
also an Assistant Professor at California State University Dominguez Hills,
where he instructs upper division courses in manufacturing techniques and
material resource planning. He holds a B.S. in business management from the
University of LaVerne in LaVerne, California.
Dr. Tilton has served as Senior Vice President, Science and Technology
since August 1999. Prior to this time he 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,
serving as its President from 1989 to 1993. Dr. Tilton has 25 years 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.
Ms. Benjamin has served as Vice President, Human Resources since January
1999. Prior to her promotion to Vice President, Ms. Benjamin served as Director
of Human Resources and Investor Relations from 1997 to 1999. Prior to joining
the Company in 1997 she was employed by Shields Health Care Group, a provider of
Magnetic Resonance Imaging and radiation oncology, serving as their Director of
Operations from 1992 to 1997. Prior to this time she was an educator. Ms.
Benjamin received her B.S., from the College of Life Sciences and Agriculture at
the University of New Hampshire.
Mr. D'Allessandro has served as Vice President, Information Technology
since January 1999. Mr. D'Allessandro joined the Company in 1993 as Director,
Management Information Systems and served in that capacity until his promotion
to Vice President. Mr. D'Allessandro has 30 years of experience in data
processing/information systems technology, with a focus on manufacturing and
biotechnology organizations. Mr. D'Allessandro is APICS certified and received
his B.S. in Management Information Systems from Northeastern University.
Officers are nominated by the Chief Executive Officer and elected by the
Board of Directors.
16
ITEM 2. PROPERTIES.
The Company owns its corporate offices and diagnostic products
manufacturing facility for its BBI Diagnostics operating segment, which is
located in a two-story, 32,000 square foot building in West Bridgewater,
Massachusetts. The Company has been renovating and expanding this facility
during recent years, and believes that upon completion of renovations, its
facility in West Bridgewater MA will be sufficient to meet its needs for several
years. This building is subject to a 10 year mortgage. Monthly payments on this
mortgage is based on a 20 year amortization schedule with a balloon payment
representing the remaining balance due in full on March 10, 2010. The Company
leases 41,000 square feet of space in Garden Grove, California where its BBI
Source business unit manufactures laboratory instruments. The lease continues
until February 1, 2002 and the Company has an option to renew at market rates.
Commencing in October 2000, approximately 17,000 square feet of this facility
were subleased to a third party through the end of the lease term. The Company
leases laboratory facilities in Gaithersburg and Frederick, Maryland. The BBI
Biotech segment's Gaithersburg facility contains 36,500 square feet of custom
built laboratory and office space, and is occupied under a ten-year lease that
is due to expire on October 31, 2007. The Frederick facility contains 36,000
square feet of primarily repository space and is also occupied by the BBI
Biotech segment, under a seven-year lease that is due to expire on November 30,
2006.
BBI Clinical Laboratories, a discontinued operation as of December 2000,
occupies a 15,000 square foot facility in New Britain CT facility pursuant to a
lease which expires in July 2004. In February 2001, the buyer of certain assets
and liabilities of BBICL agreed to reimburse the Company for essentially all
rental-related costs of this facility through December 31, 2001.
ITEM 3. LEGAL PROCEEDINGS.
On August 18, 2000, the Company received a summons and complaint from
Paradigm Group, LLC naming the Company as a defendant. Paradigm Group, LLC is a
selling shareholder in the Company's registration statement on Form S-3 which
has been declared effective by the Securities and Exchange Commission on
December 8, 2000. The suit, filed in the Circuit Court of Cook County, Illinois,
alleged breach of contract claims and fraud against the Company in connection
with the sale by the Company to the Paradigm Group, LLC of warrants to purchase
up to 500,000 shares of the Company's common stock, the exercise of those
warrants by Paradigm Group, LLC and a delay in the registration of those shares
with the Securities and Exchange Commission. Paradigm Group LLC sought several
remedies, including $3,000,000 in damages or unspecified monetary damages,
return of the $42,500 purchase price for the warrants and rescission of its
exercise of the warrants, and unspecified punitive damages. In December 2000,
Paradigm Group, LLC withdrew this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 2000 to a vote
of security holders of the Company.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's 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".
The following table sets forth the high and low price, by quarter, during
the two most recent fiscal years:
Common Stock Price
Fiscal Year Ended December 31, 2000 High Low
First Quarter ..................... $ 16.968 $ 2.250
Second Quarter .................... $ 7.500 $ 3.375
Third Quarter ..................... $ 7.125 $ 2.625
Fourth Quarter .................... $ 4.625 $ 1.500
Fiscal Year Ended December 31, 1999 High Low
First Quarter ..................... $ 4.000 $ 2.625
Second Quarter .................... $ 5.375 $ 2.625
Third Quarter ..................... $ 4.625 $ 3.250
Fourth Quarter .................... $ 4.625 $ 2.375
As of March 12, 2001, there were 20,000,000 shares of Common Stock
authorized of which 6,454,841 shares were issued and outstanding, held of record
by approximately 3,992 stockholders. See also Note 12 of Notes to Consolidated
Financial Statements included in Part 2, Item 8 hereunder.
The Company has not declared or paid any dividends on its Common Stock. In
accordance with the terms of the Company's mortgage with a bank, payment of
dividends on Common Stock is not permitted. The Company plans to reinvest future
profits to expand its business.
18
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
The statement of income data for each of the fiscal years in the five-year
period ended December 31, 2000, and the balance sheet data as of December 31,
2000, 1999, 1998, 1997, and 1996, have been derived from the consolidated
financial statements of the Company. 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,
--------------------------------------------------------
2000 1999 1998 (1) 1997 (2) 1996
Consolidated Statement of Income Data: -------- -------- -------- -------- --------
REVENUE:
Products ...................................................... $ 12,387 $ 14,057 $ 13,075 $ 11,711 $ 8,470
Services ...................................................... 7,083 5,741 6,190 4,844 2,562
-------- -------- -------- -------- --------
Total revenue ................................................. 19,470 19,798 19,265 16,555 11,032
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products .............................................. 7,270 7,267 7,180 5,774 4,252
Cost of services .............................................. 5,581 4,568 4,289 3,624 2,019
Research and development ...................................... 2,444 3,132 2,297 1,311 797
Acquired research and development (3) ......................... -- -- 4,231 -- --
Selling and marketing ......................................... 2,660 2,831 2,883 2,306 1,416
General and administrative .................................... 4,919 3,451 3,334 2,447 1,556
Impairment of intangible asset (4) ............................ 1,464 -- -- -- --
-------- -------- -------- -------- --------
Total operating costs and expenses ............................ 24,338 21,249 24,214 15,462 10,040
-------- -------- -------- -------- --------
(Loss) income from continuing operations ...................... (4,868) (1,451) (4,949) 1,093 992
Interest (expense) income, net (5) ............................ (1,594) (413) (48) 287 (205)
-------- -------- -------- -------- --------
(Loss) income from continuing operations before income taxes .. (6,462) (1,864) (4,997) 1,380 787
(Provision for) benefit from income taxes (6) ................. (1,152) 744 614 (510) (302)
-------- -------- -------- -------- --------
Loss from continuing operations before cumulative effect
of change in accounting principle ............................. (7,614) (1,120) (4,383) 870 485
Cumulative effect of change in accounting principle (5) ....... (190) -- -- -- --
-------- -------- -------- -------- --------
(Loss) income from continuing operations ...................... (7,804) (1,120) (4,383) 870 485
(Loss) income from discontinued operations .................... (197) 306 (6) 135 (4)
-------- -------- -------- -------- --------
Net (loss) income ............................................. $ (8,001) $ (814) $ (4,389) $ 1,005 $ 481
======== ======== ======== ======== ========
(Loss) income per share from continuing operations, basic ..... $ (1.43) $ (0.24) $ (0.94) $ 0.20 $ 0.17
(Loss) income per share from continuing operations, diluted ... (1.43) (0.24) (0.94) 0.18 0.15
Net (loss) income per share, basic ............................ (1.46) (0.17) (0.94) 0.23 0.17
Net (loss) income per share, diluted .......................... $ (1.46) $ (0.17) $ (0.94) $ 0.21 $ 0.14
Number of shares used to calculate net (loss) income per share
Basic ..................................................... 5,465 4,670 4,655 4,438 2,916
Diluted ................................................... 5,465 4,670 4,655 4,780 3,340
December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Working capital ............................................... $ 3,596 $ 8,615 $ 8,231 $ 8,935 $ 11,561
Net assets from discontinued operations........................ 1,238 1,978 1,346 1,180 1,721
Total assets .................................................. 22,549 24,934 23,038 22,882 19,523
Long term debt, less current maturities ....................... 5,287 7,146 3,977 -- --
Total stockholders' equity .................................... 7,750 13,646 14,069 18,067 16,290
Dividends ..................................................... -- -- -- -- --
(1) Effective September 30, 1998, the Company acquired all classes of stock of
BioSeq, Inc., a development stage company with no revenue, for a total
purchase price of $4,226.
(2) Effective July 1, 1997, the Company acquired the business and net assets of
Source Scientific, Inc. for $1,994 which increased 1997 revenue by $2,608.
(3) Consists of $3,381 of in-process research and development related to the
BioSeq acquisition, and a charge of $850 related to the purchase of
licensed technology in the first quarter of 1998.
(4) Includes a $1,464 write-down of goodwill associated with the acquisition of
BBI Source Scientific.
(5) Includes $840 of interest expense associated with the beneficial conversion
feature of the Company's 3% Senior Subordinated Convertible Debentures.
$190 of this amount is recorded as a cumulative effect of change in
accounting principle.
(6) Includes $1,135 for establishment of a full valuation allowance on the
Company's deferred tax assets.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company generates revenue from products and services provided primarily
to the in vitro diagnostic infectious disease industry. As discussed in Note 6
to the Consolidated Financial Statements, the Company has four operating
segments: "Diagnostics," "Biotech," "Laboratory Instrumentation" and "Other."
Two of these, "Diagnostics" and "Laboratory Instrumentation" primarily
manufacture products. Within Diagnostics there are three groups: Quality Control
Panels, Accurun(R) Run Controls, and Diagnostic Components. The remaining two
segments generate primarily service revenue and consist of "BBI Biotech", and
"Other" (development stage research and development). Within BBI Biotech there
are three groups: Contract Research, Blood Processing and Repository Services,
and Research Services. Revenue in the "Other" segment consists of both private
and NIH funded support for the research activities associated with our pressure
cycling technology and drug discovery operations. See Note 6 of Notes to
Financial statements for a further discussion of the activities of these
segments and Note 13 of Notes to Financial Statements relative to the Company's
discontinued clinical laboratory operations.
Effective January 2000, all of the Company's technology related to its drug
discovery and vaccine programs, consisting primarily of patents and related
sponsored research agreements, were transferred to Panacos Pharmaceuticals,
Inc., a wholly-owned subsidiary that the Company formed in October 1999. In
November 2000, Panacos sold a majority of its equity to third party investors,
reducing the Company's ownership to 30.5% which is held in non-voting preferred
securities. As a result, the Company no longer consolidates the results of
Panacos. As of November 14, 2000 the Company's investment in Panacos was zero
and the Company is no longer required to fund Panacos's operations. Therefore no
further losses of Panacos will be recorded by the Company. The Company believes
that this will position Panacos to progress to more advanced stages of drug
development including clinical trials, while at the same time allowing
management to focus more time on the Company's core business.
In December 2000, the Company decided to exit the clinical laboratory
segment of the business and accordingly, in February 2001, the Company sold a
majority of the assets and the accounts payable of BBI Clinical Laboratories, a
wholly-owned subsidiary, to a third party. In connection with the sale, BBI
Clinical Laboratories will continue to provide clinical laboratory testing
services for at least 180 days from the closing date of the transaction, but in
no event later than December 31, 2001. Results of operations for this segment of
the business are discussed hereunder in the caption entitled "Discontinued
Operations." Prior period data has been reclassified to conform to the current
format of presentation relative to continuing operations.
PRODUCTS
The economics and cost structures of the segments have certain differences.
The Diagnostics segment has historically been the largest and most profitable
segment, both in absolute dollars and in operating profit margin, as it operates
primarily in a commercial environment with fewer competitors and relatively
short product development cycles. The Laboratory Instrumentation segment had
been in decline for several years prior to its acquisition in mid 1997, and
management is working to turn around this business. It also operates in a highly
competitive, low margin business: contract manufacturing of instruments and
medical devices. At the current low annual revenue level of less than $2.5
million, it operates significantly under capacity with high overhead, and should
significantly benefit from relatively small revenue increases.
20
SERVICES
BBI Biotech has been project oriented with a high proportion of its revenue
generated from government contracts (for both research and service activities)
and assisting the other segments in their new product and service development.
It has the highest level of inter-segment activity, and is structured around
project tracking of direct costs plus overhead and a low percentage fee. Its
financial goal has been to breakeven while contributing to the development of
future products and services for the Company. The "Other" segment's R&D
operation does not currently have any product or service revenue, and no
significant revenues are expected in the near future. Revenue to date consists
of both private and public (NIH) funding of segment research. Most of the
expenditures by this segment are for R&D expenses, and general management
expenses including patent costs. The Company continues to seek funding from both
private and public sources to minimize the impact of their development costs on
the Company's overall operating results. In this regard, Panacos Pharmaceuticals
obtained independent third party equity financing in November 2000, thus
terminating the Company's responsibility going forward to fund future research
and development activities of Panacos. The Company retains a 30.5% interest in
non-voting preferred shares of Panacos.
QUARTERLY FLUCTUATIONS
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, primarily customer
purchasing patterns, driven by end-of-year expenditures. In particular, in the
Diagnostics segment, the Company's sales of its off-the-shelf 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 OEM product
sales may peak in any quarter of the year, depending on the production cycle of
a given project. In the Company's BBI Biotech segment, research contracts are
generally for large dollar amounts spread over one to five year periods, and
upon completion, frequently do not have renewal phases. As a result these
contracts 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 performed. Neither the Laboratory Instrumentation segment nor the Other
segment are subject to material seasonal variations.
RESEARCH AND DEVELOPMENT
With the acquisition of BioSeq, Inc and its pressure cycling technology in
September 1998 as well as the hiring of a Vice President for the Drug Discovery
and Development program (which evolved into Panacos Pharmaceuticals, Inc. in
2000) the Company has expended significant amounts for ongoing research and
development spending on new technologies in the Other operating segment.
EXPORT SALES
The Company does not have any foreign operations. However, the Company does
have significant export sales in Europe, the Pacific Rim countries and Canada to
agents under distribution agreements, as well as directly to test kit
manufacturers. All sales are denominated in US dollars. Export sales for the
years ended December 31, 2000, 1999, and 1998 were $4.2 million, $4.0 million,
and $4.1 million, respectively. The Company expects that export sales will
continue to be a significant source of revenue and gross profit.
21
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,
2000 1999 1998
------- ------- -------
Revenue:
Products ...................................... 63.6 % 71.0 % 67.9 %
Services ...................................... 36.4 29.0 32.1
------- ------- -------
Total revenue .......................... 100.0 100.0 100.0
Gross profit ...................................... 34.0 40.2 40.5
Operating expenses:
Research and development ...................... 12.6 15.8 11.9
Acquired research and development ............. -- -- 22.0
Selling and marketing ......................... 13.7 14.3 15.0
General and administrative .................... 25.3 17.4 17.3
Impairment of intangible asset ................ 7.5 -- --
------- ------- -------
Total operating expenses ............... 59.1 47.5 66.2
------- ------- -------
Operating loss from continuing operations ......... (25.0) (7.3) (25.7)
Interest expense, net ............................. (8.2) (2.1) (0.3)
------- ------- -------
Loss before income taxes and cumulative
effect of change in accounting principle ........ (33.2) (9.4) (26.0)
Provision for (benefit from) income taxes ......... (5.9) 3.8 3.2
Cumulative effect of change in accouting principle. (1.0) -- --
(Loss) income from discontinued operations ........ (1.0) 1.5 --
------- ------- -------
Net loss ...................................... (41.1) (4.1) (22.8)
======= ======= =======
Product gross profit .............................. 41.3 % 48.3 % 45.1 %
Services gross profit ............................. 21.2 % 20.4 % 30.7 %
Years Ended December 31, 2000 and 1999
Revenue
Total revenue from continuing operations decreased 1.7%, or $328,000, to
$19,470,000 in 2000 from $19,798,000 in 1999. The decrease in revenue was the
result of a decrease in product revenue of 11.9% or $1,670,000 to $12,387,000 in
2000 from $14,057,000 in 1999, partially offset by an increase in service
revenue of 23.4% or $1,341,000 to $7,083,000 in 2000 from $5,742,000 in 1999.
Product Revenue
The product revenue decrease was primarily attributable to a $1,078,000
decrease in the Diagnostics segment and a $625,000 decrease in the Laboratory
Instrumentation segment. The Diagnostics decrease was the result of a reduced
level of sales of its OEM and Seroconversion panels, and Basematrix as the
consolidation within the in vitro diagnostic industry has negatively affected
demand for these products. These decreases were partially offset by an increase
in Accurun(R) and Characterized Disease State blood product sales. The
Laboratory Instrumentation segment revenue decreased due to a lower level of
contract manufacturing due to the timing of an order from a large customer and
another customer experiencing financial difficulty causing them to place their
order on hold. The Company believes the negative effects of industry
consolidation are mostly befind it and that there are growth oppertunities
within both its existing business as well as providing products for rapid test
and chip based technologies.
22
Service Revenue
The increase in service revenue was primarily attributable to increases of
$104,000 from the Diagnostics segment, $850,000 from the Biotech segment and
$198,000 in the Other segment. The growth in Diagnostics was related to
increased service work for in vitro Diagnostic manufacturers including plasma
inactivations. The Biotech segment's growth was due to new government contracts
for both its repository and research services. The Other segment's growth was a
result of funding received from both the NIH and the Consortium for Plasma
Science, which partially defrayed the cost of pressure cycling technology
development and certain other drug discovery activities associated with Panacos
Pharmaceuticals ("Panacos").
Gross Profit
Overall gross profit decreased 16.9%, or $1,344,000, to $6,619,000 in the
year ended December 31, 2000 from $7,963,000 for 1999. Product gross profit
decreased 24.6%, or $1,671,000, to $5,118,000 in 2000 from $6,789,000 for 1999
and product gross margin decreased to 41.3% in 2000, from 48.3% in 1999.
Services gross profit increased $327,000 to $1,501,000 in 2000 from $1,174,000
for 1999 and service gross margin increased to 21.2% in 2000, from 20.4% in
1999.
Product Gross Margin
The decrease in product gross margin was due substantially to a 12.3%
decrease in the gross margin of the Laboratory Instrumentation operating
segment. This decrease was due to a lower level of sales activity, resulting in
underutilized capacity and excess overhead costs. In addition, the Company
increased the inventory reserves for both this segment and the Diagnostic
segment in year 2000.
Service Gross Margin
The increase in service gross margins was due to small increases in both
the Diagnostics and Other segments, which were partially offset by a lower
service gross margin from the Biotech segment due to an increase in low margin
government contracts.
Research and Development
Research and development expenditures decreased 22.0%, or $688,000, to
$2,444,000 in 2000 as compared to $3,132,000 in 1999. The Company continued to
emphasize development efforts within the "Other" business segment which includes
BBI BioSeq ("BioSeq") and Panacos, the latter being included during the period
January 1, 2000 to November 14, 2000 as discussed further hereunder. Other
segment research and development expenditures were approximately flat. However
there was a decrease in spending at the Laboratory Instrumentation segment as
the PlateMate program was discontinued in September 1999. In addition, there was
a decrease in spending at Biotech in order to meet contract schedules.
Selling and Marketing
Selling and marketing expenses decreased by 6.0%, or $171,000, to
$2,660,000 in 2000 from $2,831,000 in 1999. This decrease was a result of a
slight reduction in promotion and travel costs, and vacancies in several key
positions at the Diagnostics and Laboratory Instrumentation segments. Some of
these positions were filled early in the third quarter of 2000.
General and Administrative
General and administrative costs increased 42.6%, or $1,468,000, to
$4,919,000 for 2000 from $3,451,000 in 1999. This increase was primarily the
result of an increase in professional consulting services associated with the
Company's exploration of various financing and strategic transactions and
options in 2000. Additionally, $448,000 of general and administrative personnel
related expenses incurred in 1999 were capitalized as part of the ERP system
implementation in accordance with applicable accounting standards. The Company
completed the project in November 1999; therefore, no additional costs were
capitalized in 2000.
23
Impairment of Intangible Asset
As part of an ongoing strategic review process, the Company's Board of
Directors met in September 2000 to review the progress of its Laboratory
Instrumentation segment, and that segment's prospects for the future to
determine if any impairment of the segment's goodwill had occurred. Based on
information presented at that meeting and subsequent analyses showing lower
revenue expectations, management approved a cost reduction plan including a
headcount reduction, salary freeze, and sublease of excess manufacturing space.
Using the lower revenue projections associated with this plan, the Laboratory
Instrumentation segment's undiscounted future cash flows were projected to be
less than the carrying value of that segment's goodwill. In accordance with the
provisions of both "Accounting Principles Board Opinion No. 17 - Intangible
Assets" and "Statement of Financial Accounting Standards No. 121 - Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," this segment's goodwill was written down by approximately $1,464,000 in the
third quarter of fiscal year 2000.
Operating Loss
Consolidated loss from continuing operations increased to $4,868,000 in
2000 versus a $1,451,000 loss in 1999. The Diagnostics segment's operating
income decreased to $1,015,000 in 2000 from $2,436,000 in 1999 as a result of
decreased revenue and the beneficial effect on 1999's operating income of
capitalizing certain employee salaries associated with the ERP System
implementation. The Biotech segment's operating loss decreased to $398,000 in
2000 from $482,000 in 1999, due to increased revenue from government contracts.
The Laboratory Instrumentation segment had an operating loss of $2,819,000 for
2000 versus a loss for 1999 of $1,163,000. The year 2000 loss includes a
write-down of approximately 80% of their goodwill as of the previous balance
sheet date. Excluding this, the Laboratory Instrumentation segment had an
operating loss of $1,355,000 for 2000 as a result of continued low levels of
revenue. At the end of the third quarter of 2000, management approved a cost
reduction plan in the Laboratory Instrumentation segment including a headcount
reduction, salary freeze, and sublease of excess manufacturing space. The
operating loss of the Other segment increased to $2,325,000 in 2000 from
$2,006,000 in 1999 due to planned research and development and patent related
costs. The Company continued to invest heavily in the areas of pressure cycling
technology and the drug discovery program, through its subsidiary BBI BioSeq and
its investment in Panacos Pharmaceuticals.
The Company's ownership of Panacos was reduced to 30.5% in the fourth
quarter of 2000 as a result of Panacos obtaining additional equity financing
from new investors. Accordingly, the Company terminated consolidation accounting
subsequent to November 14, 2000. The Company had recorded Panacos's operating
losses for the period January 1, 2000 to November 14, 2000 in the amount of
approximately $790,000.
Interest Expense/Cumulative change in accounting principle
Interest expense increased from $420,000 in 1999 to $1,617,000 in 2000.
Throughout the year 2000, the Company carried a higher average debt balance and
interest rate on its line of credit than in 1999. Additional interest expense
was incurred in 2000 associated with the Company obtaining a new $2,447,000
mortgage on its West Bridgewater MA facility, effective April 2000. In addition,
the Company incurred a charge of $898,000 (including $190,223 for the cumulative
effect of change in accounting principle) due to amortization of the beneficial
conversion feature, warrant costs and original issue discount/debt issuance
costs associated with the Company's August 2000 issuance of $3,250,000 3% Senior
Subordinated Convertible Debentures.
Income Taxes
In 2000 the Company established a full valuation allowance for its deferred
tax assets in accordance with Statement of Financial Accounting Standards No.
109 and in consideration of three consecutive years of losses. In 1999 the
Company recorded an income tax benefit at a combined rate of 38%.
24
Loss from Continuing Operations
Loss from continuing operations increased to $7,614,000 for the year ended
December 31, 2000 from $1,120,000 for the year ended December 31, 1999, as a
result of the items discussed above.
Discontinued Operations
The Clinical Laboratory Services segment, a discontinued operation, had an
operating loss of $197,000 in 2000 versus income of $306,000 for 1999 due to
both a lower volume of molecular testing as several customers began performing
these tests in-house in 2000, and competitive pricing pressure in molecular
testing, resulting in lower gross margin.
Summary
The Company had a net loss of $8,001,000 in 2000 as compared to a net loss
of $814,000 in 1999 as a result of the operating loss, interest expense
associated with the August 2000 issuance of $3,250,000 of debentures, the
impairment of an intangible asset at the laboratory instrument segment, and the
establishment of a full valuation allowance for deferred tax assets as described
above.
Years Ended December 31, 1999 and 1998
Revenue
Total revenue from continuing operations increased 2.8%, or $533,000, to
$19,798,000 in 1999 from $19,265,000 in 1998. The increase in revenue was the
result of an increase in product revenue of 7.5% or $981,000 to $14,057,000 from
$13,075,000, partially offset by a decline in service revenue of 7.2% or
$448,000 to $5,742,000 from $6,190,000 in 1998.
Product Revenue
The product revenue increase was primarily attributable to a $700,000
increase by the Diagnostics segment and a $287,000 increase by the Laboratory
Instrumentation segment. The Diagnostics increase was a result of a 15.0%
increase in Accurun(R) sales as the Company continued to successfully penetrate
the emerging end-user market, and a 57.8% increase in Basematrix sales due to
increased outsourcing occurring in the in vitro diagnostics industry. These
increases were partially offset by a 22.7% decrease in Seroconversion Panel
sales, as the consolidation within the in vitro diagnostic industry has
negatively affected demand for these products. The Laboratory Instrumentation
segment achieved a $287,000 or 12.6% increase in instrument sales as it
refocused its efforts in OEM contract manufacturing. Management feels that the
end-user market will continue to be an area of growth for its Quality Control
Products while the outsourcing within the IN VITRO diagnostics market will
continue to benefit sales of Diagnostic Components and Laboratory
Instrumentation.
Service Revenue
The decrease in service revenue was primarily attributable to a $1,293,000
decrease in Laboratory Instrumentation services as the Company completed its
work on the ABX, Inc. contract in the first quarter of 1999.This decrease was
partially offset by a $942,000 increase in BBI Biotech, and a $434,000 increase
in the Other segment revenue. BBI Biotech's growth was driven by a 43.9%
increase in repository services and the start of new contracts in the AIDS
Vaccine Support arena. The Other segment's growth was a result of funding
received from both the NIH and the Consortium for Plasma Science, which
partially defrayed the cost of pressure cycling technology development. The
Company anticipates that new contracts at the BBI Biotech segment will
contribute to revenue growth.
25
Gross Profit
Overall gross profit increased 2.1%, or $167,000, to $7,963,000 in 1999
from $7,796,000 in 1998. Product gross profit increased 15.2%, or $894,000, to
$6,789,000 in 1999 from $5,895,000 in 1998 and product gross margin increased to
48.3% in 1999, from 45.1% in 1998. Services gross profit decreased $727,000 to
$1,174,000 in 1999 from $1,901,000 in 1998 and service gross margin declined to
20.4% in 1999 from 30.7% in 1998.
Product Gross Margin
The increase in product gross margin was due entirely to the gross margins
realized in the Laboratory Instrumentation operating segment, which increased
from 17.8% in 1998 to 28.1% in 1999 as the business unit operated at a higher
volume, thus realizing better economies of scale compared with 1998 as overhead
costs were spread over a greater number of units. Product gross margins at the
Diagnostics segment remained relatively steady. Management anticipates that
further utilization increases for the Laboratory Instrumentation segment will
continue to benefit gross margins.
Service Gross Margin
The decrease in service gross margins was realized at all operating
segments. The BBI Biotech segment's service gross margin decreased from 26.8% to
19.8%. BBI Biotech margins were adversely affected by startup costs associated
with new repository contracts in 1999, primarily the acquisition of freezers,
which under the terms of the contract become government property and thus are
charged directly to cost of services. Finally, in early 1999 the Laboratory
Instruments segment realized a decrease in service gross margins from 52.7% to
46.3%, as it completed the high-margin ABX, Inc. contract in early 1999. The
other remaining Company segments do not generate service revenues that would
significantly impact segment results.
Research and Development
Research and development costs, exclusive of acquired in-process research
and development, increased 36.4% or $835,000 to $3,132,000 in 1999 from
$2,297,000 in 1998. A significant portion of the increase is attributable to the
operating segment referred to as "Other", which consists of the pressure cycling
technology ("PCT") and Drug Discovery activities. The Company increased its PCT
expenditures by approximately $893,000 as it completed the design, development,
and manufacture of 8 prototype PCT instruments known as "barocyclers". The
Company also made significant progress during 1999 with its patents in the
nucleic acid extraction and pathogen inactivation areas. The Company's increased
expenditures in Drug Discovery by approximately $361,000 resulted in expanded
rights under its agreement with the University of North Carolina, at Chapel
Hill, and significant progress in the prosecution of patents for the compounds.
In addition, the BBI Biotech segment increased its spending to continue its
support of the Diagnostics and Clinical Laboratory Services segments.
There were two accounting charges in 1998, which were classified on the
income statement as acquired in-process research and development. In the first
quarter there was an accounting charge of $850,000 related to the acquisition of
the worldwide exclusive rights to BioSeq, Inc.'s immunodiagnostic research and
development technology. In the third quarter, the Company recorded a charge of
$3,381,000 related to in-process technology as a result of the Company's
acquisition of BioSeq, Inc. This allocation of the purchase price was based on
an independent valuation and was expensed, as no alternative future uses exist.
There were no such charges during 1999.
Selling and Marketing
Selling and marketing expenditures remained relatively flat during 1999 as
compared to 1998, across all operating segments. Costs declined 1.8% or $52,000
to $2,831,000 in 1999 from $2,883,000 in 1998 as the Company effectively managed
costs in this area.
26
General and Administrative
General and administrative costs increased 3.5% or $117,000 to $3,451,000
in 1999 from $3,334,000 in 1998. This increase is attributable to the corporate
reorganization that was announced in July of 1999. The reorganization created
operating segments, which are directed by a senior vice president and general
manager. The reorganization resulted in the classification of the salaries, and
other related costs, of two executives in the general and administrative line of
the income statement from other income statement lines, to more accurately
reflect their new responsibilities. General and administrative costs are
expected to increase in 2000, as the reorganization impact will be felt for the
entire fiscal year 2000. In addition, 1999 benefited as certain general and
administrative personnel costs amounting to $448,000 were capitalized as
property and equipment in connection with the implementation of enterprise
resource planning systems at the Diagnostics and Laboratory Instruments
segments. General and administrative costs at the other segments were flat.
Operating Loss
As a result of all of the above, the Company experienced an operating loss
from continuing operations of $1,451,000 in 1999 versus $4,949,000 in 1998.
Excluding the $4,231,000 of acquired in-process research and development charges
realized in 1998, the Company's operating loss increased $732,000 to $1,451,000
in 1999 from $719,000 in 1998. The Diagnostics operating segment realized an
increase in operating income (excluding $850,000 of acquired research and
development costs in 1998) of approximately $346,000 or 61.8%, as a result of a
6.4% increase in product sales coupled with a relatively steady product gross
margin. The Laboratory Instrumentation segment only realized a slight reduction,
8.1%, in its operating loss as the improved product gross margin was more than
offset by lower service profitability due to the completion of the previously
discussed ABX contract. These operational improvements were more than offset by
the planned increases in research and development expenditures, which resulted
in significant operating losses in the "Other" operating segment. In addition,
increased research and development expenses at the BBI Biotech segment were
primarily responsible for the increased operating loss of $661,000 in 1999
versus a loss of $61,000 in 1998. Management anticipates continued strength from
its Diagnostics segment. Although the Laboratory Instrumentation segment has
realized operating losses since it was acquired in July 1997, the Company
believes that the goodwill created in connection with the acquisition is
realizable as management believes that the segment will begin to generate
operating income by the end of 2001. The Company will continue to increase its
spending in the Other segment, however, it expects that the impact from this
increased spending on the Company's bottom line will be mitigated by the planned
sale of the common stock of Panacos and the continued funding support in the
area of PCT.
Interest Expense
The Company had interest expense of $420,000 in 1999 versus $75,000 in
1998. The Company had used its proceeds from its initial public offering and, at
the end of the second quarter of 1998, began to borrow funds from its revolving
line of credit to continue its infrastructure and research and development
investments. In addition to a higher average borrowing balance in 1999, the
Company realized the effects of rising interest rates.
Income Taxes
The Company recorded tax benefits at its combined federal and state
statutory rate of 38% for 1999. Although the Company realized consolidated
operating losses for 1999 and 1998, management believed that its valuation
allowance was adequate as the Company had planned to return to profitability
within six to twelve months, at which point it would have begun to realize the
benefit from its federal and state tax assets. The tax benefit rate recognized
in 1998 was adversely affected by the in-process research and development
charges discussed above. The March 1998 technology license transaction resulted
in a temporary difference as the technology license is deductible for tax
purposes over a 15-year period, while the September 1998 common stock
acquisition resulted in a permanent difference that is never deductible. See
Note 9 to Consolidated Financial Statements in Item 8 hereunder for further
detail.
27
Loss from Continuing Operations
Loss from continuing operations decreased to $1,120,000 for the year ended
December 31, 1999 from $4,382,000 for the year ended December 31, 1998, as a
result of the items discussed above.
Discontinued Operations
The Clinical Laboratories Services segment of the business, a discontinued
operation, recorded income of $306,000 in 1999 as compared to a loss of $6,000
in 1998. This segment's growth was led by a 55.1% increase in molecular testing
as part of a 37% increase in segment revenues, which more than offset a slight
decline in that segment's service gross margin to 30.3% in 1999 from 32.4% in
1998.
Summary
The Company had a net loss of $814,000 in 1999 versus $4,389,000 in 1998 as
a result of the operating loss (which includes acquired research and development
costs expensed in 1998 in the amount of $4,231,000), interest expense, and the
tax benefit described above.
LIQUIDITY AND FINANCIAL CONDITION
In December 2000, the Company made a decision to exit the clinical
laboratory testing services segment and in February 2001, BBI Clinical
Laboratories, Inc. ("BBICL"), a wholly-owned subsidiary of the Company, sold
certain assets and liabilities to a third party for an aggregate purchase price
of $9,500,000, subject to certain post closing adjustments. The Company has
retained certain other assets and liabilities of BBICL subsequent to the closing
date, which the Company intends to liquidate throughout the remainder of year
2001 as part of its decision to exit this segment of the business. The Company
expects to record an after-tax gain in the first quarter of 2001. Closing costs
include an estimate of costs associated with disposing of all remaining assets
and retiring all existing liabilities including a facility lease. The Company
expects to utilize in year 2001 certain prior period net operating loss
carryforwards, previously reserved for by the Company in year 2000, to offset
the tax effect of this future gain. In accordance with a transition services
agreement, the Company is required to operate the business in a normal fashion
for a minimum of six months subsequent to the sale but in no event longer than
one year from the date of sale; substantially all costs associated with
operation of the business subsequent to the closing date will be borne by the
purchaser. A portion of the proceeds from this sale were used to redeem all
outstanding 3% Senior Subordinated Convertible Debentures and to retire the
Company's line of credit, as discussed further hereunder.
In August 2000, the Company issued $3,250,000 of 3% Senior Subordinated
Convertible Debentures due August 25, 2003. Net proceeds to the Company amounted
to approximately $2,871,000 after deduction of original issue discount of
$162,500 and associated closing costs of $216,500. For accounting purposes, a
portion of the cash proceeds, amounting to $327,000, has been allocated to the
relative fair value of warrants issued in conjunction with these debentures. In
the first quarter of 2001, certain holders of the Company's outstanding 3%
Senior Convertible Debentures (the "Debentures") exercised their rights to
convert $1,210,000 of such Debentures into shares of the Company's common stock,
in accordance with the conversion formula. The conversion of a portion of these
outstanding Debentures and/or the exercise of outstanding warrants to purchase
the Company's common stock will have a dilutive impact on our security holders.
The conversion price of the Debentures was the lower of: (i) $3.36 a share or
(ii) 90% of the average of the five (5) lowest volume weighted average sales
prices of common stock as reported by Bloomberg, L.P. during the 25 business
days immediately preceding the date on which any Debenture holder notified the
Company that it will convert all or a part of their Debenture into common stock.
The terms of the Debenture entitled the Company to redeem any of the outstanding
Debenture(s) at a redemption price equal to the number of shares of common stock
into which the Debenture(s) was then convertible times the average closing bid
price as reported by Bloomberg L.P. for the five (5) trading days immediately
prior to the date that the Debenture(s) is called for redemption, plus accrued
and unpaid interest. These conversions resulted in the issuance of 801,325
28
additional shares of common stock subsequent to December 31, 2000. In addition,
in the first quarter of 2001, the Company redeemed the remaining $2,040,000 of
Debentures at face value plus a $190,000 premium and accrued interest.
Unamortized debt discount, debt issuance costs and warrant-related costs
associated with the converted Debentures, approximating $40,000, will be
reclassified as an offset to additional paid-in capital, with the remaining
$377,000 of such costs associated with the redeemed Debentures being included in
the loss on extinguishment of the Debentures. The Company will also reverse
approximately $528,000 of expenses, previously recorded in 2000, associated with
the Debentures beneficial conversion feature. As a result of the above items,
the Company expect to record a net loss of approximately $39,000, relative to
this early extinguishment of debt, in the first quarter of 2001. As a result of
both the conversions and redemptions, which occurred in the first quarter of
2001, none of the 3%, Senior Subordinated Convertible Debentures remain
outstanding subsequent to February 27, 2001.
The Company's working capital position as of December 31, 2000 was
adversely affected by the classification of its $5,763,000 line-of-credit
balance as short-term debt. The Company reclassified the debt because in 2000,
it violated a financial covenant limiting the amount of allowable losses. In the
first quarter of 2001, utilizing proceeds generated by the sale of certain
assets of BBICL as discussed above, the Company paid off in full the $5,763,000
outstanding balance (plus accrued interest), thereby terminating this line of
credit. There were no payment defaults at any time on this line of credit.
In October 1999, the Company formed a new, wholly-owned subsidiary, Panacos
Pharmaceuticals, Inc. ("Panacos"), a Delaware corporation. All of the Company's
technology related to its drug discovery and vaccine programs, consisting
primarily of patents and related sponsored research agreements, were transferred
to Panacos effective January 2000. In accordance with its strategic plans,
Panacos obtained additional equity financing from third party investors in
November 2000 as the first step in raising the substantial amount of capital
required to progress to more advanced stages of drug development including human
clinical trials. As a result of the new equity financing, the Company retained a
30.5% interest in non-voting preferred shares of Panacos. Accordingly,
subsequent to November 14, 2000, the Company no longer consolidates Panacos'
results of operations, nor is the Company required to fund any further research
and development activities of Panacos.
In April 2000, the Company borrowed $2,447,000 (net of issuance costs)
under a mortgage agreement on its West Bridgewater, MA facility. The Company
used these funds to reduce the outstanding balance on its line-of-credit. The
mortgage is due on March 31, 2010. During the first five years the note carries
an interest rate of 9.75%; after five years the rate charged will be 0.75%
greater than the bank base rate then in effect. Under this mortgage agreement
the Company is subject to certain financial covenants by which a default in its
line-of-credit covenants will cause a default on this note. The Company has
received a waiver from this lending institution regarding the covenant
violation. Payments due on this mortgage are based on a 20 year amortization
schedule with a balloon payment representing the remaining balance due in full
on March 10, 2010.
In February 2000, the Company received notice that Paradigm Group, LLC
exercised all of its warrants to purchase the Company's common stock. This
exercise was expected to result in proceeds to the Company of approximately
$2,100,000. The holders of the warrants were required to pay the exercise price
when the registration of the underlying shares became effective which was in
December 2000. In August 2000, the Company received a summons and complaint from
Paradigm Group, LLC naming the Company as a defendant. The suit, filed in the
Circuit Court of Cook County, Illinois, alleged breach of contract claims and
fraud against the Company in connection with the sale by the Company to the
Paradigm Group, LLC of the above warrants, the exercise of those warrants by
Paradigm Group, LLC and a delay in the registration of those shares with the
U.S. Securities and Exchange Commission. In December 2000, Paradigm Group, LLC
withdrew this lawsuit. The Company believes it is entitled to the funds due from
the exercise of the above warrants, however, it has fully reserved the
receivable as of December 31, 2000 pending receipt of payment. Additionally, in
29
the fourth quarter, the Company expensed approximately $265,000 of costs
incurred related to these warrants and the registration of the underlying
shares. The shares related the exercise of these warrants are outstanding from
the date the warrants were exercised through the end of the year and have been
included in the calculation of weighted average shares outstanding and earnings
per share.
The Company has outstanding warrants, with various strike prices, which are
exercisable for a total of 457,730 shares of common stock. This represents
approximately 8.1% of the Company's issued and outstanding common stock based on
the number of shares issued and outstanding as of December 31, 2000.
Net cash used in continuing operations for the year ended December 31, 2000
was $2,796,000 as compared to cash use of $601,000 for year 1999. This increase
in operational use of cash was primarily the result of higher operating losses.
Cash used in investing activities was $1,025,000 for the year 2000 versus
$2,457,000 for the year 1999. During 2000, the Company's BBI Biotech segment
invested $580,000 to build-out its new repository facility in Frederick,
Maryland, and approximately $800,000 relative to the Company's investment in
Panacos Pharmaceuticals as discussed further above. In addition, significant
investments were made for laboratory and manufacturing equipment. Expenditures
in 1999 included approximately $1,138,000 of computer hardware and software, of
which $807,000 was invested in new enterprise resource planning systems for the
Diagnostics and Laboratory Instrumentation segments of the business; this latter
amount includes approximately $448,000 of general and administrative costs
capitalized by the Company relative to the implementation of its ERP system in
1999.
Cash provided by financing activities was $4,783,000 in 2000 versus
$3,560,000 in 1999. During 2000, the net cash provided by debt consisted of the
mortgage of approximately $2,447,000 and the Debentures and related warrants of
approximately $2,531,000 and $328,000, respectively, as discussed above, less
net repayments on the line-of-credit of $1,383,000. In addition, cash of
approximately $936,000 was received in year 2000 from the exercise of stock
options and warrants, exclusive of the 500,000 warrants associated with the
Paradigm Group LLC as discussed herein.
As of March 1, 2001, the Company had existing cash balances approximating
$2,100,000 (excluding $900,000 of restricted cash relating to final post closing
adjustments associated with the sale of certain BBICL assets as discussed
herein) and believes this amount coupled with internally generated cash flows
will be sufficient to fund operations and anticipated capital expenditures for
the next year. The Company continually evaluates financing options, as well as
other strategic alternatives, in order to maximize shareholder value.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended, is
effective for quarters of fiscal years beginning after June 15, 2000. The new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivatives and whether they qualify for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. The
Company does not currently engage in derivative trading or hedging activity so
it does not believe that adoption of SFAS 133 will have a material effect on its
financial statements.
30
In late 2000 the and early 2001, the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") reached consensus on a number of revisions
to EITF Issue No. 98-5 "Accounting for Convertible Securities with Beneficial
Conversions Features or Contingently Adjustable Conversion Ratios." The
Securities and Exchange Commission's ("SEC") Observer to the EITF indicated the
SEC's preference that the revision relative to the computation of a beneficial
conversion features associated with convertible securities be applied to all
securities issued after May 20, 1999. The Company has therefore applied this
adjusted calculation to the beneficial conversion feature associated with its
August 2000 issuance of $3,250,000 of 3% Senior Subordinated Convertible
Debentures and accordingly, the Company has included the effects of the
revisions, as indicated by the SEC staff member. Approximately $190,000 of this
revised computation is reflected as the cumulative effect of a change in
accounting principle in the accompanying financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125". SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company does not expect the adoption of SFAS No. 140 to have a material effect
on its financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," (an Interpretation of
Accounting Principles Bulletin Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44
provides guidance on the application of APB 25, particularly as it relates to
options. The effective date of FIN 44 was July 1, 2000, and the Company has
adopted FIN 44 as of that date. The application of FIN 44 has not had a material
effect on the Company's financial statements.
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 by the September
2000 downsizing of this segment of the business; the renewal and full funding of
contracts with National Institutes of Health (NIH), National Heart, Lung and
Blood Institute (NHLBI) and other government agencies; the inability of the
Company to develop the technology acquired as part of its purchase of BioSeq,
Inc. to the level of commercial utilization; the 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 most
recent Registration Statements on Form S-3 (SEC File No.'s 333-94379 and
333-46426).
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk in connection with its
long-term debt. The aggregate hypothetical loss in earnings for one year of
those financial instruments held by the Company at December 31, 2000 that are
subject to interest rate risk resulting from a hypothetical increase in interest
rates of 10 percent is less than $100,000, after-tax. The hypothetical loss was
determined by calculating the aggregate impact of a 10 percent increase in the
interest rate of each variable rate financial instrument held by the Company at
December 31, 2000, that is subject to interest rate risk. Fixed rate financial
instruments were not evaluated, as the Company believes the risk exposure is not
material.
The Company is exposed to concentrations of credit risk in cash and cash
equivalents and trade receivables. Cash and cash equivalents are placed with
major financial institutions with high quality credit ratings. Trade receivables
credit risk exposure is significant as the Company derives a significant portion
of its revenues from a small number of customers however this risk is mitigated
by the dispersion across different industries and geographies in which the
customers operate; in addition to this, approximately 30% of 2000 consolidated
revenue was from all branches of the National Institutes of Health, a U.S.
Government agency. The Company is exposed to credit-related risks associated
with its trade accounts receivable denominated in U.S. Dollars but receivable
from foreign customers.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 1,782,100 $ 276,168
Accounts receivable, less allowances of $88,981 in 2000 and
$86,796 in 1999 ............................................... 3,881,943 4,353,950
Inventories ...................................................... 6,465,548 6,461,693
Prepaid expenses and other current assets ........................ 236,731 285,047
Income taxes receivable (2000) and deferred (1999) ............... 212,762 934,790
------------ ------------
Total current assets ................................. 12,579,084 12,311,648
------------ ------------
Property and equipment, net .......................................... 7,459,283 7,752,719
OTHER ASSETS:
Goodwill and other intangibles, net .............................. 933,793 2,571,404
Deferred income taxes ............................................ -- 220,535
Debt issuance costs .............................................. 203,523 --
Other long-term assets ........................................... 135,578 99,171
Net assets from discontinued operations (Note 15) ................ 1,237,535 1,978,245
------------ ------------
2,510,429 4,869,355
------------ ------------
TOTAL ASSETS ........................................... $ 22,548,796 $ 24,933,722
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 1,232,697 $ 1,787,577
Accrued employee compensation .................................... 836,804 833,233
Other accrued expenses ........................................... 974,606 1,076,014
Current maturities of long term debt ............................. 5,840,172 --
Deferred revenue and other current liabilities ................... 99,074 --
------------ ------------
Total current liabilities ............................ 8,983,353 3,696,824
------------ ------------
LONG-TERM LIABILITIES:
Long term debt, less current maturities .......................... 2,420,449 7,145,651
3% Senior Subordinated Convertible Debentures .................... 2,818,375 --
Other liabilities ................................................ 577,044 445,124
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized,
5,652,516 and 4,773,365 issued and outstanding at
December 31, 2000 and 1999, respectively ....................... 56,525 47,734
Additional paid-in capital ....................................... 18,904,862 16,809,242
Accumulated deficit .............................................. (11,211,812) (3,210,853)
------------ ------------
Total stockholders' equity ........................... 7,749,575 13,646,123
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ................ $ 22,548,796 $ 24,933,722
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
33
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUE:
Products ................................................... $ 12,387,416 $ 14,056,657 $ 13,075,085
Services ................................................... 7,082,538 5,741,690 6,189,674
------------ ------------ ------------
Total revenue ................................................... 19,469,954 19,798,347 19,264,759
COSTS AND EXPENSES:
Cost of products .............................................. 7,269,817 7,267,273 7,179,920
Cost of services .............................................. 5,581,636 4,567,863 4,288,968
Research and development ...................................... 2,443,779 3,131,590 2,296,717
Acquired research and development ............................. -- 4,230,812
Selling and marketing ......................................... 2,659,935 2,831,293 2,883,368
General and administrative .................................... 4,918,899 3,450,879 3,334,293
Impairment of intangible asset ................................ 1,464,220 -- --
------------ ------------ ------------
Total operating costs and expenses .............................. 24,338,286 21,248,898 24,214,078
Operating loss from continuing operations ....................... (4,868,332) (1,450,551) (4,949,319)
Interest income ................................................. 23,598 6,146 27,901
Interest expense, including beneficial conversion feature (Note 7) (1,617,311) (419,980) (75,250)
------------ ------------ ------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle ....... (6,462,045) (1,864,385) (4,996,668)
(Provision for) benefit from income taxes ....................... (1,151,940) 744,093 613,905
------------ ------------ ------------
Loss from continuing operations before cumulative
effect of change in accounting principle ...................... (7,613,985) (1,120,292) (4,382,763)
Cumulative effect of change in accounting principle (Note 7) .... (190,223) -- --
------------ ------------ ------------
Loss from continuing operations ................................. $ (7,804,208) $ (1,120,292) $ (4,382,763)
Discontinued operations (Note 15)
(Loss) income from discontinued operations of Clinical
Laboratory segment (less income taxes of $0, $245,121
and $49,506 in 2000, 1999 and 1998, respectively ........... (196,751) 306,180 (5,956)
------------ ------------ ------------
Net loss ........................................................ $ (8,000,959) $ (814,112) $ (4,388,719)
============ ============ ============
Loss from continuing operations per share,
basic & diluted ............................................... $ (1.43) $ (0.24) $ (0.94)
(Loss) income per share from discontinued
operations, basic & diluted ................................... $ (0.03) $ 0.07 $ (0.00)
Net loss per share, basic & diluted ............................. $ (1.46) $ (0.17) $ (0.94)
Number of shares used to calculate net (loss)
income per share basic & diluted .............................. 5,465,358 4,669,717 4,654,609
The accompanying notes are an integral part of these
consolidated financial statements
34
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Common Stock
------------------------- Additional Receivable Retained Total
$.01 Par Paid-In for Exercised Earnings Stockholders'
Shares Value Capital Warrants (Deficit) Equity
----------- ----------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997 ................... 4,622,566 $ 46,226 $ 16,029,049 $ 1,991,978 $ 18,067,253
Stock options and warrants issued with
acquisition .............................. 236,327 236,327
Stock options exercised .................... 45,250 453 88,696 89,149
Tax benefit of stock options exercised ..... 64,644 64,644
Net loss ................................... (4,388,719) (4,388,719)
----------- ----------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 ................... 4,667,816 46,679 16,418,716 (2,396,741) 14,068,654
Common stock issued ........................ 53,300 533 147,905 148,438
Stock warrants issued, net of
issuance costs ........................... 206,011 206,011
Stock options and warrants exercised ....... 52,249 522 36,610 37,132
Net loss ................................... (814,112) (814,112)
----------- ----------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1999 ................... 4,773,365 47,734 16,809,242 (3,210,853) 13,646,123
Common stock issued in connection with
Employee Stock Purchase Plan ............... 8,458 84 26,264 26,348
Stock warrants issued ...................... 1,000 1,000
Stock options and other warrants exercised . 370,693 3,707 906,304 910,011
Exercise of Paradigm warrants .............. 500,000 5,000 1,954,979 $(2,225,000) (265,021)
Reserve for exercise of Paradigm warrants .. (1,959,979) 2,225,000 265,021
Stock warrants issued and beneficial conversion
feature in connection with 3% Senior
Subordinated Convertible Debentures ...... 1,167,052 1,167,052
Net loss ................................... (8,000,959) (8,000,959)
----------- ----------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 2000 ................... 5,652,516 $ 56,525 $ 18,904,862 $ -- $(11,211,812) $ 7,749,575
=========== =========== ============ =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
35
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $(8,000,959) $ (814,112) $(4,388,719)
Income (loss) from discontinued operations ...................... (196,751) 306,180 (5,956)
----------- ----------- -----------
Loss from continuing operations ................................. (7,804,208) (1,120,292) (4,382,763)
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization ................................... 1,609,454 1,338,789 1,062,615
Non-cash interest expense on convertible debentures ............. 707,704 -- --
Cumulative effect of change in accounting principle ............. 190,223
Impairment of intangible assets ................................. 1,464,220 -- --
Provision for doubtful accounts ................................. 2,064 -- 87,229
Other liabilities ............................................... 190,078 (320,243) 117,911
Deferred income tax valuation allowance ......................... 1,155,325 (447,420) (528,676)
Tax benefit of stock options exercised .......................... -- -- 64,644
Acquired research and development ............................... -- -- 4,230,812
Loss on disposal of property and equipment ...................... 4,721 35,672 74,506
Changes in operating assets and liabilities:
Accounts receivable ........................................... 469,943 237,548 (332,695)
Inventories ................................................... (3,855) (73,672) (657,863)
Prepaid expenses and other current assets ..................... 48,316 141,608 (117,415)
Receivable for income taxes ................................... (212,762)
Other long-term assets ........................................ 11,910 (2,224) 26,971
Accounts payable .............................................. (554,880) 29,150 (82,958)
Accrued compensation .......................................... 3,571 (124,042) 127,766
Other accrued expenses ........................................ (101,408) 395,260 (289,096)
Deferred revenue .............................................. 23,897 (690,760) (558,264)
----------- ----------- -----------
Net cash used in operating activities ................... (2,795,687) (600,626) (1,157,276)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquired research and development ........................... -- -- (850,000)
Payments for additions to property and equipment ............ (1,025,460) (2,456,521) (2,802,061)
Purchase of intangible assets ............................... -- -- (3,470)
Acquisitions, net of cash aquired ........................... -- -- (1,706,540)
----------- ----------- -----------
Net cash used in investing activities ................... (1,025,460) (2,456,521) (5,362,071)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage, net ..................................... 2,446,573 -- --
Proceeds from issuance of convertible debentures, net ........... 2,531,023 -- --
Proceeds from issuance of warrants .............................. 327,643 206,011 --
Proceeds from issuance of common stock .......................... 936,359 185,570 89,149
(Repayments) Borrowings on line of credit ....................... (1,383,016) 3,168,300 3,977,351
Repayments of long-term debt .................................... (75,462) -- --
----------- ----------- -----------
Net cash provided by financing activities ............... 4,783,120 3,559,881 4,066,500
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: ............... 961,973 502,734 (2,452,847)
Change in cash and cash equivilants provided by
discontinued operations ....................................... 543,959 (326,480) (171,571)
Cash and cash equivalents, beginning of year .................... 276,168 99,914 2,724,332
----------- ----------- -----------
Cash and cash equivalents, end of year .......................... $ 1,782,100 $ 276,168 $ 99,914
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Income taxes paid ............................................. $ 85,119 $ 33,391 $ 113,287
Interest paid ................................................. 416,557 414,297 72,755
Long-term investment included in acquisition .................. -- -- 1,482,500
NON-CASH ACTIVITIES:
Capital lease obligations incurred ............................ $ 95,577 $ -- $ --
The accompanying notes are an integral part of these
consolidated financial statements
36
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, laboratory instrumentation,
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 as of December 31, 2000. The Company also
invests in new technologies related to infectious diseases. The Company is
subject to risks common to companies in the biotechnology, medical device and
diagnostic industries, 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
governmental 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, BBI Biotech Research Laboratories, Inc. ("BBI
Biotech"), BBI Source Scientific, Inc. ("BBI Source"), and BBI BioSeq, Inc.
("BBI BioSeq"). BBI consists primarily of the Diagnostic Products segment as
well as the executive corporate office. In January 2000, the Company
incorporated Panacos Pharmaceuticals, Inc., ("Panacos"). All of the Company's
technology related to its drug discovery and vaccine programs, consisting of
primarily patents and related sponsored agreements, were transferred to Panacos
effective January 2000. Panacos was accounted for as a consolidated subsidiary
of the Company during the period January 1, 2000 to November 14, 2000,
subsequent to which Panacos obtained independent third party funding and the
Company ceased consolidation of Panacos as a wholly-owned subsidiary. As of
November 14, 2000 the Company's investment in Panacos was zero and the Company
is no longer required to fund Panacos's operations. Therefore no further losses
of Panacos will be recorded by the Company. The Company retains a 30.5% interest
in non-voting preferred shares of Panacos. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
Subsequent to December 31, 2000, the Company sold certain assets of BBI
Clinical Laboratories, Inc. ("BBICL") to a third party in conjunction with its
decision to exit the clinical laboratory business segment. Accordingly, the
accompanying financial statements have been reclassified to present BBICL's net
assets and results of operations as discontinued operations.
(ii) Use of Estimates
To prepare the financial statements in conformity with generally accepted
accounting principles, management is required to make significant 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, the value and realizability
of intangible assets, deferred tax assets, as well as the net realizable value
of its inventory.
The valuation methodology applied to the acquisition of BioSeq, Inc. (see
Note 2) was based on estimated discounted future cash flows. The purchase price
accounting is based on this valuation. Significant assumptions include gross and
operating profit margins, and future tax, discount, and royalty rates.
Actual results could differ from the estimates and assumptions used by
management.
37
(1) Business and Significant Accounting Policies (Continued)
(iii) Revenue Recognition
Product revenue is recognized 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,
firm commitment and transfer to the customers of all risks and rewards of
ownership. Total revenue related to bill and hold transactions was approximately
$562,000, $1,998,000, and $1,388,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
Services are recognized as revenue upon completion of tests for laboratory
services. Revenue from service contracts and research and development contracts
for the Company's laboratory instrumentation business is recognized as the
service and research and development activities are performed under the terms of
the contracts.
Revenue under long-term contracts, generally lasting from one to five
years, including funded research and development contracts, is recorded when
costs to perform such research and development activities are incurred. Billings
under long-term contracts are generally at cost plus a predetermined profit.
Billings occur as costs associated with time and materials are incurred.
Customers are obligated to pay for such services, when billed, and payments are
non-refundable. On occasion certain customers make advance payments that are
deferred until revenue recognition is appropriate. The Company does not believe
there are any material collectability issues associated with these receivables.
Total revenue related to long-term contracts was approximately $5,082,000,
$4,457,000, and $4,175,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. Total contract costs associated with these agreements were
approximately $5,540,000, $4,323,000, and $3,950,000 for the years ended
December 2000, 1999 and 1998, respectively. Included in the revenue recognized
under long-term contracts are certain unbilled receivables representing
additional indirect costs, which are allowed under the terms of the respective
contracts. Unbilled receivables were less than $40,000 for all years presented.
In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). This SAB summarizes certain of the Staff's views in
applying generally accepted accounting principles, in the United States, to
revenue recognition in financial statements. SAB 101 is effective for the
Company's fiscal year ended December 31, 2000. The adoption of this standard by
the Company did not have a material impact on the accompanying financial
statements.
(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 fair market value, and classified as cash
equivalents.
(v) Research and Development Costs
Research and development costs are expensed as incurred.
(vi) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value and include material, labor and manufacturing overhead.
38
(1) Business and Significant Accounting Policies (Continued)
(vii) Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is recognized using the straight-line method, allocating
the cost of the assets over their estimated useful lives ranging from five to
ten years for certain manufacturing and laboratory equipment, from three to five
years for management information systems and office equipment, three years for
automobiles and thirty years for the building. Leasehold improvements are
amortized over the shorter of the life of the improvement or the remaining life
of the leases, which range from four to ten years. Upon retirement or sale, the
cost and related accumulated depreciation of the asset are removed from the
accounting records. Any resulting gain or loss is credited or charged to income.
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 became
effective beginning January 1, 1999. The Company adopted this policy during 1999
as it implemented enterprise resource planning systems at two of its locations.
See Footnote 4 for further information.
(viii) Goodwill and Intangibles
The Company has classified as goodwill, the cost in excess of fair value of
the assets of the businesses acquired. Goodwill is being amortized on a
straight-line basis over ten to fifteen years. Other intangibles primarily
consist of patents, licenses, and intellectual property rights and are amortized
over periods ranging from four to sixteen years.
(ix) Impairment of Long-Lived Assets
The Company evaluates the potential impairment of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. At the occurrence of a certain event or change
in circumstances, the Company evaluates the potential impairment of an asset
based on estimated future undiscounted cash flows. In the event impairment
exists, the Company will measure the amount of such impairment based on the
present value of estimated future cash flows using a discount rate commensurate
with the risks involved. Upon the occurrence of a material circumstance, such as
the failure of certain technology to demonstrate promise that it may gain
commercial acceptance or the failure of a business segment to achieve certain
performance objectives, management reassesses the value of associated assets and
if appropriate at that time, will recognize an impairment charge. (See Note 5.)
(x) Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this 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. In the year ended December
31, 2000, the Company' established a full valuation allowance for all of its
deferred tax assets based on applicable accounting standards and in
consideration of incurring three consecutive years of losses (see Note 10).
(xi) 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 and cash equivalents with high
credit quality financial institutions. 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 Note 6). 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.
39
(1) Business and Significant Accounting Policies (Continued)
(xii) Deferred Revenue
Deferred revenue consists of payments received from customers in advance of
services performed.
(xiii) Computation of Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted average common shares
outstanding plus additional common shares that would have been outstanding if
dilutive potential common shares had been issued. For purposes of this
calculation, stock options are considered common stock equivalents in periods in
which they have a dilutive effect. Options and warrants that are antidilutive
are excluded from the calculation.
Potentially dilutive securities having a net effect of 2,500, 68,023 and
192,826 common shares were not included in the computation of diluted loss per
share because to do so would have been antidilutive for the years ended December
31, 2000, 1999 and 1998, respectively.
(xiv) Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Disclosures required by this
new standard are included in the notes to the consolidated financial statements
under the caption "Segment Reporting and Related Information."
(xv) Recent Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended, is
effective for quarters of fiscal years beginning after June 15, 2000. The new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivatives and whether they qualify for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. The
Company does not currently engage in derivative trading or hedging activity so
it does not believe that adoption of SFAS 133 will have a material effect on its
financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125". SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company does not expect the adoption of SFAS No. 140 to have a material effect
on its financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," (an Interpretation of
Accounting Principles Bulletin Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44
provides guidance on the application of APB 25, particularly as it relates to
options. The effective date of FIN 44 was July 1, 2000, and the Company has
adopted FIN 44 as of that date. The application of FIN 44 has not had a material
effect on the Company's financial statements.
(xvi) Reclassifications
Certain amounts included in the prior year's financial statements have been
reclassified to conform to the current years presentation.
40
(2) Acquisition of BioSeq, Inc.
On September 30, 1998 the Company acquired the remaining common stock
outstanding of BioSeq (approximately 81%) for $879,000 in cash (net of cash
acquired of $121,000), warrants to purchase 100,000 shares of the Company's
stock at an exercise price of $2.50 per share, minimum long-term royalty
payments of $424,000, debt and accrued interest owed by BioSeq at the time of
acquisition of approximately $736,000, and other acquisition costs. The Company
also exchanged BioSeq's stock options for 46,623 of the Company's stock options
with an average exercise price of $2.74. Accordingly, the Company's aggregate
cost of acquiring all of BioSeq's equity, including the original 19% investment
under the 1996 Purchase Agreement of $1,482,000 (classified as long-term
investment at December 31, 1997 was approximately $4,226,000. The cash portion
of the acquisition was financed from a combination of debt and cash. The
acquisition has been recorded using purchase accounting, and BioSeq's results
are included in the consolidated results of the Company commencing October 1,
1998.
BBI BioSeq is a development stage company with patent pending technology
based on pressure cycling technology. The assets were capitalized by allocating
the aggregate cost of $4,226,000 ratably to the individual components of the
$11,124,000 total estimated fair value of the assets acquired, based upon
independent valuation of the assets acquired as performed by the Michel/Shaked
Group, a division of Back Bay Management Company. Management believes that
because of the Company's initial investment in BioSeq, and intimate knowledge of
its technology and business, its understanding of the industry to which pressure
cycling technology would be applied, and as a result of lengthy and intense
negotiations, the Company was successful in reaching an extremely favorable
purchase price for BioSeq compared to the fair value of the assets acquired.
The assets acquired and their allocation are as follows:
Estimated Allocated
Item Useful Life Fair Value Purchase Price
----------------------------------- ------------- --------------- ---------------
Acquired in-process research
and development ................... -- $ 8,764,000 $ 3,381,000
Patents ........................... 16 years 2,017,000 778,000
Other assets ...................... 3 - 10 years 343,000 67,000
--------------- ---------------
Totals ............................ $ 11,124,000 $ 4,226,000
=============== ===============
Allocated in-process research and development consists of two projects,
that were on-going at the time of the acquisition: nucleic acid extraction and
purification and pathogen inactivation. BioSeq had expended approximately $1.6
million prior to September 30, 1998 on these projects. Both of these projects
have encouraging preliminary data demonstrating potential feasibility, but
significant scientific, mechanical and design issues remain. The Company
estimates that it may spend up to $3.0 million in years 2001 through 2003 to
complete the development into commercially viable products and to begin
generating revenue. Remaining development efforts are focused on feasibility
studies to establish the key performance parameters and biological activities to
be retained; designing and building a prototype instrument; further development
of the prototype for the applications; scale-up of design; data generation and
clinical trials; applying and obtaining Food and Drug Administration approval,
where applicable, final design modifications; and transfer to manufacturing. In
addition to the risk of the technology ultimately not working, failure to
complete on a timely basis could allow new or existing competing technologies to
be developed and commercially accepted. The valuation methodology was based on
estimated discounted future cash flows. Significant assumptions include gross
and operating profit margins, and future tax, discount, and royalty rates.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and BioSeq as if the acquisition had
occurred at the beginning of 1998, after giving effect to certain adjustments,
including amortization of the intangible assets, increased interest expense on
the acquisition debt, and related income tax effects. The unaudited pro forma
information is shown for comparative purposes only and is based on management's
estimates of research and development expenditures.
41
(2) Acquisition of BioSeq, Inc. (continued)
Year Ended
December 31, 1998
Pro Forma
----------
Revenues .................. $ 26,081,077
Operating income (loss) ... (1,474,694)
Net income (loss) ......... (989,327)
EPS ....................... $ (0.21)
The pro forma information excludes acquired research and development of
$4,231,000
(3) 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 QC Panels, Accurun(R) 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 also includes component parts used
in the manufacture of laboratory instrumentation. Inventory balances at December
31, 2000 and 1999 consisted of the following:
2000 1999
---------- ----------
Raw materials ........... $3,029,962 $2,219,512
Work-in-process ......... 1,753,867 1,845,778
Finished goods .......... 1,681,719 2,396,403
---------- ----------
$6,465,548 $6,461,693
========== ==========
(4) Property and Equipment
Property and equipment at December 31, 2000 and 1999 consisted of the
following:
2000 1999
----------- -----------
Laboratory and manufacturing equipment .... $ 3,228,054 $ 3,006,313
Management information systems ............ 3,315,397 3,119,064
Office equipment .......................... 882,584 838,950
Automobiles ............................... 135,485 135,485
Leasehold improvements .................... 2,696,561 2,114,261
Land, building and improvements ........... 2,672,240 2,611,733
----------- -----------
12,930,321 11,825,806
Less accumulated depreciation ............. 5,471,038 4,073,087
----------- -----------
Net book value ............................ $ 7,459,283 $ 7,752,719
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was approximately $1,410,000, $1,126,000, and $886,000 respectively. Included in
2000, 1999 and 1998 land, building and improvements is approximately $0,
$203,000 and $1,345,000, respectively, of construction in progress.
42
(4) Property and Equipment (continued)
In accordance with SOP 98-1, the Company capitalized approximately $448,000
of internal labor and related costs, in 1999, in connection with its ERP System
Implementation. These costs are included in the Management Information Systems
line item and are being depreciated over the same life as the system, 5 years.
Depreciation expense, related to these capitalized costs was approximately
$90,000 and $7,000 for the years ended December 31, 2000 and 1999, respectively.
(5) Intangible Assets
Intangible assets at December 31, 2000 and 1999 consisted of the following:
2000 1999
---------- ----------
Goodwill .......................... $ 820,248 $2,284,468
Patents ........................... 795,880 795,880
Licenses .......................... 6,359 6,359
---------- ----------
1,622,487 3,086,707
Less accumulated amortization ..... 688,694 515,303
---------- ----------
Net book value .................... $ 933,793 $2,571,404
========== ==========
Amortization expense for the years ended December 31, 2000, 1999 and 1998
was approximately $173,000, $213,000, and $177,000 respectively.
As part of an ongoing strategic review process, the Company's Board of
Directors met in late September 2000 to review the progress of its Laboratory
Instrumentation segment, and that segment's prospects for the future. Based on
new updated information presented at this meeting and subsequent analyses
showing lower revenue expectations, management approved implementation of a cost
reduction plan including a headcount reduction, salary freeze, and sublease of
excess manufacturing space. Using the assumptions associated with this revised
business plan, the Company estimated future net undiscounted cash inflows and
cash outflows over the remaining original amortization period of that segment's
goodwill, and concluded an impairment had occurred. These annual net future cash
inflows and outflows were then discounted at a rate commensurate with the
business risks inherent with the future operations of the Laboratory
Instrumentation segment, and thus, in accordance with the provisions of both
"Accounting Principles Board Opinion No. 17 - Intangible Assets" and "Statement
of Financial Accounting Standards No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," this segment's
goodwill was written down by approximately $1,464,000 in year 2000. The
remaining net balance of goodwill associated with the Laboratory Instrument
segment is approximately $249,000 as of December 31, 2000.
(6) Segment Reporting and Related Information
(all dollar amounts in thousands)
Operating segments are components of an enterprise for which separate
financial information is available that is evaluated regularly by senior
management in deciding how to allocate resources and in assessing the
performance of each segment. The Company is organized along legal entity lines
and senior management regularly reviews financial results for all entities,
focusing primarily on revenue and operating income.
The Company had four operating segments as of December 31, 2000, as a
result of its decision in late 2000 to exit the clinical laboratory segment of
the business. The Diagnostics segment serves the worldwide in vitro diagnostics
industry, including users and regulators of their test kits, with quality
control products, and test kit components. The Biotech segment pursues third
party contracts to help fund the development of products and services for the
other segments, primarily with agencies of the United States Government. The
Laboratory Instrumentation segment sells diagnostic instruments primarily to the
43
(6) Segment Reporting and Related Information
(continued - all dollar amounts in thousands)
worldwide in vitro diagnostic industry on an OEM basis, and also performs
in-house instrument servicing. "Other" consists of research and development
primarily in pressure cycling technology ("PCT"). The Company performs research
in the development of PCT, with particular focus in the areas of nucleic acid
purification and pathogen inactivation. The "Other" segment's R&D operations
does not currently have any significant product or service revenue, and no
significant revenue is expected in the near future. This revenue to date
consists of both private and public (NIH) funding of segment research. Most of
the expenditures by this segment are for R&D expenses, and general management
expenses including patent costs.
The Company's underlying accounting records are maintained on a legal
entity basis for government and public reporting requirements, as well as for
segment performance and internal management reporting. Inter-segment sales are
recorded on a "third party best price" basis and are significant in measuring
segment operating results. Throughout 1999, the cost of most corporate functions
are included in the Diagnostic Products segment as the senior management group
has dual responsibility to this segment as well as the Company. Pursuant to the
August 1999 reorganization, many of the senior managers and a few other
employees were segregated from the Diagnostics segment to form a Corporate
operating unit, effective January 2000. The following segment information has
been prepared in accordance with the internal accounting policies of the
Company, as described above. Prior year data has been restated, where feasible,
to conform to the current year presentation format.
Operating segment revenue for the years ended December 31, 2000, 1999 and
1998 were as follows:
2000 1999 1998
-------- -------- --------
Diagnostics ....................... $ 10,863 $ 11,837 $ 11,277
Biotech ........................... 7,428 6,297 5,355
Laboratory Instrumentation ........ 2,309 2,923 3,929
Other ............................. 532 434 --
Eliminations ...................... (1,662) (1,693) (1,296)
-------- -------- --------
Total revenue .................. $ 19,470 $ 19,798 $ 19,265
======== ======== ========
Operating segment (loss) income for the years ended December 31, 2000, 1999
and 1998 were as follows:
2000 1999 1998
-------- -------- --------
Diagnostics ....................... $ 1,015 $ 2,436 $ 1,962
Biotech ........................... (398) (482) (214)
Laboratory Instrumentation ........ (2,819) (1,163) (1,187)
Other ............................. (2,325) (2,006) (1,085)
Eliminations ...................... (341) (236) (194)
Acquired research & development ... -- -- (4,231)
-------- -------- --------
Total loss from operations ..... $ (4,868) $ (1,451) $ (4,949)
======== ======== ========
44
(6) Segment Reporting and Related Information
(continued - all dollar amounts in thousands)
Operating segment depreciation and amortization expense for the years ended
December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- -------- --------
Diagnostics ....................... $ 665 $ 537 $ 408
Biotech ........................... 582 419 346
Laboratory Instrumentation (1) .... 1,717 299 292
Other ............................. 83 84 17
-------- -------- --------
Total depreciation and
amortization.....................$ 3,047 $ 1,339 $ 1,063
======== ======== ========
(1) Included in the Laboratory Instrumentation segments loss for 2000 is a
$1,464 write down of a portion of the Laboratory Instrumentation segment's
goodwill. (See also Note 5)
Identifiable operating segment assets are all located in the United States,
and as of December 31, 2000 and 1999 were as follows:
2000 1999
-------- --------
Diagnostics ....................... $ 11,183 $ 13,375
Biotech ........................... 4,693 4,643
Laboratory Instrumentation ........ 2,141 3,789
Other ............................. 3,294 1,148
-------- --------
Total assets ................... $ 21,311 $ 22,955
======== ========
Operating segment capital expenditures for the years ended December 31,
2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- -------- --------
Diagnostics ....................... $ 283 $ 1,315 $ 1,472
Biotech ........................... 818 944 1,234
Laboratory Instrumentation ........ 19 164 96
Other ............................. 1 34 --
-------- -------- --------
Total capital expenditures ..... $ 1,121 $ 2,457 $ 2,802
======== ======== ========
Revenue by geographic area for the years ended December 31, 2000, 1999 and
1998 are as follows:
2000 1999 1998
-------- -------- --------
United States ..................... $ 15,295 $ 15,758 $ 15,162
Europe ............................ 2,594 2,509 2,453
Pacific Rim ....................... 841 818 1,063
Total all others .................. 740 713 587
-------- -------- --------
Total ........................ $ 19,470 $ 19,798 $ 19,265
======== ======== ========
45
(6) Segment Reporting and Related Information
(continued - all dollar amounts in thousands)
Revenue of Product and Service classes in excess of 10% of consolidated
revenue from continuing operations (excludes inter-segment sales) for the years
ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- -------- --------
Quality Control Products .......... $ 8,210 $ 9,445 $ 9,369
Government Contracts .............. 5,929 4,530 3,535
Laboratory Instrument Products .... 1,953 2,578 2,291
The government contract revenues are from United States government
agencies, primarily various branches of the National Institutes of Health (NIH)
and represent the only customer with revenue in excess of 10% of consolidated
revenue in each of the years ended December 31, 2000, 1999 and 1998.
(7) Debt
Effective June 30, 1999, the Company entered into an amended revolving line
of credit agreement (the "Amended Line") with its bank, increasing the facility
to $10 million from $7.5 million. The Amended Line bears interest at the
Company's option based on either the base rate plus 1/4% or LIBOR plus 2.75%;
carries a facility fee of 1/4% per annum, payable quarterly; and is
collateralized by substantially all of the assets of the Company, excluding real
property. Borrowings under the Amended Line are limited to commercially standard
percentages of accounts receivable, inventory and equipment. The Amended Line
contains covenants regarding the Company's total liabilities to tangible net
worth ratio, minimum debt service coverage ratio, and maximum net loss. The
Amended Line further provides for restrictions on the payment of dividends,
incurring additional debt, and the amount of capital expenditures.
The December 31, 2000 balance sheet reflects the classification of the
Company's $5,762,635 outstanding line-of-credit balance as short-term debt. The
Company has reclassified this debt to short-term because in March 2000 and
through the remainder of the year, the Company was in violation of a financial
covenant limiting the amount of allowable losses. In December 2000, the line of
credit was limited to a maximum borrowing level of $5,762,635 and the interest
rate was raised four percentage points above the normal rate associated with
this line of credit. In February 2001, the Company utilized a portion of the
proceeds from the sale of BBICL to pay off in full the outstanding balance
(together with accrued interest) on this line of credit, at which time the bank
released all liens associated with this line of credit and terminated the line
of credit. There were no payment defaults at any time associated with this line
of credit.
On August 25, 2000, the Company entered into Securities Purchase Agreements
providing for the issuance of $3,250,000 (face value) 3% Senior Subordinated
Convertible Debentures due August 25, 2003, (the "Debentures"). Proceeds to the
Company, net of a 5% original issue discount and debt issuance costs, amounted
to $2,858,000, of which $327,000 has been allocated to the relative fair value
of the associated common stock purchase warrants. The fair value of the warrants
was determined using the Black Scholes option-pricing model and the following
assumptions: a risk free interest rate of 6.02%, a volatility factor of 91.17%,
a contractual life of 5 years and no expected dividend yield. The Company then
allocated the proceeds of the Debentures, net of the original issue discount
($3,087,500), on a pro-rata basis using the calculated fair value of the
warrants ($318,000) and the fair value of the Debentures ($2,685,000). This
resulted in proceeds of approximately $327,000 and $2,761,000 being allocated to
the relative fair value of the warrants and the Debentures, respectively. The
Debentures are convertible into the Company's common stock commencing November
24, 2000, at a conversion price equal to the lesser of (i) $3.36 per share or
(ii) 90% of the average of the five lowest volume weighted average sales prices
of Common Stock as reported by Bloomberg L.P. during the twenty-five business
days immediately preceding the date on which the Debenture holders notify the
Company of their intention to convert all or part of the Debenture into Common
Stock. In connection with this transaction, the Company issued warrants to
46
(7) Debt (continued)
purchase up to 135,556 shares of the Company's common stock at an exercise price
of $3.60 per share. Interest on the Debentures is payable quarterly in arrears
commencing September 30, 2000. The Debentures are subordinate to both the
Company's line of credit (which was terminated in February 2001) and mortgage on
its West Bridgewater, MA facility. The Company may elect at any time to redeem
all or any portion of the remaining unpaid principal amount of the Debentures
for cash. In addition, upon receipt of a notice of conversion from a holder of
the Debentures, the Company may elect to redeem that portion being converted for
cash in lieu of common stock of the Company. In both cases, the redemption price
equals the number of shares of common stock into which the Debenture being
redeemed is convertible, times the average closing bid price of the Company's
common stock for the five preceding trading days.
The Securities Purchase Agreements and related documents place certain
restrictions on the Company's ability to incur additional indebtedness, to make
certain payments, investments, loans, guarantees and/or transactions with
affiliates, to sell or otherwise dispose of a substantial portion of assets,
and/or to merge or consolidate with an unaffiliated entity.
Original issue discount and associated debt issuance costs of $162,500 and
$230,000, respectively, are being amortized ratably over the three-year life of
the underlying debt as additional interest expense. Also, in accordance with
Emerging Issues Task Force Issues 98-5 and 00-27, proceeds of $840,000 have been
allocated to the beneficial conversion feature of the Debentures by decreasing
the value of the debt and increasing additional paid in capital. Of this,
$351,000 was originally calculated in the third quarter when the Debentures were
issued. The additional amount of $489,000 was calculated in the fourth quarter
using the accounting conversion method preferred by the SEC pursuant to EITF
00-27 which clarified the method of calculating the beneficial conversion
feature. The amount allocated to the beneficial conversion feature was valued
using conversion method (ii) from above as of the date of the transaction as it
was determined to be the most beneficial to the holders of the Debentures. This
amount was expensed over the initial 90-day non-convertible period. The
remaining difference between the relative fair value of the Debentures and the
face value of the Debentures (as a result of the $327,000 of proceeds allocated
to the warrants) will be expensed as interest expense over the three-year term
of the Debentures. For the year ended December 31, 2000, the Company recorded a
charge of $898,000 (including $190,223 for the cumulative effect of a change in
accounting principle noted above) due to amortization of the beneficial
conversion feature, warrant costs and original issue discount/debt issuance
costs associated with the Company's August 2000 issuance of $3,250,000 3% Senior
Subordinated Convertible Debentures. Under the Debenture agreements the Company
is subject to certain financial covenants by which a default in its line of
credit financial covenants will cause a default on the Debentures. The Company
has received a waiver from the holders of the debentures regarding the covenant
vioaltion.
In the first quarter of 2001, certain holders of the Company's outstanding
3% Senior Convertible Debentures (the "Debentures") exercised their rights to
convert $1,210,000 of such Debentures into shares of the Company's common stock,
in accordance with the conversion formula. These conversions resulted in the
issuance of 801,325 additional shares of common stock subsequent to December 31,
2000. In addition, the Company redeemed the remaining $2,040,000 of Debentures
at face plus a $190,000 premium and accrued interest. Unamortized debt discount,
debt issuance costs and warrant-related costs associated with the converted
Debentures, approximating $231,000 will debited to additional paid-in capital,
with the remaining $377,000 of such costs associated with the redeemed
Debentures being included in the loss on extinguishment of the Debentures. In
addition, the Company will reverse approximately $528,000 of expense previously
recorded in 2000 associated with the Debentures beneficial conversion feature.
Accordingly, the Company will record a net loss of approximately $39,000
relative to this early extinguishment of debt in the first quarter of 2001. As a
result of both the conversions and redemptions, which occurred in the first
quarter of 2001, none of the 3%, Senior Subordinated Convertible Debentures
remain outstanding subsequent to February 27, 2001.
47
(7) Debt (continued)
On April 5, 2000, the Company borrowed $2,447,000, net of related costs,
under a mortgage agreement on its West Bridgewater, MA facility, of which
approximately $2,466,000 remains outstanding as of December 31, 2000. The
Company used the funds to reduce the outstanding balance of its existing line of
credit. The principal amount of the note issued in connection with the mortgage
is due on March 31, 2010. During the first five years the note carries an
interest rate of 9.75%; after five years the rate charged will be .75% greater
than the Corporate Base Rate then in effect. The mortgage precludes the payment
of dividends on the Company's common stock and contains certain other
restrictive covenants. Under this mortgage agreement the Company is subject to
certain financial covenants by which a default in its line of credit financial
covenants will cause a default on this note. The Company has received a waiver
from this lending institution regarding the covenant violation. Monthly payments
on this mortgage are based on a 20 year amortization schedule with a balloon
payment representing the remaining balance due in full on March 10, 2010. The
mortgage is collateralized by the Company's West Bridgewater, MA facility.
Principal payments due on the Company's mortgage agreement are approximately
$49,000, $54,000, $60,000, $66,000 and $72,000 for each of the years ended
December 31, 2001, 2002, 2003, 2004 and 2005, respectively.
(8) Other Liabilities
Included in long-term liabilities at December 31, 2000 and 1999 are the
present value of future minimum royalty payments of approximately $55,000 and
$139,000 payable to the former owners of BioSeq, Inc. (see Note 2).
(9) Income Taxes
The components of the (benefit) provision for income taxes are as follows:
2000 1999 1998
---------- ---------- ----------
Current (benefit) provision: federal ............. $ -- $ (226,368) $ (63,868)
Current provision: state ......................... -- 2,168 2,168
---------- ---------- ----------
Total current (benefit) provision ............ -- (224,200) (61,700)
Deferred (benefit) provision: federal ............ 879,557 (373,497) (437,315)
Deferred (benefit) provision: state .............. 272,383 (146,396) (114,890)
---------- ---------- ----------
Total deferred (benefit) provision ........... 1,151,940 (519,893) (552,205)
---------- ---------- ----------
Total (benefit) provision for income taxes ... $1,151,940 $ (744,093) $ (613,905)
========== ========== ==========
Significant items making up deferred tax liabilities and deferred tax
assets were as follows:
2000 1999
----------- -----------
Current deferred taxes:
Inventory ............................ $ 562,134 $ 174,338
Accounts receivable allowance ........ 355,611 298,271
Technology licensed .................. 277,250 299,883
Other accruals ....................... 173,504 162,298
Less: valuation allowance ............ (1,368,499) --
----------- -----------
Total current deferred tax assets ........ -- 934,790
Long term deferred taxes:
Accelerated tax depreciation ......... (232,282) (335,880)
Goodwill and intangibles ............. 594,657 19,961
Tax credits .......................... 252,589 252,589
Operating loss carryforwards ......... 3,094,247 1,082,665
Less: valuation allowance ............ (3,709,211) (798,800)
----------- -----------
Total long term deferred tax
assets (liabilities), net.............. -- 220,535
----------- -----------
Total net deferred tax assets ........... $ -- $ 1,155,325
=========== ===========
48
(9) Income Taxes (continued)
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been established for the full amount of the deferred tax
asset due to the uncertainty of realization.
The Company had net operating loss carryforwards for federal income tax
purposes of approximately $7,550,000 and $2,300,000 at December 31, 2000 and
1999, respectively. These net operating loss carryforwards expire at various
dates from 2011 through 2020. Included in this number are loss carryforwards of
approximately $2,000,000 that were obtained through the acquisition of BioSeq,
Inc. These carryforwards expire from 2011 through 2018. The Company has
established a valuation allowance of $798,800 to reserve for this entire loss
since the acquisition of BioSeq, Inc.
The Company had net operating loss carryforwards for state income tax
purposes of approximately $9,200,000 and $5,000,000 at December 31,2000 and
1999, respectively. These net operating loss carryforwards expire at various
dates from 2001 through 2020. Included in this number are loss carryforwards of
approximately $2,000,000 that were obtained through the acquisition of BioSeq,
Inc. These carryforwards expire from 2001 through 2003. As discussed above, the
Company has established a valuation allowance to reserve for this entire loss
since the acquisition of BioSeq, Inc.
Included in the net operating loss carryforwards discussed above is a
deferred tax asset of approximately $1,200,000 reflecting the benefit of
deductions from the exercise of stock options. The benefit from this deferred
tax asset will be recorded as a credit to additional paid-in-capital when
realized.
As of December 31, 2000, the Company had approximately $47,000 of
alternative minimum tax credits, which do not expire, and $205,000 of federal
research credits, which expire from 2011 to 2018.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:
2000 1999 1998
----- ----- -----
Federal tax (benefit) provision rate .......................... (34%) (34%) (34%)
State tax (benefit) provision, net of federal benefit ......... (6%) (6%) (1%)
Nondeductable writeoff of acquired research and development ... 23%
Non-cash deductions and other permanent items ................. 4%
Effect of subsidiary leaving the group ........................ (6%)
Valuation allowance ........................................... 59% 2% 1%
----- ----- -----
Effective income tax (benefit) provision rate ................. 17% (38%) (11%)
===== ===== =====
The Company's federal income tax return for fiscal year 1997 is currently
under examination by the Internal Revenue Service. The Company's Massachusetts
state income tax returns for the years 1996-1998 have been reviewed and closed
pursuant to a recently completed examination. Any assessments or potential
assessments are not expected to have a material adverse effect on the
accompanying financial statements.
(10) Commitments and Contingencies
The Company leases certain office space, repository, research and
manufacturing facilities under operating leases with various terms through
October 2007. All of the real estate leases include renewal options at either
market or increasing levels of rent.
In May 2000, the Company acquired laboratory equipment pursuant to a
three-year capital lease at 12% financing, resulting in total payments of
approximately $115,000 over the life of the lease agreement.
49
(10) Commitments and Contingencies (continued)
At December 31, 2000, future minimum lease payments under non-cancelable
leases, excluding discontinued operations, is as follows:
Year Ended Operating Leases Capital Leases
-------------- --------------- ---------------
2001 ............................................. $ 1,128,000 $ 38,000
2002 ............................................. 858,000 38,000
2003 ............................................. 870,000 16,000
2004 ............................................. 889,000 -
2005 ............................................. 915,000 -
2006 and thereafter .............................. 1,186,000 -
------------- -------------
Total mimimum lease payments ..................... $ 5,846,000 92,000
=============
Less amount representing interest ......................................... (15,000)
-------------
Present value of minimum lease payments ................................... $ 77,000
=============
The Company has entered into a non-cancelable sublease agreement with a
third party that will offset the future minimum lease payments by $184,000. Rent
expense, net of sublease income consisted of the following:
2000 1999 1998
----------- ----------- -----------
Basic expense ..................... $ 1,109,000 $ 1,094,000 $ 797,000
Sublease income ................... (42,000) -- --
----------- ----------- -----------
Rent expense, net ................. $ 1,067,000 $ 1,094,000 $ 797,000
=========== =========== ===========
In addition, as discussed further in Note 13 hereunder, the Company is
subject to future minimum lease payments in connection with the discontinued
operations of its Clinical Laboratory segment of $161,000, $161,000, $161,000,
$161,000, and $67,000 in 2001, 2002, 2003, 2004 and 2005, respectively. The
Company has entered into a Transition Services agreement with the purchaser
whereby the purchaser has subleased these premises for the remainder of 2001.
The Company has accrued a portion of the remaining lease commitment in 2001 as
part of the calculation of the gain on the sale of certain assets from the
Clinical Laboratory segment.
The Company's California and Maryland facility's leases include scheduled
base rent increases over the term of the lease. The amount of base rent payments
is charged to expense using the straight-line method over the term of the lease.
As of December 31, 2000 and 1999, the Company has recorded a long-term liability
of $262,000 and $306,000, respectively ($337,000 and $341,000 including the
current portion) 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 California
and Maryland facilities.
In April 1999, the Company increased it's commitment to directly support a
drug discovery program at UNC, in which a full-time post-doctoral research
scientist and two doctoral students are working to develop synthetic derivatives
of anti-HIV compounds that have been discovered pursuant to the Company's joint
collaboration with UNC. The Company was committed to pay approximately $44,000
per quarter for three years. These costs, charged to research and development
expense, provide for the rights to any new anti-HIV compounds and derivatives
developed in the course of this sponsored research, provided certain regulatory
approvals are obtained from the FDA. Effective November 2000, all rights, costs
and obligations under this agreement were transferred to Panacos
Pharmaceuticals, Inc., of which the Company has a 30.5% ownership of non-voting
securities as of December 31, 2000.
50
(11) 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 Internal Revenue
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. Company contributions are made at the discretion of management. To
date, no such contributions have been made. During 2000, 1999 and 1998 the
Company recognized administrative expense of approximately $30,000, $30,000, and
$32,000, respectively in connection with the plan.
(12) Stockholders' Equity
Common Stock
In July 1999, the Company's Board of Directors approved the 1999 Employee
Stock Purchase Plan. The Company adopted this plan, which allows eligible
employees to purchase shares of the Company's stock at 85% of market value as
determined at the beginning and the end of the offering period. A total of
250,000 shares have been reserved for this plan. As of December 31, 2000, 8,458
shares had been issued under this plan.
Options and Warrants
The Company has a nonqualified stock option plan and an incentive stock
option plan (1996 Employee Stock Option Plan) both of which are administered by
a committee of the Board of Directors. In July 1999 the Company's Board of
Directors approved the designation of an additional 1,250,000 shares to become
available for distribution under the 1996 Employee Stock Option Plan. The Board
of Directors also approved the 1999 Non- Qualified Stock Option Plan, and
designated 500,000 shares for distribution under this plan. The exercise price
of an option generally equals the fair market value of the stock at grant date.
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 expire ten years
from the date of grant, or 30 days from the date the grantee's affiliation with
the Company terminates.
At December 31, 2000, 1,999,500 shares were reserved for incentive stock
options, of which 1,031,185 are available for future grants. At December 31,
2000, 1,098,680 shares were reserved under the nonqualified stock option plan of
which 251,270 were available for future grants.
In August 1999, the Company sold 500,000 warrants to purchase the Company's
stock to Paradigm Group, a private investment company. The private placement
consisted of 400,000 common stock purchase warrants with a exercise price of
$4.25 and 100,000 common stock purchase warrants with an exercise price of
$5.25. Paradigm Group paid the Company $50,000 for the warrants. In addition,
National Securities received 40,000 common stock purchase warrants with an
exercise price of $4.25, 10,000 common stock purchase warrants with an exercise
price of $5.25, and 25,000 common stock purchase warrants with an exercise price
of $8.00, as transaction fee.
In February 2000, the Company received notice that Paradigm Group, LLC
exercised all of their warrants to purchase the Company's common stock. The
holders of the warrants were required to pay the exercise price when the
registration of the underlying shares became effective which was in December
2000. In August 2000, the Company received a summons and complaint from Paradigm
Group, LLC naming the Company as a defendant. The suit, filed in the Circuit
Court of Cook County, Illinois, alleged breach of contract claims and fraud
against the Company in connection with the sale by the Company to the Paradigm
Group, LLC of the above warrants, the exercise of those warrants by Paradigm
Group, LLC and a delay in the registration of those shares with the U. S.
Securities and Exchange Commission. In December 2000, Paradigm Group, LLC
withdrew this lawsuit. While the Company believes that it is entitled to the
funds due from the exercise of the above warrants, it has fully reserved the
receivable due to concerns over its collectability. Additionally, in the fourth
quarter, the Company has expensed approximately $265,000 of expenses related to
these warrants and the registration of the underlying shares. The 500,000 shares
associated with the exercise of these warrants are included in the total shares
outstanding as well as in the calculation of earnings (loss) per share from the
date the warrants were exercised through the end of the year.
51
(12) Stockholders' Equity (continued)
In November 1999, the Company sold 29,153 equity units to MDBio, Inc., a
Maryland not-for-profit corporation. Each equity unit consists of one share of
common stock and one common stock purchase warrant with an exercise price of
$10.00. MDBio paid the Company $175,000 for the equity units and has until
September 2003 to exercise the warrants.
On December 11, 1998, the Company's Board of Directors authorized the
Company to offer a reduction of the stock option exercise price to $3.25 per
share, which represented a premium over the market price of $2.56 on that day.
Any option holder with outstanding stock options with an exercise price higher
than $3.25 was eligible to participate in the repricing. A total of 411,417
options were repriced, which represents substantially all eligible options. The
original vesting schedule, generally four years from date of grant, remained
unchanged. However, all optionees accepting the offer agreed not to exercise
vested, repriced options for a period of one year from the date of amendment.
The previous weighted average exercise price of the options repriced was $6.72.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999, and 1998.
2000 1999 1998
-------- -------- --------
Risk-free interest rate ........... 5.77% 5.26% 4.69%
Volatility factor ................. 98.54% 76.68% 75.57%
Weighted average expected life .... 5.1 years 5.1 years 5.0 years
Expected dividend yield ........... -- -- --
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and pro forma net loss per share is as follows:
2000 1999 1998
------------- ------------- -----------
Net loss - as reported ............................ $ (8,000,959) $ (814,112) $(4,388,719)
Net loss - pro forma .............................. $ (9,161,689) $ (1,394,564) $(4,776,812)
Net loss per share - as reported, basic$a $ (1.46) $ (0.17) $ (0.94)
Net loss per share - pro forma, basic a $ (1.68) $ (0.30) $ (1.03)
The average fair value of options granted during 2000, 1999 and 1998 is
estimated as $2.67, $2.63 and $1.77, respectively.
52
(12) 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, 1997 1,026,093 4.28 160,000 11.48 1,186,093 832,231
Granted ............................... 358,836 3.80 * 100,000 2.50 458,836
Exercised ............................. (45,250) 1.97 -- -- (45,250)
Cancelled ............................. (165,013) 6.05 -- -- (165,013)
---------- ---------- ----------
Balance outstanding, December 31, 1998 1,174,666 2.75 ** 260,000 8.34 1,434,666 829,434
Granted ............................... 260,500 3.91 579,153 4.73 839,653
Exercised ............................. (47,249) 0.52 (5,000) 2.50 (52,249)
Cancelled ............................. (107,688) 3.56 -- -- (107,688)
---------- ---------- ----------
Balance outstanding, December 31, 1999 1,280,229 3.00 834,153 5.80 2,114,382 1,591,795
Granted ............................... 489,600 3.05 145,556 3.64 635,156
Exercised ............................. (353,254) 2.51 (521,979) *** 4.38 (875,233)
Cancelled ............................. (171,397) 3.51 -- -- (171,397)
---------- ---------- ----------
Balance outstanding, December 31, 2000 1,245,178 3.06 457,730 6.81 1,702,908 1,061,316
========== ========== ==========
* Includes 46,623 shares at $2.74 granted in connection with the BioSeq, Inc.
acquisition.
** Includes the effect of 411,417 options repriced in December 1998 from a
weighted average price of $6.72 to $3.25 per share.
*** Included a net exercise of 11,397 warrants for which 7,232 shares of the
Company's common stock were issued.
The following table summarizes information concerning options outstanding
and exercisable as of December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------- -----------------------------------
Range of Exercise Weighted Average Number of Weighted Average Number of Weighted Average
Price Remaining Life Options Exercise Price Options Exercise Price
---------------------- ------------------ --------------- ------------------ -------------- -----------------
0.00 - 1.50 0.3 42,000 1.50 42,000 1.50
1.51 - 2.00 0.8 27,000 1.65 27,000 1.65
2.01 - 2.50 7.0 469,100 2.50 153,100 2.50
2.51 - 3.00 1.5 42,986 2.83 33,505 2.86
3.01 - 3.50 6.2 445,942 3.26 300,669 3.26
3.51 - 4.00 8.8 60,150 4.00 3,000 4.00
4.01 - 4.50 8.7 130,500 4.32 29,312 4.27
4.51 - 5.00 8.6 25,000 4.68 12,500 4.68
5.51 - 7.00 5.2 2,500 7.00 2,500 7.00
-------------- -------------
0.00 - 7.00 6.5 1,245,178 3.06 603,586 2.97
============== =============
Preferred Stock
In 1996, the Company authorized the issuance of 1,000,000 shares of
preferred stock having a par value of $0.01. None of these shares have been
issued to date.
53
(13) Subsequent Events
In December 2000, the Company made a decision to exit the clinical
laboratory testing services segment and in February 2001, BBI Clinical
Laboratories, Inc., a wholly-owned subsidiary of the Company, sold certain
assets and liabilities of its clinical laboratory business to a third party for
an aggregate purchase price of $9,500,000, of which $900,000 is being held in
escrow subject to certain post closing adjustments. The Company has retained
certain other assets and liabilities of BBICL, primarily property plant and
equipment together with a facility lease subsequent to the closing date, which
the Company intends to liquidate throughout the remainder of year 2001 as part
of its decision to exit this segment of the business. In accordance with a
transition services agreement, the Company is required to operate the business
in a normal fashion for a minimum of six months subsequent to the sale but in no
event longer than one year from the date of sale; substantially all costs
associated with operating the business subsequent to the closing date will be
borne by the purchaser.
The Company expects to record an after-tax gain in the first quarter of
2001, subject to post closing adjustments. Closing costs include estimate to
dispose of all remaining assets and retire all existing liabilities including
the facility lease. The Company expects to utilize in year 2001 certain prior
period net operating loss carryforwards, previously reserved for by the Company
in year 2000, to offset the tax effect of this future gain. All financial data
presented in the accompanying financial statements has been reclassified to
reflect discontinued operations of this segment of the business for all periods
presented. Revenues from discontinued operations net of intercompany
eliminations of $197,287, $368,979 and $367,617 were $8,366,995, $9,472,741 and
$6,816,317 in 2000, 1999 and 1998 respectively.
(14) Selected Quarterly Financial Data
(Unaudited - Amounts in thousands, except for per share data)
2000 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue ..................................... $ 4,539 $ 5,535 $ 4,534 $ 4,862
Gross profit ...................................... 1,631 2,160 1,537 1,291
Net loss from continuing operations before
cumulative effect of change in accounting principle (608) (276) (4,695) (2,035)
Loss from continuing operations ................... (608) (276) (4,695) (2,225)
Loss from discontinued operations ................. (63) (16) (71) (47)
------- ------- ------- -------
Net (loss) ........................................ $ (671) $ (292) $(4,766) $(2,272)
======= ======= ======= =======
(Loss) per share from continuing operations
before cumulative effect of change in accounting
principle, basic & diluted ..................... $ -- $ -- $ -- $ (0.36)
(Loss) per share from continuing operations,
basic & diluted ................................ (0.12) (0.05) (0.84) (0.39)
(Loss) per share from discontinued operations,
basic & diluted ................................ (0.01) -- (0.01) (0.01)
------- ------- ------- -------
Net (loss) per share, basic & diluted ............. $ (0.13) $ (0.05) $ (0.85) $ (0.40)
======= ======= ======= =======
1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue ..................................... $ 4,725 $ 4,783 $ 4,925 $ 5,365
Gross profit ...................................... 1,921 2,001 2,036 2,005
Loss from continuing operations ................... (309) (281) (337) (193)
Loss from discontinued operations ................. 72 56 80 98
------- ------- ------- -------
Net (loss) ........................................ $ (237) $ (225) $ (257) $ (95)
======= ======= ======= =======
(Loss) per share from continuing operations,
basic & diluted ................................ $ (0.07) $ (0.06) $ (0.07) $ (0.04)
(Loss) per share from discontinued operations,
basic & diluted ................................ 0.02 0.01 0.02 0.02
------- ------- ------- -------
Net (loss) per share, basic & diluted ............. $ (0.05) $ (0.05) $ (0.05) $ (0.02)
======= ======= ======= =======
54
Report of Independent Accountants
To the Board of Directors and Stockholders
of Boston Biomedica, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index in item 14 of this Form 10-K, present fairly, in all material
respects, the financial position of Boston Biomedica, Inc. and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2001
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information called for by Item 10 is hereby incorporated by
reference to the information under Part I, Item 1 - Business under the heading
"Executive Officers of the Registrant" at page 16 of this report.
The following table sets forth certain information with respect to the
Directors of the Company.
Director Year Term Expires,
Name Age Position Since and Class
---- --- -------- -------- ---------------------
Francis E. Capitanio (1) 57 Director 1986 2003
Class I
Calvin A. Saravis (1)(2) 71 Director 1978 2003
Class I
William R. Prather 54 Senior Vice President, Finance and 1999 2001
Business Development, Treasurer and Class II
Director
Kevin W. Quinlan (1) 51 President and Chief Operating 1978 2002
Officer, and Director Class III
Richard T. Schumacher (2) 50 Chief Executive Officer and 1978 2002
Chairman of the Board Class III
(1) Member of the Company's Audit Committee
(2) Member of the Company's Compensation Committee
Mr. Capitanio has served as a Director of the Company since January 1986.
Since 1997, Mr. Capitanio has served as President of Kalisto Biologicals, Inc.
From 1996 to 1997, he served as an independent consultant in the medical
diagnostics industry. From 1980 to 1996, he served as President, Treasurer and
Director of Diatech Diagnostics Inc. (formerly Immunotech Corporation), an in
vitro diagnostics company and a wholly owned subsidiary of Healthcare
Technologies Ltd. Mr. Capitanio received an M.B.A. from the Sloan School of
Management, Massachusetts Institute of Technology and a B.S. in metallurgy from
Massachusetts Institute of Technology.
Dr. Saravis has served as a Director of the Company since 1978. Since 1984,
he has been an Associate Professor of Surgery (Biochemistry) at Harvard Medical
School and an Associate Research Professor of Pathology at Boston University
School of Medicine. From 1971 to 1997, Dr. Saravis was a Senior Research
Associate at the Mallory Institute of Pathology and from 1979 to 1997, he was a
Senior Research Associate at the Cancer Research Institute--New England
Deaconess Hospital. Dr. Saravis received his Ph.D. in immunology and serology
from Rutgers University.
Dr. Prather, a Director of the Company since 1999, has been Senior Vice
President, Finance and Business Development since August 1999. From January 1999
to August 1999, Dr. Prather served as Senior Vice President, Business
Development. Prior to joining the Company, Dr. Prather was the Senior Health
Care Analyst for Cruttenden Roth, Inc. from 1995 to 1998. From 1992 to 1995 he
was the Senior Analyst in Health Care for Manning and Napier Advisors. Dr.
Prather earned a B.S. in pharmacy and his MD at the University of Missouri -
Kansas City, and completed a Clinical Research Geriatric Fellowship at Harvard
Medical School. Dr. Prather is a Director of Primed International, a medical
device company and a member of the Advisory Board of the Canadian Medical
Discovery Fund, Inc., a fund of MDS Capital Corp.
Mr. Quinlan, a Director of the Company since 1978, has served as President
and Chief Operating Officer since August 1999. From January 1993 to August 1999,
he served as Senior Vice President, Finance, Treasurer, and Chief Financial
Officer. 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 (now PricewaterhouseCoopers L.L.P.)
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.
Mr. Schumacher, the Founder of the Company, has been the Chief Executive
Officer and Chairman of the Board since 1992 and served as President from 1986
to August 1999. Mr. Schumacher served as the Director of Infectious Disease
Services for Clinical Sciences 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.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Executive Officers and Directors, and persons who own more than
10% of the Company's Common Stock, to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission and
the Nasdaq. Executive Officers, Directors and greater than 10% stockholders are
required to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such Form(s) it has
received and written representations from certain reporting persons, the Company
believes that all of its Executive Officers, Directors and greater than 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them during the Company's fiscal year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation of
each of the Chief Executive Officer and the four other most highly compensated
executive officers of the Company who were serving as Executive Officers at the
end of fiscal 2000 and whose total annual salary and bonus, if any, exceeded
$100,000 for services in all capacities to the Company during the fiscal year
ended December 31, 2000 (the "Named Executive Officers").
Summary Compensation Table
--------------------------
Annual Compensation Long Term
------------------- Compensation
Other Annual Securities All Other
Name and Fiscal Year Salary Bonus Compensation Underlying Compensation
Principal Position Ended ($) ($) ($) Stock Options (#) ($)
------------------ ----------- ------ ----- ------------ ---------------- ------------
Richard T. Schumacher 12/31/00 $229,279 -- $1,550(1) -- $5,579(2)(4)
Chief Executive Officer 12/31/99 229,010 -- 1,520(1) 25,000 4,450(2)(4)
and Chairman of the Board 12/31/98 200,002 $5,000 370(1) 15,000 420(2)
Kevin W. Quinlan 12/31/00 $178,596 -- $3,575(1) -- $850(4)
President and Chief 12/31/99 168,075 -- -- 17,500 --
Operating Officer, and 12/31/98 143,347 $4,000 -- 10,000 --
Director
Richard C. Tilton 12/31/00 $131,095 -- $6,000(3) 12,000 $2,391(2)(4)
Senior Vice President, 12/31/99 135,203 -- 6,000(3) -- --
Science and Technology 12/31/98 127,019 $3,000 6,000(3) 6,000 --
Mark M. Manak, 12/31/00 $137,846 -- -- 5,000 $624(4)
Senior Vice President 12/31/99 129,894 -- -- -- --
and General Manager 12/31/98 118,510 $3,000 -- 6,000 --
Patricia E. Garrett 12/31/00 $126,465 -- -- 12,000 $1,047(2)(4)
Senior Vice President 12/31/99 124,873 -- -- 10,000 --
and General Manager 12/31/98 112,402 -- -- 17,000 --
(1) Consists of personal usage of Company vehicle
(2) Includes the value of premiums paid for a term life insurance policy
(3) Consists of automobile allowance
(4) Includes the value of imputed income from group life insurance
The following tables set forth certain information with respect to the
stock options granted to and exercised by the Named Executive Officers during
fiscal 2000 and the aggregate number of and value of options exercisable and
un-exercisable held by the Named Executive Officers during fiscal 2000.
Options Granted in Fiscal Year 2000
-----------------------------------
Individual Grants Potential Realizable Value at
------------------------------------------------------------ Assumed Annual Rates of Stock
Number of Total Price Appreciation
Securities Options Exercise for Option Term at Year End (1)
Underlying Granted to ---------- ----------- --------------------------------
Options Employees Price Expiration
Name Granted (#) in 2000 ($/Sh.) Date 5% ($) 10% ($)
------------------------ -------------- ------------ ---------- ----------- --------- -----------
Richard T. Schumacher -- -- -- -- -- --
Kevin W. Quinlan -- -- -- -- -- --
Richard C. Tilton, Ph.D. 12,000 2.45% 2.50 12/01/10 $11,537 $36,140
Mark M. Manak, Ph.D. 5,000 1.02% 4.00 02/03/10 $28,613 $57,408
Patricia E. Garrett 12,000 2.45% 2.50 12/01/10 $11,537 $36,140
(1) The 5% and 10% assumed rates of annual compounded stock price
appreciation are mandated by the rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of future Common Stock
prices.
Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year End Option Values
---------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Year End (#) (2) at Year End ($) (3)
on Realized ----------------------------- -----------------------------
Name Exercise (#) ($) (1) Exercisable Un-exercisable Exercisable Un-exercisable
------------------------ ------------ -------------- ------------ ---------------- ------------ ----------------
Richard T. Schumacher 90,000 288,500 26,785 20,595 -- --
Kevin W. Quinlan, -- -- 69,375 18,125 1,250 --
Richard C. Tilton, Ph.D. 35,000 274,050 20,500 -- -- --
Mark M. Manak, Ph.D. -- -- 40,500 8,000 -- --
Patricia E. Garrett 10,000 67,500 20,500 22,500 -- --
(1) The "value realized" represents the excess of the fair market value over
the purchase price at the time of purchase based upon the closing price
of the Common Stock on the Nasdaq National Market on the date of exercise,
minus the respective option exercise price.
(2) Includes the number of shares underlying both "exercisable" (i.e. vested)
and "un-exercisable" (i.e. unvested) stock options as of December 31, 2000.
(3) The values of "in-the-money" options reflect the positive spread between
the exercise price of any such existing stock options and the closing
year-end per share price of the Common Stock of $1.625.
Compensation of Directors
-------------------------
Non-employee Directors of the Company received cash compensation of $6,000
for their services in year 2000. Commencing in year 2001, non-employee Directors
will receive a quarterly stipend of $1,500, for a yearly total of $6,000 each.
In addition, in year 2001, each non-employee director who is a member of the
Audit Committee will receive an additional $500 per quarter for a yearly total
of $2,000 each. Each Director is eligible to receive options to purchase Common
Stock under the Company's 1999 Non-Qualified Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Board of Directors makes decisions regarding executive compensation
based on the recommendations of the Compensation Committee. The Compensation
Committee of the Board of Directors is comprised of Richard T. Schumacher and
Calvin A. Saravis, each of whom has received options to purchase Common Stock.
Mr. Schumacher serves as the Chief Executive Officer and Chairman of the Board
of the Company. Dr. Saravis is neither a former nor current officer nor employee
of the Company.
Compensation Committee Report
-----------------------------
The Compensation Committee of the Board of Directors is comprised of Mr.
Schumacher and one non-employee Director, Dr. Saravis. The functions of the
Compensation Committee include making recommendations and presentations to the
Board of Directors on compensation levels, including salaries, incentive plans,
benefits and overall compensation for officers and Directors and issuance of
stock options to officers, Directors and employees. Subsequent to the
recommendation of the Compensation Committee, the Board of Directors then votes
on these proposals.
The objectives of the Compensation Committee in determining the type and
amount of Executive Officer compensation are to provide a level of base
compensation which allows the Company to attract and retain superior talent. The
Compensation Committee endeavors to align the Executive Officer's interests with
the success of the Company through participation in the Company's Employee Stock
Option Plan, which provides the Executive Officer with the opportunity to build
a substantial ownership interest in the Company.
The compensation of Executive Officers includes cash compensation, the
grant of stock options, and participation in benefit plans generally available
to employees. In determining base salary, the Compensation Committee considers
executive compensation for comparably sized companies as well as the individual
experience and performance of each Executive Officer. The Compensation Committee
then recommends to the Board of Directors base salaries at a level that it
believes is comparable to cash compensation of officers with similar
responsibilities in similarly situated corporations. The Board makes final
determination of recommendations.
Each of the Executive Officers, including Mr. Schumacher, and all full-time
employees are eligible to receive grants of options under the Company's employee
stock option plans. The employee stock option plans are used to provide
incentives to officers and employees and to associate more closely the interests
of such persons with stockholders' interests and the long-term success of the
Company. In determining the number of options to be granted to each Executive
Officer or employee, the Compensation Committee makes a subjective determination
based on factors such as the individual's level of responsibility, performance,
and number of options held. The Board of Directors then acts on the
recommendation of the Compensation Committee. During fiscal 2000, a total of
29,000 options were granted to the Named Executive Officers noted above under
the employee stock option plans.
During the fiscal year ended December 31, 2000, Mr. Schumacher, the
Company's Chief Executive Officer, received a base salary of $229,279. The
Compensation Committee, and the Board of Directors, believes that this
compensation is comparable to the cash compensation of Chief Executive Officers
of comparable companies. Mr. Schumacher was not granted any options to purchase
shares of Common Stock in 2000.
Compensation Committee
Richard T. Schumacher
Calvin A. Saravis
Performance Graph
-----------------
The following graph compares the change in the Company's cumulative total
stockholder return from October 31, 1996, when the Company's Common Stock became
publicly traded, to March 31, 2001 including December 31, 2000, which includes
the last trading day of fiscal 2000, with the cumulative total return on the
Nasdaq Stock Market Index (Composite) and the Nasdaq Biotechnology Stocks Index
(SIC 2830-2839 U.S. and Foreign) for that period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LEGEND
Index Description 10/31/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 3/31/01
Boston Biomedica, Inc. 100.0 87.1 70.97 38.31 37.10 20.97 21.78
Nasdaq Stock Market 100.0 102.11 102.04 147.23 296.87 365.12 258.08
(Biotechnology)
Nasdaq Stock Market 100.0 105.69 128.56 179.51 333.14 202.25 150.65
(Composite)
Assumes $100 invested on October 31, 1996 in the Company's Common Stock,
the Nasdaq Stock Market Index (Biotechnology) and the Nasdaq Stock Market Index
(Composite), and the reinvestment of any and all dividends.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 2001
concerning beneficial ownership of Common Stock by each Director, each nominee
for Director, each named Executive Officer in the Summary Compensation Table
under "Executive Compensation" below, all Executive Officers and Directors as a
group, and each person known by the Company to be the beneficial owner of 5% or
more of the Company's Common Stock. This information is based upon information
received from or on behalf of the named individuals.
Number of Shares of
Common Stock Beneficially
Name * Owned Percent of Class
------------------------------------------------ ------------------------- ----------------
Richard T. Schumacher (1)(2)* 866,657 13.35%
c/o Boston Biomedica, Inc.
375 West Street
West Bridgewater, MA 02379
Kevin W. Quinlan (1) 97,475 1.49%
William R. Prather (1)(4) 82,018 1.26%
Mark M. Manak (1)(3) 69,311 1.07%
Patricia E. Garrett 50,000 **
Richard C. Tilton (1) 38,000 **
Calvin A. Saravis (1) 13,456 **
Francis E. Capitanio (1) 2,500 **
All Executive Officers and Directors as a group
(11 Persons)(1)(2)(3)(4) 1,251,495 19.26%
Paradigm Group, L.L.C. * 425,000*** 6.58%
3000 Dundee Road, Suite 105
Northbrook, IL 60062
Richard P. Kiphart (5) * 879,685 13.61%
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, IL 60606
* Address provided for beneficial owners of more than 5% of the Common
Stock.
** Less than 1% of the outstanding Common Stock.
*** These shares are not entitled to vote until they are fully paid for.
(1) Includes the following shares subject to options exercisable within 60
days after March 31, 2001: Mr.Schumacher - 31,130; Mr. Quinlan - 71,875;
Dr. Prather - 52,918, Dr. Tilton - 20,500; Dr. Manak - 43,250;
Dr. Garrett - 25,000; Dr. Saravis - 2,500; and Mr. Capitanio - 2,500
(2) Includes 30,500 shares held of record by Mr. Schumacher's spouse.
Excludes certain additional shares held by other relatives of
Mr. Schumacher as to which Mr. Schumacher disclaims beneficial ownership.
(3) Includes 4,000 shares held of record by Mr. Manak's daughter and 20,466
in Mr. Manak's name.
(4) Includes 28,300 shares held by Avon Medical Profit Sharing Plan and
Trust. Dr. Prather and his spouse are the sole trustees and beneficiaries
of the trust.
(5) Includes 357,791 shares held of record by Shoreline Micro-Cap Fund I LP
of which Mr. Kiphart has reported to the Securities and Exchange
Commission on February 26, 2001 as having sole voting power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In August 1999, the Company sold 500,000 warrants to purchase the Company's
stock to Paradigm Group L.L.C., a private investment company. The private
placement consisted of 400,000 common stock purchase warrants with an exercise
price of $4.25 and 100,000 common stock purchase warrants with an exercise price
of $5.25. Paradigm Group paid the Company $50,000 for the warrants. In addition,
National Securities received 40,000 common stock purchase warrants with an
exercise price of $4.25, 10,000 common stock purchase warrants with an exercise
price of $5.25, and 25,000 common stock purchase warrants with an exercise price
of $8.00, as transaction fee. In February 2000, the Company received notice that
Paradigm Group, L.L.C. exercised all of their warrants to purchase the Company's
common stock. The holders of the warrants were required to pay the exercise
price when the registration of the underlying shares became effective which was
in December 2000. See also Part I Item 3 "Legal Proceedings" herein.
In August 2000, the Company issued $3,250,000 of 3% Senior Subordinated
Convertible Debentures to investors, of which $780,000 were issued to Mr.
Richard P. Kiphart and $220,000 were issued to Shoreline Micro-Cap Fund I L.P.
In January 2001, Mr. Kiphart and Shoreline Micro-Cap Fund I L.P. exercised their
conversion rights associated with these debentures. Mr. Kiphart has subsequently
indicated in a Schedule 13D filing with the Securities and Exchange Commission
that he has sole voting power of 897,685 shares of common stock of the Company,
which includes 357,791 shares held in the name of Shoreline Micro-Cap Fund I
L.P. as of February 6, 2001. See also Part II Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Financial Condition" herein.
56
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, 2000 and 1999 ....................... 33
Consolidated Statements of Income for the three years ended December 31, 2000 ...... 34
Consolidated Statements of Changes in Stockholders' Equity for the three years
ended December 31, 2000 ......................................................... 35
Consolidated Statements of Cash Flows for the three years ended December 31, 2000 .. 36
Notes to Consolidated Financial Statements ......................................... 37
Report of Independent Accountants .................................................. 55
(a) 2. Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts ...................................... 61
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.
57
(a) 3. Exhibits:
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)
4.3 Form of warrants issued in connection with Paradigm Group H**
4.4 3% Senior Subordinated Convertible Debenture issued to GCA Strategic Investment K**
Fund Limited
4.5 Warrant issued to GCA Strategic Investment Fund Limited K**
4.6 Warrant issued to Wharton Capital Partners, Ltd. K**
4.7 Warrant issued to DP Securities, Inc. K**
4.8 Registration Rights Agreement, dated as of August 25, 2000, by and among Boston K**
Biomedica, Inc., Wharton Capital Partners, Ltd., DP Securities, Inc. and GCA
Strategic Investment Fund Limited
4.9 3% Senior Subordinated Convertible Debenture issued to Richard P. Kiphart K**
4.10 3% Senior Subordinated Convertible Debenture issued to Shoreline Micro-Cap K**
Fund, L.P.
4.11 Warrant issued to Richard P. Kiphart K**
4.12 Warrant issued to Shoreline Micro-Cap Fund, L.P. K**
4.13 Registration Rights Agreement dated as of August 25, 2000, by and among Boston K**
Biomedica, Inc., Richard P. Kiphart and Shoreline Micro-Cap Fund, L.P.
10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems, Inc. and A**
the Company
10.2 Exclusive License Agreement, dated April 28, 1999, between the University of A**
North Carolina at Chapel Hill and the Company
10.3 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company A**
10.4 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility A**
between MB Associates and the Company
10.5 1987 Non-Qualified Stock Option Plan* A**
10.6 Employee Stock Option Plan* A**
10.7 1999 Non-Qualified Stock Option Plan* I**
10.8 1999 Employee Stock Purchase Plan* I**
10.9 Underwriters Warrants, each dated November 4, 1996, between the Company and B**
each of Oscar Gruss & Son Incorporated and Kaufman Bros., L.P.
10.11 Contract, dated March 1, 1997, between National Cancer Institute and the Company D**
10.12 Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland facility E**
between B.F. Saul Real Estate Investment Trust and the Company
10.13 Lease Agreement dated January 30, 1995 for Garden Grove, California facility F**
between TR Brell, Cal Corp. and Source Scientific, Inc., and Assignment of
Lease, dated July 2, 1997, for Garden Grove, California facility between Source
Scientific, Inc. and BBI Source Scientific
10.14 Contract, dated July 1, 1998, between the National Institutes of Health and the G**
Company (NO1-A1-85341)
58
10.15 Contract, dated July 1, 1998, between the National Heart Lung and Blood G**
Institute and the Company (NO1-HB-87144)
10.16 Line of Credit Agreement with BankBoston dated June 30, 1999 H**
10.17 Agreement with Paradigm Group for the purchase of warrants dated August 18, 1999 H**
10.18 Agreement with MDBio for the purchase of common stock and common stock J**
warrants, dated September 30, 1999
10.19 Lease Agreement dated September 30, 1999, for Frederick, Maryland facility, J**
between MIE Properties, Inc., and the Company.
10.20 Sponsored Research Agreement with the University of North Carolina, Chapel Hill J**
and the Company, dated, April 28, 1999 and the Company.
10.21 Repository Contract with National Institute of Allergy and Infectious Disease, J**
Division of AIDS (NO1-A1-95381), dated August 16, 1999.
10.22 Securities Purchase Agreement dated as of August 25, 2000, by and among Boston K**
Biomedica, Inc., and GCA Strategic Investment Fund Limited
10.23 Securities Purchase Agreement dated as of August 25, 2000, by and among Boston K**
Biomedica, Inc., Richard P. Kiphart and Shoreline Micro-Cap Fund, L.P.
10.24 Mortgage and Security Agreement dated March 31, 2000 L**
10.25 Asset Purchase Agreement dated February 20, 2001, by and between BBI Clinical M**
Laboratories, Inc., Boston Biomedica, Inc. and Specialty Laboratories, Inc.
21.1 Subsidiaries of the registrant N**
23 Consent of PricewaterhouseCoopers LLP N**
99 Audited Financial Statements of BioSeq, Inc., for the years ended December 31,
1997, 1996 and for the period October 17, 1994 (Date of Inception) to
December 31, 1997. J**
A Incorporated by reference to the registrant'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 Exhibit No. 10.17 of the Registration
Statement.
C Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
D Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997.
E Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997.
F Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
G Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
H Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1999.
I Incorporated by reference to the registrant's proxy statement, filed with
the Securities and Exchange Commission on June 14, 1999.
J Incorporated by reference to the registrant's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1999.
K Incorporated by reference to the registrant's Report on Form 8-K filed
September 8, 2000.
L Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1999.
M Incorporated by reference to the registrant's Report on Form 8-K filed
March 8, 2001.
N Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.
* 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.
59
(b) REPORTS ON FORM 8-K.
The Registrant did not file any Current Reports on Form 8-K during the
quarter ended December 31, 2000.
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: May 2, 2001 Boston Biomedica, Inc.
By:/s/ Richard T. Schumacher
--------------------------
Richard T. Schumacher
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
/S/ Richard T. Schumacher
---------------------------- Director and Principal
Richard T. Schumacher Executive Officer
/s/ Kevin W. Quinlan
---------------------------- Director and Principal
Kevin W. Quinlan Accounting and Financial Officer
---------------------------- Director
Francis E. Capitanio
---------------------------- Director and Treasurer
William R. Prather, R.Ph. MD.
/s/ Calvin A. Saravis, Ph.D.
---------------------------- Director
Calvin A. Saravis, Ph.D.
60
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Allowance for Begining of Balance at
Doubtful Accounts Period Additions Recoveries Deductions end of Period
--------------- --------------- --------------- --------------- ---------------
2000 .................... $ 86,796 $ 2,064 $ 2,185 $ (2,064) $ 88,981
1999 .................... 151,564 1,751 -- (66,519) 86,796
1998 .................... 103,008 87,229 -- (38,673) 151,564
Inventory Reserve
2000 .................... $ 601,167 $ 176,397 $ -- $ (11,864) $ 765,700
1999 .................... 533,252 145,497 -- (77,582) 601,167
1998 .................... 631,565 16,932 -- (115,245) 533,252
61