-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U0aT+lPNKEWTV1mekNM/EV4/Yf2wE3ixMHNo8X8gZeXiESzf6kdawtgDSc1ReRKt KfaE4yNbLvFGZ3ZLtFXjtw== 0000893220-98-001373.txt : 19980817 0000893220-98-001373.hdr.sgml : 19980817 ACCESSION NUMBER: 0000893220-98-001373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMATRIX INC CENTRAL INDEX KEY: 0000747952 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 133058261 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14221 FILM NUMBER: 98689983 BUSINESS ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 BUSINESS PHONE: 2019459550 MAIL ADDRESS: STREET 1: 65 RAILROAD AVE STREET 2: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 10-Q 1 BIOMATRIX, INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-19373 ----------------------------------------- BIOMATRIX, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3058261 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 65 Railroad Avenue, Ridgefield, N.J. 07657 (Address of principal executive offices) (Zip Code) (201) 945-9550 (Registrant's telephone number, including area code) 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 [ ] The number of shares outstanding of the issuer's common stock as of the latest practicable date: Class June 30, 1998 ----- ------------- Common stock, $ 0.0001 par value 11,350,425 2 BIOMATRIX, INC. TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1 - Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 (Unaudited)............................ 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 (Unaudited).............. 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 (Unaudited)........................ 5 Notes to Condensed Consolidated Financial Statements....................... 6-8 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 9-12 PART II. OTHER INFORMATION ITEM 4 Submission of matters to a vote of security holders........................ 13 ITEM 6 Exhibits and Reports on Form 8-K........................................... 13 Signatures................................................................. 14
2 3 BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents ................................... $ 18,919,524 $ 17,387,085 Accounts receivable, less allowance for doubtful accounts of $25,500 in 1998 and 1997 ............................... 6,681,456 3,517,112 Inventory, at lower of cost or market ....................... 3,803,642 3,111,351 Prepaid expenses and other current assets ................... 1,621,665 1,903,528 ------------ ------------ Total current assets ................................. 31,026,287 25,919,076 Property, plant and equipment, net ............................. 29,202,607 17,780,526 Other assets ................................................... 2,952,439 525,045 ------------ ------------ Total assets ......................................... $ 63,181,333 $ 44,224,647 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of notes payable ............................ $ 156,013 $ 162,210 Current portion of capital lease obligations ................ 21,494 16,062 Accounts payable ............................................ 2,422,266 784,894 Accrued expenses ............................................ 3,640,925 3,053,770 ------------ ------------ Total current liabilities ........................... 6,240,698 4,016,936 Notes payable less current maturities .......................... 15,848,886 935,478 Capital lease obligations less current maturities .............. 4,651,439 4,663,715 ------------ ------------ Total liabilities ................................... 26,741,023 9,616,129 ------------ ------------ Commitments and contingent liabilities Shareholders' equity: Preferred stock, 3,000 shares authorized; none issued ....... -- -- Common stock, $.0001 par value: 60,000,000 shares authorized; 11,396,572 and 11,013,035 issued and 11,350,425 and 10,966,888 outstanding in 1998 and 1997, respectively ..... 1,139 1,101 Additional paid-in capital .................................. 69,799,667 59,813,585 Notes receivable - related parties .......................... (12,653,663) (2,868,538) Accumulated deficit ......................................... (17,891,232) (19,826,634) Accumulated other comprehensive loss ........................ (1,874,690) (1,570,085) Treasury stock, 46,147 shares of common stock at cost ....... (940,911) (940,911) ------------ ------------ Total shareholders' equity .......................... 36,440,310 34,608,518 ------------ ------------ Total liabilities and shareholders' equity ........... $ 63,181,333 $ 44,224,647 ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 4 BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Net product sales .......................... $ 9,181,934 $ 1,841,094 $ 13,746,988 $ 3,743,050 Income from licenses, royalties, and research contracts ................... 493,520 3,136,488 3,426,874 7,277,332 ------------ ------------ ------------ ------------ Total revenues .................... 9,675,454 4,977,582 17,173,862 11,020,382 ------------ ------------ ------------ ------------ Cost and expenses: Cost of sales .............................. 2,303,469 604,091 3,817,964 1,477,827 Research and development expenses .......... 2,403,495 1,425,659 4,555,552 2,805,545 Selling, general and administrative expenses 3,522,107 1,883,320 6,440,403 3,300,576 ------------ ------------ ------------ ------------ Total costs and expenses .......... 8,229,071 3,913,070 14,813,919 7,583,948 ------------ ------------ ------------ ------------ Income from operations ..................... 1,446,383 1,064,512 2,359,943 3,436,434 Interest expense ........................... (170,930) (28,376) (196,496) (55,407) Interest and miscellaneous income .......... 355,359 243,016 646,955 426,495 ------------ ------------ ------------ ------------ Income before taxes ........................ 1,630,812 1,279,152 2,810,402 3,807,522 ------------ ------------ ------------ ------------ Provision for income taxes ................. 500,000 61,000 875,000 61,000 ------------ ------------ ------------ ------------ Net income ................................. $ 1,130,812 $ 1,218,152 $ 1,935,402 $ 3,746,522 ============ ============ ============ ============ Net income per share: Basic ................................. $ 0.10 $ 0.11 $ 0.17 $ 0.35 ============ ============ ============ ============ Weighted average shares outstanding ... 11,156,727 10,844,719 11,082,162 10,760,559 ============ ============ ============ ============ Diluted ............................... $ 0.10 $ 0.11 $ 0.17 $ 0.34 ============ ============ ============ ============ Weighted average shares outstanding ... 11,705,190 11,158,598 11,622,706 11,077,380 ============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1998 1997 ---- ---- Cash flows from operating activities: Net income .................................................. $ 1,935,402 $ 3,746,522 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Depreciation and amortization ............................ 508,881 317,109 Stock option compensation ................................ 8,698 46,250 Change in assets and liabilities: Accounts receivable ................................... (3,228,827) (252,688) Inventory ............................................. (773,012) (1,037,121) Prepaid expenses and other current assets ............. 243,794 (391,798) Other assets .......................................... (1,769,275) (150,184) Accounts payable and accrued expenses ................. 2,111,623 1,475,086 ------------ ------------ Net cash (used for) provided by operating activities (962,716) 3,753,176 ------------ ------------ Cash flows from investing activities: Maturity of held-to-maturity securities ..................... -- 7,002,264 Capital expenditures ........................................ (12,021,865) (2,120,430) ------------ ------------ Net cash (used for) provided by investing activities (12,021,865) 4,881,834 ------------ ------------ Cash flows from financing activities: Payments of notes payable and capital lease obligations ..... (72,987) (74,376) Proceeds from issuance of convertible debt .................. 14,325,000 -- Sale of common stock to related parties ..................... -- 1,890,000 Stock options exercised ..................................... 192,748 543,334 ------------ ------------ Net cash provided by financing activities .......... 14,444,761 2,358,958 ------------ ------------ Effect of exchange rate changes on cash ................ 72,259 44,216 ------------ ------------ Net increase in cash and cash equivalents ............................ 1,532,439 11,038,184 Cash and cash equivalents at beginning of period ..................... 17,387,085 3,034,764 ------------ ------------ Cash and cash equivalents at end of period ........................... $ 18,919,524 $ 14,072,948 ============ ============ Non-cash financing activities: Sale of common stock financed with notes receivable (Note 3) .... $ 9,785,125 $ 303,000
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements at June 30, 1998 and for the three and six months ended June 30, 1998 and 1997 are unaudited, but include all adjustments which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1997, which were included as part of the Company's Form 10-K, filed with the Securities and Exchange Commission. Results for the interim periods are not necessarily indicative of results for the entire year. NOTE 2 - INVENTORIES Inventories at June 30, 1998 and December 31, 1997 consisted of :
June 30, December 31, 1998 1997 ---- ---- Raw Materials................................................. $ 1,701,544 $ 912,353 Work-in-Process............................................... 1,673,580 1,568,682 Finished Goods................................................ 428,518 630,316 ----------- ----------- $ 3,803,642 $ 3,111,351 =========== ===========
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES Notes receivable - related parties relate to the acquisition of common stock of the Company at fair market value by certain officers and directors of the Company. The notes are with full recourse, are secured by the shares of common stock issued and are payable with simple interest upon maturity. The notes mature in April 2000, May 2007, January 2008, March 2008, April 2008, and June 2008 in the amounts of $2,450,000, $418,538, $888,750, $560,000, $1,636,375, and $6,700,000, respectively, plus accrued interest. All notes issued during 1997 and 1998 have been for common stock issued pursuant to the Company's 1997 Restricted Stock Plan. In August 1998, a certain officer of the Company repaid a note in the amount of $2,450,000 plus accrued interest. Such note was originally scheduled to mature in April 2000. NOTE 4 - NET INCOME PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" which requires the presentation of basic net income per share and diluted net income per share. Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted net income per share is reflective of all common share equivalents. The subordinated debt outstanding at June 30, 1998 that is convertible into common shares at $40 per share was not included in diluted earnings per share as the calculation under the if-converted method was anti-dilutive. Prior periods have been restated to reflect the new standard. A reconciliation of weighted average shares outstanding from basic to diluted for the three and six months ended June 30, 1998 and 1997 is as follows:
Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average shares outstanding - Basic..... 11,156,727 10,844,719 11,082,162 10,760,559 Dilutive effect of stock options................ 548,463 313,879 540,544 316,821 ------------ ------------ ------------ ------------ Weighted average shares outstanding - Diluted... 11,705,190 11,158,598 11,622,706 11,077,380 ========== ========== ========== ==========
6 7 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 5 - COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income are net income and all other non-owner changes in equity, such as the change in the cumulative translation adjustment. This statement is effective for financial statements issued for periods beginning after December 15, 1997. Presentation of comprehensive income for earlier periods is required and is presented below. The following table shows comprehensive income for the three and six months ended June 30, 1998 and 1997:
Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income...................................... $1,130,812 $1,218,152 $1,935,402 $3,746,522 Change in cumulative translation adjustment..... (571,836) (56,811) (304,605) (145,131) ------------ ------------- ------------ ------------ Comprehensive income............................ $ 558,976 $1,161,341 $1,630,797 $3,601,391 =========== ========== ========== ==========
NOTE 6 - CONTINGENCIES In August 1990, the Company received a notice from the Pennsylvania Department of Environmental Protection ("DEP") that it is one of approximately 1,000 potentially responsible parties ("PRPs") that may have clean-up responsibility at the Industrial Solvents and Chemical Company site in York Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a licensed waste disposal transport company, shipped industrial solvents to the Site, which was operating as a recycling facility. The DEP reviewed hazardous waste found at the Site as well as the DEP's own records in order to identify additional PRPs and to quantify each PRP's volumetric contributions. The Company is a member of a steering committee that consists of many PRPs. Although neither the total clean-up cost nor the portion of the total clean-up cost assigned to each PRP has been determined, the Company estimated, based upon the advice of a consultant, that its liability would be approximately $780,000. Further, the same consultant has reported to the Company that there is less than a 10% chance that its liability might exceed $1,070,033. During the second quarter of 1995 the Company paid its first assessment for clean-up costs of $79,390. Additionally, the Company paid $15,000 during the first quarter of 1997; therefore, the reserve at June 30, 1998 was $685,610. The steering committee for the PRPs has prepared a buy-out proposal pursuant to a consent order with the DEP. This buy-out proposal identifies each PRP's assigned portion of assumed total clean-up costs. The Company's assigned portion of the assumed clean-up costs within the proposal is currently less than its reserve. When the final remedy is selected by the DEP, the Company plans to settle out of the matter pursuant to the buy-out proposal. The Company will monitor this situation and make any necessary adjustments to the reserve once additional information is available. In October 1996, Michael Jarcho ("Jarcho") filed suit in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for the alleged breach by the Company of Jarcho's consulting agreement. A consulting agreement had been entered into between the Company and Jarcho on December 2, 1988. The agreement contains certain royalty provisions for products that result from Jarcho's consultancy. Jarcho contends, inaccurately in the Company's view, that Hylaform resulted from his consultancy. Jarcho seeks compensatory damages of $300,000 plus a royalty on the Company's net sales of Hylaform as well as punitive damages and recovery of attorney fees. The Company believes that no royalties are owed Jarcho as a result of Hylaform sales. Jarcho's case was dismissed on January 10, 1997, on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, the Company opposed that request, and the request was denied. On June 16, 1997 Jarcho filed suit in New Jersey state court. The Company intends to defend this matter vigorously. The Company has not made any provision in the accompanying consolidated financial statements for any liability that might result. 7 8 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 7 - START-UP COSTS In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires companies to expense all costs related to pre-operating and start-up of various activities. The Company adopted this standard during the first quarter of 1998. As a result of adopting this standard the Company expensed all pre-operating and start-up costs incurred during the first and second quarters of 1998. The adoption of this standard did not create a cumulative effect of a change in accounting principle. NOTE 8 - CONVERTIBLE DEBT In May 1998, the Company issued $15,000,000 of subordinated convertible debt to a third party. The debt has a five year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $40 per share after one year. In addition, the Company can call the debt at par after three years or after two years if certain conditions are satisfied. Debt fees are included in other assets and are being amortized on a straight up basis over the five year term of the debt. NOTE 9 - CAPITAL STOCK TRANSACTION In April 1998, a Canadian venture capital firm exercised its right to convert the 62,500 Class A shares it held in Biomatrix Medical Canada Inc. ("BMC") into 38,462 shares of Biomatrix, Inc. common stock. As a result, BMC is now a wholly-owned subsidiary of Biomatrix, Inc. No gain or loss was recognized on the conversion of shares. NOTE 10 - IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" which establishes standards for the way that public enterprises report information about operating segments, geographic areas, products and major customers. The Company is required to adopt this standard at December 31, 1998 and is currently evaluating the effect of this standard. 8 9 BIOMATRIX, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Biomatrix, Inc., together with its subsidiaries Biomatrix Medical Canada Inc. ("BMC"), Biomatrix Svenska AB ("Biomatrix Svenska"), Biomatrix (U.K.) Limited ("Biomatrix UK"), Biomatrix Limited ("Biomatrix Hong Kong"), Biomatrix France SARL ("Biomatrix France"), and Biomatrix Switzerland GmbH ("Biomatrix Switzerland") (together, "Biomatrix" or the "Company") develops, manufactures, markets and sells a series of proprietary viscoelastic products made of biological polymers called hylans for use in therapeutic medical applications and skin care. Hylans are chemically modified forms of the naturally occurring hyaluronan (also known as hyaluronic acid or sodium hyaluronate). Hylans are the second generation of viscoelastics used in medicine, and are characterized by significantly enhanced physical (rheological) properties (elasticity, viscosity and pseudoplasticity) as compared to naturally occurring hyaluronan, from which the first generation viscoelastics are made. The discovery of hylans has allowed the Company to develop a range of patented products with superior viscoelastic properties in the forms of fluids, gels and solids. The Company's business is subject to significant risks. Certain statements contained in this Form 10-Q are forward-looking within the meaning of Section 27A of the Securities Act of 1933 and involve risks and uncertainties, including, but not limited to, the regulatory approval process, obtaining and enforcing patents, manufacturing capabilities, product liability, and other risks detailed in the Company's reports filed under the Securities and Exchange Act, including the Company's Form 10-K for the year ended December 31, 1997. As a portion of the Company's future revenues may be based on payments from corporate license and distribution agreements, the Company's total revenues and net income will fluctuate from quarter to quarter. Some of these fluctuations may be significant and, as a result, quarter to quarter comparisons may not be meaningful. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUES. Total revenues for the three months ended June 30, 1998 were $9,675,454, representing an increase of $4,697,872 over the same period of the prior year. Net product sales for the three months ended June 30, 1998 were $9,181,934, representing an increase of $7,340,840 or 399% over the same period of 1997. This increase was primarily due to U.S. sales of Synvisc(R), which received marketing approval from the U.S. FDA in August of 1997, and increased sales of Hylaform(R). The market demand for Synvisc exceeded the Company's ability to supply product during the second quarter. Income from licenses, royalties and research contracts was $493,520 for the three months ended June 30, 1998 and included up-front license fees of $350,000 from Novartis Pharma AG related to the distribution agreement for Synvisc in Central and South America. The decrease in licenses, royalties and research contract revenues is due primarily to an up-front, non-refundable license fee payment of $3,000,000 received from Bayer AG during the second quarter of 1997. 9 10 BIOMATRIX, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (CONTINUED) COSTS AND EXPENSES. Total costs and expenses were $8,229,071 for the three months ended June 30, 1998, representing an increase of $4,316,001 or 110% over the same period of the prior year. Cost of goods sold for the second quarter of 1998 and 1997 were $2,303,469 and $604,091, respectively, which represented 25% and 33% of net product sales, respectively. The decrease in the ratio of cost of goods sold to sales is due primarily to a higher average selling price per unit and greater utilization of capacity at the Company's Canadian manufacturing facility. Research and development expenses were $2,403,495 for the second quarter of 1998, representing an increase of $977,836 or 69% over the second quarter of 1997. The increase in research and development expenses is primarily related to process development costs associated with the Company's new U.S. manufacturing facility. Selling, general and administrative expenses for the second quarter of 1998 were $3,522,107, representing an increase of $1,638,787 or 87%, over the second quarter of 1997. This increase is primarily due to increased staffing needed to support the scope of the Company's growing global activities. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUES. Total revenues for the six months ended June 30, 1998 were $17,173,862, representing an increase of $6,153,480 or 56% over the same period of the prior year. Net product sales for the six months ended June 30, 1998 were $13,746,988, representing an increase of $10,003,938 or 267% over the same period of 1997. This increase was primarily due to U.S. sales of Synvisc, which received marketing approval from the U.S. FDA in August of 1997. The market demand for Synvisc exceeded the Company's ability to supply product during the first six months of 1998. Income from licenses, royalties and research contracts was $3,426,874 for the six months ended June 30, 1998 and included up-front license fees of $3,100,000 from Novartis Pharma AG related to the distribution of Synvisc in Central and South America. The decrease in licenses, royalties and research contract revenues is due primarily to up-front, non-refundable license fee payments of $4,000,000 and $3,000,000 from Wyeth Ayerst and Bayer AG, respectively, which were received during the six months ended June 30, 1997. COSTS AND EXPENSES. Total costs and expenses were $14,813,919 for the six months ended June 30, 1998, representing an increase of $7,229,971 or 95% over the same period of the prior year. Cost of goods sold for the six months ended June 30, 1998 and 1997 were $3,817,964 and $1,477,827, respectively, which represented 28% and 39% of net product sales, respectively. The decrease in the ratio of cost of goods sold to sales is due primarily to a higher average selling price per unit and greater utilization of capacity at the Company's Canadian manufacturing facility. Research and development expenses were $4,555,552 for the first six months of 1998, representing an increase of $1,750,007 or 62% over the comparable period in 1997. The increase in research and development expenses is primarily related to process development costs associated with the Company's new U.S. manufacturing facility. Selling, general and administrative expenses for the first six months of 1998 were $6,440,403, representing an increase of $3,139,827 or 95%, over the first six months of 1997. This increase is primarily due to increased staffing needed to support the scope of the Company's growing global activities. 10 11 BIOMATRIX, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAXES During the three and six months ended June 30, 1998, the Company recorded federal and state tax provisions of $500,000 and $875,000, respectively, for alternative minimum federal and state taxes. The Company has provided a full valuation allowance on its deferred tax assets due to the uncertainty of realization. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $18,919,524 at June 30, 1998. Overall, the Company's cash position increased by $1,532,439 in the six months ended June 30, 1998. The Company's operations over the past several years have been financed primarily from up-front non-refundable license fee payments from corporate partners and from the private placement of equity securities. Since January 1, 1995, the Company has received funding of $36,980,000 from non-refundable license fee payments, $5,720,900 from the private placement of equity securities, and $14,325,000 from the private placement of a convertible debt security. For the six months ended June 30, 1998 the Company had cash outflows from operations of $962,716 which primarily resulted from the timing of collection of trade receivables and license fees offset by the timing of payments made to vendors. During the six months ended June 30, 1998, the Company invested $12,021,865 in property, plant, and equipment, primarily associated with building manufacturing capacity in the United States. The Company continues to lease a 93,000 square foot building in New Jersey in which the U.S. manufacturing operations will reside. The Company has an option to acquire this building at a price of approximately $4,600,000. Should the Company not exercise its option by April 1999, the landlord has the right to require the Company to purchase this building for approximately the same price. During the remainder of 1998, the Company expects to invest approximately $6,200,000 to complete the initial phase of the build-out of manufacturing capacity in the U.S. In addition, the Company intends to build laboratories as part of the same project at an estimated cost of $7,000,000. The Company expects to complete the laboratories by early 1999. The Company plans to seek mortgage and equipment financing which, if obtained, could fund a portion of these capital costs. During the remainder of 1998, the Company also expects to utilize cash for the start-up of its medical manufacturing operations in the U.S., including, but not limited to, funds for payroll and benefits, training and development, materials and supplies, and working capital requirements. The Company also expects to incur higher expenses in 1998 associated with developing its internal infrastructure to support the administration of its various distribution agreements and expanded global operations. The Company believes that its capital needs, start-up costs, and higher operating expenses will be supported by its operations, existing cash position, up-front license fee payments from the potential completion of additional distribution agreements, milestone payments from existing corporate partners and existing and potential financing arrangements. 11 12 BIOMATRIX, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) In May 1998, the Company issued $15,000,000 of subordinated convertible debt to a third party. The debt has a five-year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $40 per share after one year. In addition, the Company can call the debt at par after three years or after two years if certain conditions are satisfied. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" which establishes standards for the way that public enterprises report information about operating segments, geographic areas, products and major customers. The Company is required to adopt this standard at December 31, 1998 and is currently evaluating the impact of this standard. 12 13 BIOMATRIX, INC. AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 29, 1998, at the Company's Annual Meeting of Shareholders, the Company's shareholders met to consider and vote upon the following proposal: (1) A proposal to elect two Class 1 directors to hold office for a three-year term and until their respective successors have been duly qualified and elected. Results with respect to the voting on each of the above proposals were as follows:
Proposal 1: Endre A. Balazs For - 9,310,994 Withheld Authority - 15,664 --- --------- ------------------ ------ Kurt Mark For - 9,310,994 Withheld Authority - 15,664 --- --------- ------------------ ------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS 27.1 Financial Data Schedule B. REPORTS ON FORM 8-K None 13 14 BIOMATRIX, INC. AND SUBSIDIARIES 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. DATE: August 14, 1998 BIOMATRIX, INC. By: /s/Endre A. Balazs ---------------------------------- Endre A. Balazs Chief Executive Officer and Chief Scientific Officer By: /s/Maxine Seifert ---------------------------------- Maxine Seifert Vice President, Finance and Chief Financial Officer 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000747952 BIOMATRIX, INC. 1 US DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 18,919,524 0 6,681,456 25,500 3,803,642 31,026,287 33,899,791 (4,697,184) 63,181,333 6,240,698 20,677,832 0 0 69,800,806 (20,706,833) 63,181,333 13,746,988 17,173,862 3,817,964 14,813,919 0 0 196,496 2,810,402 875,000 1,935,402 0 0 0 1,935,402 0.17 0.17
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