10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

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 0-22879

BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)

Delaware	52-1541583
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
14920 Broschart Road
Rockville, Maryland	20850
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code:
(301) 738-1000

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 whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES   X      NO ______

As of April 30, 2003, 8,513,419 shares of registrant’s common stock, par value $.01 per share, were outstanding.

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BIORELIANCE CORPORATION

TABLE OF CONTENTS

		Page
		Number
PART I	FINANCIAL INFORMATION
	Item 1 - Financial Statements:
	Consolidated Balance Sheets as of December 31, 2002
	and March 31, 2003(Unaudited)		3
	Consolidated (Unaudited) Statements of Income for the Three
	Months Ended March 31, 2002 and 2003		4
	Consolidated (Unaudited) Statements of Cash Flows for the Three
	Months Ended March 31, 2002 and 2003		5
	Notes to Consolidated (Unaudited) Financial Statements		6
	Item 2 - Management's Discussion and Analysis of Financial
	Condition and Results of Operations		10
	Item 3 - Quantitative and Qualitative Disclosures About Market Risks		21
	Item 4 - Controls and Procedures		22
PART II	OTHER INFORMATION		23
SIGNATURES			24
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002			25
EXHIBIT INDEX			27

2

BIORELIANCE CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

								March 31,
					December 31,			2003
					2002			(Unaudited)
				Assets
Current assets:
	Cash and cash equivalents				$	37,739		$	35,547
	Accounts receivable, net					24,704			24,430
	Other current assets					2,988			3,144
		Total current assets				65,431			63,121
Property and equipment, net						41,148			42,377
Deposits and other assets						136			129
Deferred income taxes						642			543
		Total assets			$	107,357		$	106,170
			Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt and capital lease obligations				$	918		$	985
	Accounts payable					2,872			3,100
	Accrued employee compensation and benefits					5,065			2,842
	Other accrued liabilities					4,656			4,102
	Customer advances					5,152			5,422
	Deferred income taxes					4,589			4,732
		Total current liabilities				23,252			21,183
Long-term debt and capital lease obligations						10,628			10,302
		Total liabilities				33,880			31,485
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.01 par value: 6,900,000 shares authorized; no shares issued and outstanding					—			—
	Common stock, $.01 par value: 15,000,000 shares authorized; 8,485,722 and 8,513,419 shares issued and outstanding					85			85
	Additional paid-in capital					56,144			56,325
	Retained earnings					18,576			20,833
	Treasury stock, 0 and 75,300 shares at cost					—			(1,239	)
	Accumulated other comprehensive income (expense)					(1,328	)		(1,319	)
		Total stockholders’ equity				73,477			74,685
		Total liabilities and stockholders’ equity			$	107,357		$	106,170

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended
		March 31,
		2002			2003
Revenue		$	19,013		$	20,798
Expenses:
	Cost of sales		11,022			12,546
	Selling, general and administrative		4,189			4,316
	Research and development		262			216
			15,473			17,078
Income from operations			3,540			3,720
Other (income) expense:
	Interest income		(130	)		(184	)
	Interest expense		154			206
	Other expense		209			111
			233			133
Income before income taxes			3,307			3,587
Income tax provision			1,210			1,327
Net income		$	2,097		$	2,260
Net income per share :
	Basic	$	0.25		$	0.27
	Diluted	$	0.24		$	0.26

The accompanying notes are an integral part of these consolidated financial statements.

4

BIORELIANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Three Months Ended
					March 31,
					2002			2003
Cash flows from operating activities:
	Net income				$	2,097		$	2,260
	Adjustments to reconcile net income to net cash provided by operating activities:
				Depreciation		1,137			1,245
				Loss on disposal		66			122
				Deferred income taxes, net		—			242
				Changes in current assets and liabilities:
				Accounts receivable, net		2,026			155
				Other current assets		(218	)		(148	)
				Accounts payable		(626	)		211
				Accrued employee compensation and benefits		(2,829	)		(2,224	)
				Other accrued liabilities		1,156			(554	)
				Customer advances		10			356
				Increase in deposits and other assets		(251	)		40
				Net cash provided by operating activities		2,568			1,705
Cash flows from investing activities:
		Purchases of property and equipment				(1,429	)		(2,595	)
				Net cash provided by (used in) investing activities		(1,429	)		(2,595	)
Cash flows from financing activities:
			Proceeds from exercise of stock options			341			182
			Purchases of treasury stock			—			(1,239	)
			Payments on debt and capital lease obligations			(229	)		(245	)
				Net cash provided (used in) financing activities		112			(1,302	)
Effect of exchange rate changes on cash and cash equivalents						(161	)		—
Net increase in cash and cash equivalents						1,090			(2,192	)
Cash and cash equivalents, beginning of period						27,536			37,739
Cash and cash equivalents, end of period					$	28,626		$	35,547

The accompanying notes are an integral part of these consolidated financial statements.

5

BIORELIANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)  Description of the Business

     BioReliance Corporation (the Corporation) is a contract service organization that provides testing and development, and manufacturing services for biologics and other biomedical products to biotechnology and pharmaceutical companies worldwide.

(2)  Interim Financial Statements Presentation

     The accompanying interim financial statements are unaudited and have been prepared by the Corporation pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and therefore these consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in the Corporation’s Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements for the three-month periods ended March 31, 2002 and 2003 include all normal and recurring adjustments that are necessary for a fair presentation of the results of the interim period. The results of operations for the three-month period ended March 31, 2003 are not necessarily indicative of the results for the entire year ending December 31, 2003.

(3)  Net Income Per Share

     The Corporation calculates earnings per share (EPS) on both a basic and diluted basis. Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect. Net income available to common stockholders and common equivalent stockholders is equal to net income for all periods presented.

     The following table represents reconciliations between the weighted average common stock outstanding used in basic EPS and the weighted average common and common equivalent shares outstanding used in diluted EPS for each of the periods presented (in thousands):

	Three Months Ended March 31,
	2002		2003
Weighted average common stock outstanding		8,399		8,483
Effect of dilutive securities: stock options		432		356
Weighted average common and common equivalent shares outstanding		8,831		8,839

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(4)  Segment Information

     Summarized financial information concerning the Corporation’s reportable segments for the three months ended March 31 is shown in the following table (in thousands):

				Three Months
				Ended March 31,
				2002		2003
Revenue:
	Testing and Development			$	15,771	$	16,717
	Manufacturing				3,242		4,081
			Total	$	19,013	$	20,798
Gross Profit:
	Testing and Development			$	7,705	$	7,904
	Manufacturing				286		348
		Total		$	7,991	$	8,252

     Summarized financial information concerning the Corporation’s revenue and gross profit by geographic region for the three months ended March 31 is shown in the following table (in thousands):

			Three Months
			Ended March 31,
			2002		2003
Revenue:
	United States		$	15,667	$	16,172
	Europe			3,346		4,626
		Total	$	19,013	$	20,798
Gross Profit:
	United States		$	6,192	$	5,675
	Europe			1,799		2,577
		Total	$	7,991	$	8,252

(5)  Stock Based Compensation

     The Corporation has stock-based compensation plans, described more fully in Note 5 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. Effective January 1, 2003, BioReliance adopted FASB Statement No. 148 (FAS 148), “Accounting for Stock-Based Compensation — Transition and Disclosure.” FAS 148 amends FASB Statement No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” to provide, among other things, prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. As permitted by FAS 123 and amended by FAS 148, the Corporation has chosen to continue accounting for stock options at their intrinsic value. Accordingly, no compensation expense has been recognized for its stock option compensation plans. To determine fair value under FAS 123, the

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Corporation used the Black-Scholes option-pricing model and the following respective weighted average assumptions for the three months ended March 31, 2002 and 2003: a risk-free interest rate of 4.10% and 3.32%; expected lives of 6 years; expected volatility of 67% and 61%; and expected dividends of zero. Had the fair value method of accounting been applied to the Corporation’s stock option plans utilizing the valuation method currently recognized, the impact would have been as follows:

	Three Months
	Ended March 31,
	2002			2003
Net income as reported	$	2,097		$	2,260
Stock based employee compensation expense determined under fair value method for all awards, net of related tax effect		(225	)		(349	)
Pro-forma net income		1,872			1,911
Basic net income per share — as reported	$	0.25		$	0.27
Basic net income per share — pro-forma	$	0.22		$	0.23
Diluted net income per share — as reported	$	0.24		$	0.26
Diluted net income per share — pro-forma	$	0.21		$	0.22

(6)  Stock Repurchase

     On March 5, 2003, the Corporation’s Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s common stock over the following two years. The repurchase is being funded using the Corporation’s working capital. During the quarter ended March 31, 2003, the Corporation has repurchased 75,300 shares for $1.2 million.

(7)  New Accounting Pronouncements

     In April 2002, the FASB issued FAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (FAS 145). FAS 145 rescinds FAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that statement, FAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” FAS No. 145 also rescinds FAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and amends FAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. FAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Corporation does not believe that adoption of FAS No. 145 will have a material impact on its results of operations or financial position.

     In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The

8

Corporation does not expect adoption of this Statement to have a material impact on the Corporation’s results of operations or financial position.

     In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim of annual period ending after December 15, 2002. The initial adoption of FIN 45 is not anticipated to have a material impact on the Corporation’s results of operations or financial position.

     On December 31, 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (FAS 148). FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. FAS 148 also requires prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Corporation intends to continue to follow the disclosure-only provisions of FAS 123 and, accordingly, will continue to apply APB 25 and its related interpretations in accounting for its plans. The adoption of FAS 148 is not anticipated to have a material impact on the Corporation’s results of operations or financial position.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Certain statements made in this Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, which generally are not historical in nature, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or similar words or phrases. Forward-looking statements in this Report on Form 10-Q include, among others, statements regarding:

• the anticipated growth of revenue and improvement in profit margins,

• the anticipated growth of revenue to exceed cost increases related to the Corporation’s U.S. manufacturing facility,

• the Corporation’s ability to use additional capacity in its manufacturing facility, or to expand its manufacturing capacity,

• the anticipated increase in selling, general and administrative expenses and the hiring of new employees,

• the Corporation’s ability to maintain selling, general and administrative expenses as a percentage of revenue relatively constant or below 20%,

• the Corporation’s ability to maintain research and development expenses and tax rates at constant levels,

• the Corporation’s ability to fund its operations, capital expenditures, stock repurchases and interest and principal payments on debt for 2003 with existing cash, cash flows from operations and its line of credit, and

• the Corporation’s expansion plans.

     Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by BioReliance with the Securities and Exchange Commission, including in its Form10-K filed on March 31, 2003.

     As and when made, management believes that these forward-looking statements are reasonable. The Corporation undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements since new risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Corporation’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

     The following discussion and analysis of the Corporation’s financial condition and results of operations should be read in conjunction with the Corporation’s consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.

10

Results of Operations
(Dollars in tables are in thousands)

     For the three months ended March 31, 2003, the Corporation had gross revenue of $20.8 million, an increase of 9% over gross revenue of $19.0 million for the three months ended March 31, 2002. Earnings per share for the three months ended March 31, 2003 were $0.26 (diluted) compared with $0.24 (diluted) for the three months ended March 31, 2002.

     Continuing increases in orders fueled revenue growth in nearly all of the Corporation’s segments and geographic regions, with revenues in U.S. manufacturing remaining essentially unchanged. These higher revenues also drove higher gross profits in all sectors, with the exception of U.S. manufacturing. Gross margins were hampered in most segments by certain cost increases, except in European manufacturing, where significant gross margin improvements were generated. Although selling, general, and administrative costs were up, as a percentage of sales these costs decreased to 21% of sales as a result of continuing successful programs to control expenses. Income tax rates remained steady at 37%, in line with the Corporation’s historical rates.

Gross Revenue by Segment

     The following table shows a comparison of revenue by operational segment for the three months ended March 31, 2002 and 2003:

	Three Months Ended
	March 31,
	2002		2003		Fav. %
Testing and Development	$	15,771	$	16,717		6	%
Manufacturing		3,242		4,081		26	%
Total	$	19,013	$	20,798		9	%

     The increase in testing and development revenue for the three months ended March 31, 2003 is due primarily to the continued increase in new orders. These new orders included those arising from global arrangements with some major clients. The increase in U.S. testing and development revenue results from increases in biologics testing services partially offset by decreases in toxicology services. The increase in European testing and development revenue was driven by increases in revenue generated in virtually all major service areas.

     The increase in manufacturing revenue for the three months ended March 31, 2003 represents significant increases in Europe, with revenue in the U.S. remaining essentially flat. European increases are attributable to increases in both U.K. and German facilities. Both European facilities benefited by increased orders and capacity expansion also aided German revenue.

11

     Approximately 18% of the Corporation’s manufacturing revenue for the three months ended March 31, 2003 resulted from work performed under the Corporation’s smallpox vaccine contracts. Approximately 10% of the Corporation’s total revenue for the three months ended March 31, 2003 resulted from work performed under these smallpox vaccine contracts.

Gross Revenue by Geographic Region

     The following table shows a comparison of revenue by geographic region for the three months ended March 31, 2002 and 2003:

	Three Months Ended
	March 31,
	2002		2003		Fav. %
United States	$	15,667	$	16,172		3	%
Europe		3,346		4,626		38	%
Total	$	19,013	$	20,798		9	%

     The increase in revenue generated in the United States for the three months ended March 31, 2003 resulted from increases in orders, which fueled increased revenue in biologics testing services, partially offset by a decrease in toxicology services. As previously mentioned, U.S. Manufacturing revenue remained essentially unchanged.

     The increase in revenue generated in Europe for the three months ended March 31, 2003 reflects an increase in revenue generated both in the Corporation’s U.K. and German facilities, which have benefited from increased penetration into the growing European biopharmaceutical market. As the German facility continues to run near capacity, revenue fluctuations in that facility are primarily attributable to incremental improvement in throughput efficiencies and different pricing structures among contracts. Revenue growth, if any, will likely be modest for the remainder of 2003.

     The Corporation expects that testing and development revenue will continue to increase in both the U.S. and Europe in the foreseeable future, and it expects that U.S. manufacturing revenue will increase with the Corporation’s smallpox vaccine and commercial contracts, as well as with additional service offerings in the U.S. manufacturing facility. There can be no assurance that such expectations will prove to be correct. The Corporation expects European revenue to continue to grow more rapidly than revenue in the U.S. to the extent that the European markets continue to outpace U.S. markets. The Corporation is planning for laboratory expansions that would become available to meet anticipated growth in the U.S. and Europe over a two-year to three-year period.

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Gross Profit by Operating Segment

     The following table compares gross profit and gross margin by operating segment for the three months ended March 31, 2002 and 2003:

		Three Months Ended
		March 31,
		2002			2003			Fav. %
Testing and Development
	Gross Profit	$	7,705		$	7,904			3	%
	Gross Margin		49	%		47	%
Manufacturing
	Gross Profit		286			348			22	%
	Gross Margin		9	%		9	%
Totals
	Gross Profit	$	7,991		$	8,252			3	%
	Gross Margin		42	%		40	%

     The decrease in testing and development gross margin for the three months ended March 31, 2003 reflects decreased margins in both the U.S. and the U.K. Although gross profits in both geographic regions increased, increases in certain cost of sales resulted in decreased margins. Those increased costs were primarily related to quality assurance and quality control costs in the U.S., and direct material and labor related costs in Europe.

     Manufacturing gross margin for the three months ended March 31, 2003 remained essentially unchanged, with increases in European gross profit only partially offset by decreases in the U.S. gross profit. The throughput efficiencies and pricing structures mentioned earlier allowed European manufacturing to grow revenues at a much greater rate than cost of sales, thus resulting in increased margin. However, relatively flat sales and increased direct materials and labor related costs contributed to a decrease in U.S. manufacturing gross profit.

     The Corporation expects future revenue growth to exceed cost increases related to its U.S. manufacturing facility, thereby improving gross margins. Revenue growth, if any, will likely come from expanding manufacturing capabilities and service offerings. However, the build-out and validation of this facility has demanded and will continue to demand considerable time and resources, and there are high fixed costs related to the facility. The Corporation continues to utilize substantially less than full capacity in this facility. This facility will likely constrain earnings for the Corporation at least for the foreseeable future. Management cannot predict when, if ever, the facility will generate profits.

13

Gross Profit by Geographic Region

     The following table compares gross profit and gross margin by geographic region for the three months ended March 31, 2002 and 2003:

		Three Months Ended
		March 31,
								Fav
		2002			2003			(Unfav.) %
United States
	Gross Profit	$	6,192		$	5,675			(8	%)
	Gross Margin		40	%		35	%
Europe
	Gross Profit		1,799			2,577			43	%
	Gross Margin		54	%		56	%
Totals
	Gross Profit	$	7,991		$	8,252			3	%
	Gross Margin		42	%		40	%

     The decrease in U.S. gross margin for the three months ended March 31, 2003 reflects decreases in both U.S. testing and development and U.S. manufacturing margins. The decrease in U.S. testing and development was minimal, thus the increased revenue actually resulted in an increased gross profit for the quarter. Losses generated by U.S. manufacturing increased as a result of the cost increases discussed above.

     The improvement in European gross margins for the three months ended March 31, 2003 is attributable to significant European manufacturing gross margin increase outpacing a decrease in European testing and development margin. Gross profits increased in both the testing and development and manufacturing segments. While cost of sales increases in European testing and development negatively impacted gross profit, European manufacturing revenue increased at a much faster rate than its related cost of sales, thus significantly increasing the gross profit. The U.S. testing and development segment also includes several units with relatively lower margins, which are not part of the U.K. testing and development business.

     The Corporation expects margins in the testing and development segment, both in the U.S. and Europe, to improve moderately with economies of scale in the foreseeable future. The rate of improvement is expected to be impacted by expenditures related to planned additions to capacity beginning in 2003 in Europe and the U.S.

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Operating Expenses

     The following table shows a comparison of operating expenses, other than cost of sales, for the three months ended March 31, 2002 and 2003:

	Three Months Ended
	March 31,
					Fav
	2002		2003		(Unfav.) %
Selling, General and Administrative	$	4,189	$	4,316		(3	%)
Research and Development		262		216		18	%
Total	$	4,451	$	4,532		(2	%)

     Selling, general and administrative (SG&A) expenses increased for the three months ended March 31, 2003 due primarily to increases in labor, fringe and insurance costs. These increases were partially offset by a reduction in the Corporation’s bad debt expense, legal fees and sales commissions. SG&A expenses are expected to increase as the Corporation hires additional administrative staff, implements additional applications for its information systems and makes additional investments for technical sales support and marketing infrastructure, including investments in U.S. manufacturing business development.

     As a percentage of revenue, SG&A expenses decreased slightly to 21% for the three months ended March 31, 2003 from 22% for the three months ended March 31, 2002. The decrease can be attributed principally to increased revenues, continued programs to control expenses, and the successful integration of past enhancements and expansion in sales, marketing and information systems. The Corporation believes it can maintain SG&A as a percentage of revenue relatively near or below 20% for the foreseeable future.

     Research and development expenses represent the investment of internal resources to develop new methods and tests to support the Corporation’s services. The decrease in these expenses is related to a shift in the Corporation’s priorities from undertaking long-term research projects to the development of tests that can be delivered to the clients in a relatively shorter period. The Corporation expects these expenses to remain near these levels for the foreseeable future.

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Income Taxes and Other Expenses

     The following table shows a comparison of income taxes and other expenses for the three months ended March 31, 2002 and 2003:

		Three Months Ended
		March 31,
								Fav
		2002			2003			(Unfav.) %
Net Other (Income) Expense		$	233		$	133			43	%
Income Taxes
	Provision	$	1,210		$	1,327			(10	%)
	Effective Rate		37	%		37	%

     The Corporation’s net other expense improved to $133,000 for the three months ended March 31, 2003 compared to $233,000 for the three months ended March 31, 2002. The improvement was primarily due to foreign currency translation gains and a reduction in net interest expense, partially offset by increased losses on the disposal of fixed assets.

     For the three months ended March 31, 2003, the income tax rate remained unchanged and is in line with the Corporation’s long-term historical rates, excluding 2001. The Corporation expects tax rates to remain at current levels for the remainder of 2003 and into the foreseeable future. However, since the Corporation has international operations in jurisdictions with different rates, its effective tax rate may vary from quarter to quarter due to changes in the distribution of its pre-tax earnings, among other factors.

Liquidity and Capital Resources

     The Corporation has funded its business through existing cash, cash flows from operations, long-term bank loans and capital leases. At March 31, 2003, the Corporation had cash and cash equivalents of $35.5 million, compared to $37.7 million at December 31, 2002.

     The Corporation generated cash flows from operations of $1.7 million for the three months ended March 31, 2003, compared to $2.6 million for the three months ended March 31, 2002. Changes in other assets and liabilities used cash of $2.2 million for the three months ended March 31, 2003 primarily due to a reduction in accrued compensation and benefits and other accrued liabilities. Changes in other assets and liabilities used cash of $0.7 million for the three months ended March 31, 2002 primarily due to a reduction in accounts payable and accrued employee compensation and benefits, partially offset by a decrease in accounts receivable and an increase in other accrued liabilities.

     The Corporation used $1.2 million of cash for the quarter ended March 31, 2003 to repurchase shares of its common stock, which the Corporation now holds as treasury stock. These shares are available for reissuance in connection with any lawful purposes. There were no such repurchases during the quarter ended March 31, 2002.

     Working capital decreased slightly to $41.9 million at March 31, 2003 from $42.2 million at December 31, 2002 as a result of a decrease in current assets of $2.3 million, partially offset by a decrease in current liabilities. The decrease in current assets was primarily due to a decrease in cash. The decrease in current liabilities was primarily a result of the decrease in accrued employee compensation and benefits.

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     The Corporation believes that its existing cash and cash equivalents of $35.5 million at March 31, 2003, cash flows from operations for 2003, and available borrowings of $2.0 million under its revolving loan agreement will provide sufficient liquidity to meet the Corporation’s operating plan, planned capital expenditures, it’s planned stock repurchases, and interest and principal payments on the Corporation’s debt for 2003.

     A decrease in demand for the Corporation’s services could reduce operating cash flows, but would also decrease the need for any capital expansion. The key factors that could affect the Corporation’s sources of cash include the following:

• the Corporation’s ability to generate orders for new contracts;

• the ability of the Corporation to utilize its facilities, particularly the U.S. manufacturing facility;

• the size and growth of the overall markets for biopharmaceuticals; and,

• the economies in the U.S. and Europe.

     These and other factors are more fully described in the “Risk Factors” section in the Corporation’s Form 10-K filed on March 31, 2003. Additionally, a significant deterioration in the Corporation’s financial performance and ratios could accelerate the maturity of principal outstanding under the Corporation’s loans.

Operating Leases

     The Corporation leases facilities and equipment under operating leases that expire at various dates through 2024. The Corporation is required to make noncancelable lease payments totaling approximately $27.2 million under these leases.

Capital Leases

     The Corporation’s U.S. manufacturing facility in Rockville, Maryland has been operational since late 2000. The Corporation leases this facility under three capital leases that require it to make net noncancelable lease payments totaling approximately $9.8 million through 2034. The Corporation has also guaranteed indebtedness related to the construction of this facility of approximately $4.1 million at March 31, 2003. A portion of the lease payments is equivalent to the interest and principal due on the indebtedness.

     Under an interest rate swap with respect to one of these capital leases, the variable interest rate portion of the indebtedness was effectively converted into debt with a fixed rate of 6.14% per annum. This swap expires on November 1, 2009. Amounts paid or received under the interest rate swap are recognized as interest income or expense in the periods in which they accrued and are recorded in the same category as that arising from the indebtedness. As a result of a decrease in the variable interest rate, for the three months ended March 31, 2002 and 2003, the Corporation recorded $46,000 and $52,000, respectively of additional interest expense related to this interest rate swap. In accordance with the Statement of Financial Accounting Standard (FAS) 133, the Corporation adjusted the liability for the change in the fair value of this swap from $653,000 at December 31, 2002 to $645,000 at March 31, 2003. The corresponding amount is reflected in other comprehensive expense, as the Corporation has met the criteria of FAS 133 to record the contract as a cash flow hedge. This hedge will be extinguished with the lease obligation to which it pertains.

     The Corporation accounts for the leases and subleases of its U.S. manufacturing facility as capital leases. The assets underlying the capital leases are included with the Corporation’s owned property and equipment at March 31, 2003. Property and equipment, net of accumulated depreciation and amortization,

17

at March 31, 2003 included approximately $6.9 million related to these capital leases. The related obligation is included in the Corporation’s liabilities at March 31, 2003.

     The Corporation also leases land for one of its facilities and certain office equipment under terms that require the leases to be accounted for as capital leases. At March 31, 2003, property and equipment, net of accumulated depreciation and amortization, included $2.0 million related to these capital leases. The related lease obligation of $0.5 million is included in the Corporation’s liabilities at March 31, 2003.

Borrowings and Credit Facilities

     The Corporation has a mortgage loan of $4.3 million from Bank of America with a maturity date of November 30, 2009 that was used to finance the construction of one of its facilities in Rockville, Maryland. In addition to a principal payment of $10,576 per month, the mortgage loan bears interest at the London Inter-Bank Offering Rate (LIBOR) plus the applicable LIBOR Rate Additional Percentage (LIBOR Rate Option). The LIBOR Rate Option ranges from 1.0% to 2.15% depending on the Corporation achieving certain funded debt to EBITDA ratios. At March 31, 2003, the applicable interest rate on the mortgage loan was 1.31% and the LIBOR Rate Option was 1.40%. At March 31, 2003, approximately $2.1 million was outstanding on the mortgage loan.

     Under an interest rate swap, the variable interest rate portion of the mortgage loan was effectively converted into debt with a fixed rate of 6.14% per annum. This swap expires November 1, 2009. Amounts paid or received under the interest rate swap are recognized as interest income or expensed in the periods in which they accrued and are recorded in the same category as that arising from the mortgage loan. As a result of a decrease in the variable interest rate, for the three months ended March 31, 2002 and 2003, the Corporation recorded $23,000 and $26,000, respectively of additional interest expense related to the interest rate swap. In accordance with FAS 133, the Corporation adjusted the liability for the change in the fair value of this swap from $306,000 at December 31, 2002 to $301,000 at March 31, 2003. The corresponding amount is reflected in other comprehensive expense, as the Corporation has met the criteria of FAS 133 to record the contract as a cash flow hedge. This hedge will be extinguished with the mortgage loan to which it pertains.

     The Corporation has available borrowings up to $2.0 million under a revolving loan agreement with Bank of America. The revolving loan agreement requires monthly interest payments on the unpaid principal. The unpaid principal and all unpaid accrued interest is payable in full on May 31, 2003, and the line of credit expires at that time. Amounts borrowed under the revolving loan agreement bear interest at the LIBOR rate plus the applicable LIBOR Rate Option that ranges from 0.85% to 2.0% depending on the Corporation achieving certain funded debt to EBITDA ratios. During the first three months of 2003, no amounts were borrowed under this revolving loan agreement.

     All of the Corporation’s agreements with Bank of America are cross collateralized and are secured by a deed of trust on one of the Corporation’s laboratory facilities in Rockville, Maryland. The agreements require the Corporation to comply with financial and restrictive covenants, including fixed charge coverage and funded debt to EBITDA ratios. Specifically:

• Maintain a ratio of total funded indebtedness to EBITDA not greater than 3.50 to 1.00 as of the end of each fiscal quarter, calculated on the preceding four-quarter period. EBITDA is defined as earnings before interest, taxes, depreciation and amortization.

• Maintain a fixed charge coverage ratio as of the end of each quarter of at least 1.25 to 1.00. This ratio is determined by dividing EBITDA by the sum of interest expense and current maturities of long-term debt and capital leases.

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     At March 31, 2003, the Corporation was in compliance with all covenants under its loan agreements.

     The Corporation has a $3.0 million loan from the Department of Business and Economic Development, a department of the State of Maryland. The Corporation is required to use the proceeds to expand and relocate its activities in Rockville, Maryland. The loan requires quarterly principal payments of $107,143 plus accrued interest and matures on June 30, 2006. The loan bears interest at rates from 0.0% to 7.5% based on the Corporation’s achieving specific employment levels through 2005. The current interest rate is 0.0%. The terms of the loan contain annual reporting requirements, including the reporting of employment data. At March 31, 2003, approximately $1.4 million was outstanding on the loan.

Capital Expenditures

     During the three months ended March 31, 2003 and 2002, the Corporation invested $2.6 million and $1.4 million, respectively, for capital expenditures. These capital expenditures were primarily for leasehold improvements and investments in new equipment.

     Estimated capital expenditures for the remainder of 2003 include capacity expansions in U.S. testing and development operations, U.S. manufacturing and U.K. manufacturing operations. The Corporation’s plans also include additional investments in information systems, as well as in normal equipment replacements.

     The Corporation expects to fund its growth and its planned capital expenditures from existing cash and cash flows from operations, but may also enter into arrangements for bank borrowings and leases or other financing from third party sources, to the extent that funds are available on favorable terms and conditions. While the Corporation remains confident that expansion of its capacity will contribute to growth, there can be no assurance that such expansion will be fully utilized or that funding for the plans will meet with the Corporation’s expectations.

     Although the Corporation has no agreements or arrangements in place with respect to any future acquisition, there may be acquisition or other growth opportunities that require additional external financing, and the Corporation may, from time to time, seek to obtain funds from public or private issuances of equity or debt securities on a strategic basis. There can be no assurances that such financing will be available on terms acceptable to the Corporation.

Repurchase of Common Stock

     On March 5, 2003, the Corporation’s Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s common stock over the following two years. The repurchase is being funded using the Corporation’s working capital. During the quarter ended March 31, 2003, the Corporation has repurchased 75,300 shares for $1.2 million.

Foreign Currency

     The accounts of the Corporation’s international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at period-end exchange rates, and revenue and expense accounts are translated at average monthly exchange rates. Net exchange gains and losses resulting from these translations are excluded from net income and are accumulated in a separate component of stockholders’ equity. Transaction gains and losses that arise from some intercompany transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The Corporation’s net exchange loss was

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insignificant for the three months ended March 31, 2003 and was $0.1 million for the three months ended March 31, 2002.

     Since the revenues and expenses of the Corporation’s international operations generally are denominated in local currencies, exchange rate fluctuations between such local currencies and the United States dollar will subject the Corporation to currency translation risk with respect to the reported results of its international operations as well as to other risks sometimes associated with international operations. The Corporation derived 22.2% and 17.6% of its revenue for the three months ended March 31, 2003 and 2002, respectively, from services performed in the United Kingdom and Germany. In addition, the Corporation may be subject to currency risk when the Corporation’s service contracts are denominated in a currency other than the currency in which the Corporation incurs expenses related to such contracts.

     The Corporation may experience fluctuations in financial results from the Corporation’s operations outside the United States, and the Corporation may not be able, contractually or otherwise, to reduce the currency risks associated with its operations. At the present time, the Corporation does not use derivative financial instruments to manage or control foreign currency risk because most of its revenue and related expenses are in the same functional currencies. While the Corporation may use such financial instruments in the future, these financial instruments may not be successful in managing or controlling foreign currency risk.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

     The Corporation is exposed to credit market risk from adverse changes in interest rates and foreign currency exchange rates.

Interest Rate Risks

     The Corporation is exposed to interest rate risk primarily through its investments in cash equivalents. The Corporation’s investment policy stipulates investment in short-term, low-risk instruments. At March 31, 2003, the Corporation had $35.5 million in cash and cash equivalents. If interest rates fall, floating rate securities may generate less interest income. The Corporation does not believe that it is exposed to any material interest rate risk as a result of its investments in cash equivalents.

     At March 31, 2003, the Corporation had total debt of $11.3 million, most of which bears interest at a fixed interest rate. Thus, the Corporation does not believe that it is exposed to any material interest rate risk as a result of borrowing activities.

Foreign Currency Exchange Risk

     The Corporation’s international operations are subject to foreign exchange rate fluctuations. The Corporation derived 22.2% of its revenue for the three months ended March 31, 2003, from services performed in the United Kingdom and Germany. The Corporation does not hedge its foreign currency exposure. Management does not believe that the Corporation’s exposure to foreign currency rate fluctuations is material. See “Foreign Currency” in “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for a more detailed discussion of our foreign currency risks and exposures.

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Item 4. Controls and Procedures

     Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s design and operation of its disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, such officers concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation, required to be included in this Quarterly Report on Form 10-Q.

     The Corporation’s management has also evaluated the Corporation’s internal controls and there have been no significant changes in the Corporation’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date that the Corporation carried out its evaluation.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 2. Changes in Securities and Use of Proceeds

     As of March 31, 2003, the Corporation had used approximately $24.2 million of the net proceeds from its initial public offering toward planning and construction for manufacturing expansion, purchases of laboratory equipment and information systems hardware and software, and debt repayments.

     At March 31, 2003, approximately $8.0 million of the net proceeds of the initial public offering were invested in money market funds.

Item 3. Defaults upon Senior Securities

     None

Item 4. Submission of Matters to Vote of Security Holders

     None

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

10.1	Employment Agreement — David E. Jackson
99.1	Officer Certification of Chief Executive Officer
99.2	Officer Certification of Chief Financial Officer

     (b)  Reports on Form 8-K

        Report dated March 7, 2003 announcing the stock repurchase program and filing the related press release issued by the Corporation.

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SIGNATURES

     Pursuant to the requirements 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.

Dated: May 15, 2003
	BioReliance Corporation      (Registrant)
	By /s/ Capers W. McDonald
	Capers W. McDonald President and Chief Executive Officer
	By /s/ John L. Coker
	John L. Coker Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)

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BIORELIANCE CORPORATION

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Capers W. McDonald, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of BioReliance Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Capers W. McDonald
Capers W. McDonald
President and Chief Executive Officer

25

BIORELIANCE CORPORATION

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, John L. Coker, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of BioReliance Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ John L. Coker
John L. Coker
Vice President, Finance and Administration
and Chief Financial Officer

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EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
10.1	Employment Agreement — David E. Jackson
99.1	Officer Certification of Chief Executive Officer
99.2	Officer Certification of Chief Financial Officer

27 EX-10.1 3 w86506exv10w1.htm EXHIBIT 10.1

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

     THIS AGREEMENT is effective the 8th day of January, 2003 by and between BioReliance Corporation, a Delaware corporation with principal offices located at 14920 Broschart Road, Rockville, Maryland 20850, and all of its subsidiary companies and its successors or assigns (the “Corporation”) and David E. Jackson (the “Executive”).

A. POSITION AND EMPLOYMENT RELATIONSHIP:

1.	The Executive is employed as the Vice President, Manufacturing (“Vice President”) of the Corporation. Commencing on the effective date of this Agreement for a term of twelve (12) months (hereinafter referred to as “Term”), the Corporation hereby agrees to continue to employ the Executive in his current position or a comparable position consistent with his qualifications and experience, and the business needs of the Corporation. At the end of this twelve (12) month Term, this Agreement and all its provisions will renew once for another Term of twelve (12) months, unless ninety (90) days prior to the end of the original Term, the Executive or the President and Chief Executive Officer of the Corporation provides written notice to the other of an intent not to renew the Agreement.
2.	Such employment relationship is not at-will and is instead governed by the terms and conditions set forth in this Agreement. The Employment relationship, however, may be terminated by the Corporation or the Executive prior to the expiration of this twelve (12) month Term pursuant to sections E, F, I, and J respectively of this Agreement.
3.	As Vice President, the Executive shall perform such duties as may be assigned to the Executive from time to time by the Corporation’s President and Chief Executive Officer (“CEO”) or the Corporation’s Board of Directors (“Board”), including, but not limited to the following: developing and executing plans toward attainment of current and long-range objectives, including achieving revenue, revenue growth and income objectives, maximum return on invested capital, and quality, client satisfaction and employee development goals; developing financial plans and budgets; overseeing all reporting functions; coordinating activities with other vice presidents and supporting departmental directors; supporting Corporate activities including market analyses, strategic planning, R&D planning and project selection, engagement and assessments of potential partners, and the like; supporting the evaluation and analysis of acquisition opportunities, if any, as may be identified from time to time by the President and CEO; developing and documenting novel or typical

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manufacturing programs, procedures, methodologies and the like; meeting with clients, understanding their product and production methods, and developing timely and cost-effective strategies acceptable to them and to various national regulatory authorities; designing major projects and, as appropriate, writing major project plans; closing key proposals; directing complex technical activities, in particular projects of significant scale and scope; solving challenging technical, regulatory and service problems; building client relationships; and anticipating follow-on client engagements.

B.

LIMITATION ON OUTSIDE ACTIVITIES: The Executive shall devote his full employment energies, interest, abilities and time to the performance of the obligations hereunder and shall not, without written consent of the Corporation, through its President and CEO, render to others any service of any kind for compensation, and in addition, shall not engage in any activity which conflicts or interferes with the performance of the Executive’s duties hereunder.

C.

COMPENSATION: For all services rendered by Executive pursuant to this Agreement, Corporation will pay to Executive, and the Executive will accept as full compensation hereunder, the following:

1.

Base Salary: The Executive’s annual base salary (“salary”) during calendar year 2002, as determined by the Compensation Committee of the Board, shall be two hundred and twenty thousand dollars ($220,000). The salary will be subject to all appropriate federal, state and local withholding requirements and will be payable in equal bi-weekly installments. The Executive’s salary during a subsequent calendar year during the Term of this Agreement will be determined by the Compensation Committee of the Board based upon the recommendation of the President and CEO, but in no event shall the Executive’s salary be less than the salary he received during the prior calendar year.

2.

Performance Bonus: If the Executive remains in the employ of the Corporation through December 31 of each year during the Term of this Agreement, the Executive shall be eligible for a performance bonus (“bonus”) based on individual and corporate performance factors relating to mutually acceptable objectives. Executive’s bonus will be subject to all appropriate federal, state and local withholding requirements. The exact amount of the bonus will be at the discretion of the Compensation Committee of the Board. Unless otherwise specified in this Agreement, the Corporation will be obligated to pay the Executive the bonus as long as the Executive (a) does not resign from the Corporation before December 31 of each year, or (b) is not terminated for Cause (as hereinafter defined), or (c) does not fail to meet his individual performance

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objectives. This bonus may also be paid out on a quarterly basis at the discretion of the Compensation Committee of the Board.

3.

Stock Options: As an inducement to remain in the employ of the Corporation and as an incentive to build the Corporation’s value, the Corporation may grant to the Executive additional stock options. The number of option shares to be granted and their timing and other terms will be determined by the Compensation Committee of the Board and governed by the Corporation’s 1997 Incentive Plan (as adopted May 28, 1997 and amended and restated September 24, 1997, May 21, 1998, May 13, 1999, and April 24, 2002) [hereinafter referred to as “1997 Incentive Plan"], which is attached hereto as Exhibit 1.

D. BENEFITS AND PERQUISITES:

1.	Medical and Other Insurance Coverage: The Corporation shall provide such medical and other insurance coverage to the Executive to the extent and on the terms that such benefits are made available to other similarly situated employees. This provision does not alter the Corporation’s right to modify or eliminate any employee benefit plan from time to time and does not guarantee the continuation of any kind or level of benefit or perquisite.
2.	Paid Personal Leave: The Executive shall receive vacation, sick and personal holiday leave pursuant to the Corporation’s Paid Personal Leave Policy (“PPL”) under the schedule for an Executive of the Company, which is attached hereto as Exhibit 2 and incorporated herein by reference.
3.	Other Perquisites and Benefits: The Corporation will provide the Executive with appropriate office space, as it deems necessary, and will provide telephone, computer, email and internet access as required to perform the Executive’s duties during the term of his employment.

E. COMPENSATION UPON CHANGE IN CONTROL: Notwithstanding any other provision in this Agreement, if there is a “change in control” of the Corporation (as hereinafter defined) during the Term of this Agreement, and within twelve (12) months thereafter, either (1) the Executive is terminated Without Cause (as hereinafter defined in section F) or (2) the Executive’s responsibilities are significantly reduced and, as a result, the Executive terminates his employment pursuant to section J, the Executive shall be entitled to the compensation and benefits set forth below.

1. Base Compensation: The Corporation shall pay the Executive sixteen (16) months of his then current base salary. This compensation will be paid in two parts, as follows: (a) an initial lump-sum payment of eight (8) months of base salary will be paid within ten (10) working days of termination of employment

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	and (b) beginning six (6) months after termination of employment, equal monthly payments for eight (8) months thereafter. This second payment in section (b) will be correspondingly reduced by any base compensation payments the Executive receives through new employment. The Executive is obligated to inform the Corporation, its successors and assigns, in writing within ten (10) calendar days of his acceptance of such new employment and include in this notice what his base compensation and expected start date are. However, if the Executive’s base compensation at such new employment is equal to or exceeds his prior base salary at the Corporation, the Executive may simply confirm this fact in the notice in lieu of disclosing the actual new base compensation figure.
2.	Stock Options: The disposition of any and all stock options granted by the Corporation to the Executive will be governed by the 1997 Incentive Plan.
3.	Bonus Compensation: The Corporation shall pay the Executive, within thirty (30) calendar days of termination, his performance bonus, pro-rated to reflect the date of termination.
4.	Medical Benefits: If the Executive elects to continue medical benefits coverage under COBRA, the Corporation will pay the applicable COBRA premium for a period of the lesser of eighteen (18) months or until such time as the Executive obtains other employment that provides medical benefits coverage, provided the Executive and any of his eligible dependents elect COBRA continuation coverage. This provision is otherwise subject to all applicable COBRA continuation requirements and does not alter the Corporation’s right to amend or terminate its medical plan.
5.	Other Benefits: If the Executive is involved in pre-approved course work eligible for reimbursement under the Corporation’s Tuition Assistance Program (“Program”) or has an education assistance loan outstanding under that Program, the Corporation will reimburse any remaining balance due on the course work and forgive any indebtedness in connection with the outstanding education assistance loan. This provision is otherwise subject to all applicable Tuition Assistance Program requirements and does not alter the Corporation’s right to amend or terminate its Program.

A “change in control” for purpose of this Agreement shall be deemed to have occurred if the Corporation is subject to an acquisition in accordance with Section 2.12 (1) of the Corporation’s 1997 Incentive Plan, which is attached hereto as Exhibit 1.

The privileges, compensation, and benefits set forth in section E survive the expiration of this Agreement as long as there is a “change in control” as herein defined during the Term of this Agreement.

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	All compensation paid by the Corporation under section E will be subject to all appropriate federal, state and local withholding requirements. Also, notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment or distribution of any type to or for the benefit of the Executive by the Corporation, any affiliate of the Corporation, any person who acquires ownership or effective control of the Corporation or ownership of a substantial portion of the Corporation’s assets (within the meaning of Section 280G of the Internal Revenue Code of 1986 as amended (the “Code”), and the regulations thereunder), or any affiliate of such person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the “Total Payment”), is or will be subject to the excise tax imposed under Section 4999 of the Code (the “Excise Tax”), then the Total Payments shall be reduced (but not below zero) if and to the extent necessary so that no portion of the Total Payments will be subject to the Excise Tax. The Corporation shall reduce or eliminate the Total Payments by first reducing or eliminating the portion of the Total Payments which is payable in cash and then by reducing or eliminating payments which are not payable in cash, in each case in reverse order beginning with payments or benefits which are paid the farthest in time from the determination that the Total Payments need to be reduced. All determinations required to be made under this provision shall be made by a nationally recognized accounting firm that is the Corporation’s outside auditor at the time of such determinations.
	Any dispute between the Executive and the Corporation, it successors and assigns, involving section E will be resolved by arbitration in accordance with section Q below, except any 280G determination made by Corporation’s outside auditor shall be binding, final, and conclusive upon the Corporation and the Executive.
F.	TERMINATION OF EMPLOYMENT: During the Term of this Agreement, Executive’s employment is not at-will and may be terminated by the Corporation only on two bases: (1) Cause; or (2) Without Cause.

(1) As used in this Agreement, “Cause” shall mean that the Executive:

(a)	committed an act or acts of personal dishonesty intended to result in the Executive’s personal enrichment at the expense of the Corporation, and which constitute(s) fraud, embezzlement, grand larceny or any felonious act;
(b)	materially failed or refused to perform the Executive’s essential duties and obligations as an employee of the Corporation;
(c)	committed an act of willful misconduct;

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(d)	was convicted of a felony or other serious crime;
(e)	has engaged in the unlawful use of narcotics;
(f)	engaged in abusive use of alcohol to a degree, or in a manner, that would materially and adversely affect the performance of the Executive’s assigned work or degrade the reputation of the Corporation;
(g)	violated the terms of the Confidentiality, Trade Secrets and Noncompetition Agreement he signed on January 3, 2003;
(h)	violated or breached the terms of this Agreement; or
(i)	is unable to perform the essential functions of his position due to disability, injury, or illness as set forth in section I below or due to death.
In accordance with these definitions of Cause, the Board, or a delegated committee of the Board, will in its sole discretion decide whether the Executive shall be terminated for Cause after affording the Executive an opportunity to be heard on the matter. The Board, or the delegated committee of the Board, will in its sole discretion determine the time, place, and manner of the opportunity for the Executive to be heard, but to the extent practicable any such meeting will take place in Montgomery County, Maryland during regular business hours. If the Executive fails to appear or to follow the manner of opportunity afforded by the Board or its committee, the Board, or the delegated committee, may render its decision without hearing the Executive’s views.

(2) Any reason for termination other than those set forth above will be deemed to be Without Cause.

G. TERMINATION WITHOUT CAUSE — EFFECT ON FUTURE COMPENSATION: In the event Executive is terminated Without Cause and there has not been a “change in control” as defined in section E, Executive will be entitled to receive the following compensation and benefits:

1.	Base Compensation: The Corporation shall pay the Executive his then current salary for the remaining Term of this Agreement or for a period of six (6) months, which ever period is greater. Such compensation shall be paid in equal monthly payments and will be subject to all appropriate federal, state and local withholding requirements.
2.	Stock Options: The disposition of any and all stock options granted by the Corporation to the Executive will be governed by the 1997 Incentive Plan.

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3.	Bonus Compensation: The Corporation shall pay the Executive, within thirty (30) calendar days of termination, his performance bonus, pro-rated to reflect the date of termination.
4.	Medical Benefits: If the Executive elects to continue medical benefits coverage under COBRA, the Corporation will pay the applicable COBRA premium for a period of the lesser of eighteen (18) months or until such time as the Executive obtains other employment that provides medical benefits coverage, provided the Executive and any of his eligible dependents elect COBRA continuation coverage. This provision is otherwise subject to all applicable COBRA continuation requirements and does not alter the Corporation’s right to amend or terminate its medical plan.
5.	Other Benefits: If the Executive is involved in pre-approved course work eligible for reimbursement under the Corporation’s Tuition Assistance Program (“Program”) or has an education assistance loan outstanding under that Program, the Corporation will reimburse any remaining balance due on the course work and forgive any indebtedness in connection with the outstanding education assistance loan. This provision is otherwise subject to all applicable Tuition Assistance Program requirements and does not alter the Corporation’s right to amend or terminate its Program.

H.	TERMINATION WITH CAUSE — EFFECT ON FUTURE COMPENSATION: In the event Executive is terminated for Cause, Executive will be entitled to no future compensation from the Corporation and any and all stocks options granted by the Corporation to the Executive will be disposed of in accordance with the 1997 Incentive Plan. Moreover, the Executive will not earn any additional compensation after the effective date of such termination.
I.	DISABILITY: If the Executive is unable to perform the essential functions of his position due to illness, injury, or incapacity for a period of more than twelve weeks following the use of all available Paid Personal Leave (“PPL”), the compensation otherwise payable to him under this Agreement shall cease and the Corporation may terminate his employment unless the Board determines otherwise or the Executive is able to perform the essential functions of his position with reasonable accommodation.
J.	TERMINATION OF EMPLOYMENT BY EXECUTIVE: Executive may terminate his employment upon thirty (30) days written notice to the President and CEO. Unless otherwise provided herein, if the Executive terminates his employment, the Executive shall only be entitled to base compensation through the last day actually worked as well as any bonus compensation for which the work period and performance criteria have been fully met. The Board may provide the Executive with additional compensation, if the

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	Board in its discretion deems such additional compensation warranted. Also, the disposition of any and all stock options granted by the Corporation to the Executive will be governed by the 1997 Incentive Plan.
K.	CONFIDENTIALITY AND NONCOMPETITION: By signing below, the Executive acknowledges his ongoing and continuing obligation to abide by the Confidentiality, Trade Secrets and Noncompetition Agreement that he executed on January 3, 2003 (“Trade Secrets Agreements”), which is attached hereto as Exhibit 3 and incorporated herein by reference.
L.	NO PRIOR AGREEMENTS: The Executive represents and warrants that he is not a party or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect his ability to perform his obligations hereunder. The Executive further represents and warrants that his employment with the Corporation will not require the disclosure or use of any confidential information belonging to prior employers or to other persons or entities. The Executive understands that the Corporation does not expect or desire and in fact disapproves of and forbids the Executive to use or disclose, in the performance of his duties for the Corporation, any such confidential information belonging to prior employers or other persons or entities.
M.	ASSIGNMENT: This Agreement is personal to Executive and may not be assigned in any way by Executive without prior written consent by the Board of Directors of the Corporation. Any attempted assignment by Executive will be void. Notwithstanding anything in this section to the contrary, however, this Agreement may be assigned by the Corporation to any parent, subsidiary, successor, or affiliate entity. The rights and obligations under this Agreement will inure to the benefit of and will be binding upon the heirs, legatees, administrators, and personal representatives of Executive and upon the successors, representatives, and assigns of the Corporation.
N.	ILLEGAL OR INVALID PROVISION: The parties intend for all provisions of this Agreement to be enforced and enforceable to the fullest extent permitted by law. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws in effect during the term hereof, however, that provision will be fully severable. This Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof, and the remaining provisions will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable provision, there will be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.

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O.	GOVERNING LAW: This Agreement shall be construed and governed by the laws of the State of Maryland without regard to any conflict of laws rules or provisions.
P.	ENTIRE AGREEMENT: This Agreement constitutes the entire Agreement between the Corporation and the Executive. This Agreement may not be changed orally, but only by an agreement in writing signed by the parties. This Agreement supersedes all prior agreements, discussions or statements regarding the Executive’s employment, except for the Confidentiality, Trade Secrets and Noncompetition Agreement attached hereto as Exhibit 3, which will survive.
Q.	ARBITRATION: Notwithstanding any other provision in this Agreement, any claim or controversy relating to or arising out of this Agreement shall be resolved exclusively by arbitration in accordance with the commercial rules then obtaining of the American Arbitration Association. This Arbitration provision, including any challenges to its enforceability, is governed by the Federal Arbitration Act. The arbitration shall take place in Montgomery County, Maryland. The Corporation and Executive shall bear separately their respective attorney’s fees. The Corporation shall bear the cost of the arbitration and any fees required by the commercial rules then obtaining of the American Arbitration Association.
R.	MUTUAL UNDERSTANDING: Each party has read this entire Agreement, fully understands the contents hereof, has had the opportunity to obtain independent advice as to its legal effect, and is under no duress or obligation of any kind to execute it. This Agreement reflects the mutual understanding of the parties with the respect to all subject matters addressed herein and will be construed accordingly.

BioReliance Corporation

By:	/s/ William J. Gedale William J. Gedale Chairman, Compensation Committee Board of Directors	By:	/s/ David E. Jackson David E. Jackson
Address: 14920 Broschart Road Rockville, MD 20850
Date:     January 8, 2003		Date:     3 January 2003

9 of 9 EX-99.1 4 w86506exv99w1.htm EXHIBIT 99.1

EXHIBIT 99.1

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

     I, Capers W. McDonald, President and Chief Executive Officer of BioReliance Corporation (the Corporation), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, that:

     (1)  the Quarterly Report on Form 10-Q of the Corporation for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Capers W. McDonald
Capers W. McDonald
President and Chief Executive Officer
May 15, 2003

EX-99.2 5 w86506exv99w2.htm EXHIBIT 99.2

EXHIBIT 99.2

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

     I, John L. Coker, Vice President, Finance and Administration and Chief Financial Officer of BioReliance Corporation (the Corporation), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, that:

     (1)  the Quarterly Report on Form 10-Q of the Corporation for the period March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ John L. Coker
John L. Coker
Vice President, Finance and Administration
and Chief Financial Officer
May 15, 2003

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