<PAGE>
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 SEPTEMBER 30, 1998
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 NO. 1-14416
BIGMAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1445779
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9711 SPORTSMAN CLUB ROAD 43031
JOHNSTOWN, OHIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (740) 966-5800
Indicate by checkmark 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 |_|
As of November 9, 1998, 8,027,308 shares of common stock of the registrant were
outstanding.
1
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I FINANCIAL INFORMATION:
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 (Unaudited) 3
Consolidated Condensed Statements of Operations for the quarters
and nine month periods ended September 30, 1998 and 1997
(Unaudited) 4
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Comprehensive Income (Loss) for the
quarters and nine month periods ended September 30, 1998 and
1997 (Unaudited) 6
Notes to the Consolidated Condensed Financial Statements
(Unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II OTHER INFORMATION:
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 205,547 $ 643,232
Accounts receivable, net of allowance of $0 at
September 30, 1998 and December 31, 1997 935,091 847,899
Inventories (Note 2) 1,260,885 890,249
Prepaid expenses and other current assets 221,470 432,234
--------------- ----------------
Total current assets 2,622,993 2,813,614
Property, plant and equipment, net 18,470,551 17,164,158
Intangible and other assets, net 467,921 539,318
--------------- ----------------
Total $ 21,561,465 $ 20,517,090
--------------- ----------------
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,269,016 1,766,992
Notes payable 6,793,554 2,318,644
Current portion of long-term debt 623,505 581,674
Due to related parties 67,430 -
Accrued expenses and other current liabilities 932,665 630,713
--------------- ----------------
Total current liabilities 9,686,170 5,298,023
Long-term debt 10,643,776 10,090,467
--------------- ----------------
Total liabilities 20,329,946 15,388,490
--------------- ----------------
Stockholders' equity:
Preferred stock ($.001 par value; 5,000,000 shares authorized;
none issued)
Commonstock ($.001 par value; 20,000,000 shares authorized and 4,335,000
shares issued and outstanding at September 30, 1998 and 15,000,000
shares authorized and 4,185,000 shares
issued and outstanding at December 31, 1997) 4,335 4,185
Additional paid-in capital 16,321,016 15,063,166
Retained earnings (deficit) (14,190,999) (9,012,630)
Accumulated other comprehensive income:
Foreign currency translation adjustments (902,833) (926,121)
--------------- ----------------
Total stockholders' equity 1,231,519 5,128,600
--------------- ----------------
Total $ 21,561,465 $ 20,517,090
--------------- ----------------
--------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THIRD QUARTER ENDING SEPTEMBER 30
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------ --------------------------------
--------------- -------------- ------------------ -------------
1998 1997 1998 1997
--------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 1,965,916 $ 1,452,976 $ 4,852,744 $ 4,669,748
Cost of goods sold 1,440,335 913,810 3,544,614 3,276,417
----------- ----------- ----------- -----------
Gross margin 525,581 539,166 1,308,130 1,393,331
----------- ----------- ----------- -----------
Operating expenses:
Research and development 384,319 634,347 2,125,840 1,233,960
Selling, general and administrative 1,281,574 3,730,434 3,233,926 5,559,039
----------- ----------- ----------- -----------
Total operating expenses 1,665,893 4,364,781 5,359,766 6,792,999
----------- ----------- ----------- -----------
Operating income (loss) (1,140,312) (3,825,615) (4,051,636) (5,399,668)
Other income (expense) 59,859 136,607 127,941 350,097
Interest income (expense) (311,867) (139,968) (812,258) (313,868)
Issuance of preferred stock warrants for loan
guarantee (Note 3) - - (958,000) -
Gain (loss) on foreign currency transactions 811,312 - 515,584 -
----------- ----------- ----------- -----------
Income (loss) before income taxes (581,008) (3,828,976) (5,178,369) (5,363,439)
Income taxes (benefit): - 2,956 - 5,288
----------- ----------- ----------- -----------
Net income (loss) $ (581,008) $(3,831,932) $(5,178,369) $(5,368,727)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ (0.14) $ (0.94) $ (1.23) $ (1.34)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding 4,240,435 4,056,739 4,203,681 4,009,176
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
---------------------------------------
---------------- -------------------
Cash flows from operating activities: 1998 1997
---------------- -------------------
<S> <C> <C>
Net loss $ (5,178,369) $ (5,368,727)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Issue stock warrants 958,000 800,000
Depreciation and amortization 1,238,942 617,681
Unrealized foreign exchange gains (516,258) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (34,041) 33,081
(Increase) decrease in inventories (296,073) (191,143)
(Increase) decrease in prepaid expenses and other
current assets 217,808 143,664
Increase (decrease) in accounts payable (557,119) (416,032)
Increase (decrease) in due to related parties 67,176 (903,909)
Increase (decrease) in accrued expenses and other
current liabilities 260,742 (773,905)
---------------- -------------------
Net cash provided by (used in) operating activities (3,839,192) (6,059,290)
---------------- -------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,457,963) (1,663,467)
Increase in other assets - (1,646)
---------------- -------------------
Net cash (used in) investing activities (1,457,963) (1,665,113)
---------------- -------------------
Cash flows from financing activities:
Short-term borrowings 4,400,689 166,799
Net proceeds from issuance of equity securities 300,000 930,340
Long-term borrowings 178,204 4,000,000
Deferred offering costs - (280,000)
---------------- -------------------
Net cash provided by financing activities 4,878,893 4,817,139
---------------- -------------------
---------------- -------------------
Effect of exchange rates on cash (19,423) 201,467
---------------- -------------------
Net increase (decrease) in cash and cash equivalents (437,685) (2,705,797)
Cash and cash equivalents, beginning of period 643,232 4,362,938
---------------- -------------------
Cash and cash equivalents, end of period $ 205,547 $ 1,657,141
---------------- -------------------
---------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 834,143 $ 75,436
Income taxes $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THIRD QUARTER ENDING SEPTEMBER 30
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------------ ---------------------------------------
--------------- ------------------- ------------------- -------------------
1998 1997 1998 1997
--------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (581,008) $(3,831,932) $(5,178,369) $(5,368,727)
Other comprehensive income, net of tax:
Foreign currency translation
adjustments, net of income
taxes of $0 in 1998 and 1997 119,976 19,328 23,288 (361,714)
--------------- ------------------- ------------------- -------------------
Comprehensive income (loss) $ (461,032) $(3,812,604) $(5,155,081) $(5,730,441)
--------------- ------------------- ------------------- -------------------
--------------- ------------------- ------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Bigmar, Inc. is a Delaware Corporation that owns 100% of the capital stock of
two Swiss Corporations, Bioren, SA and Bigmar Pharmaceuticals, SA, and 100%
of the capital stock of a Delaware corporation, Bigmar Therapeutics, Inc.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments necessary to present fairly the Company's financial
position at September 30, 1998 and 1997, and the results of operations and
the cash flows and the comprehensive income for all periods presented.
Certain amounts in the accompanying financial statements have been restated
to conform to the September 30, 1998 presentation. The results of the interim
periods are not necessarily indicative of the results to be obtained for the
entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1997) and additional financial information, see Bigmar Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1997. The 10-K
should be read in conjunction with these financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In June 1997, the Company completed
construction on a pharmaceutical manufacturing plant in Barbengo,
Switzerland. The Company has obtained a general approval to manufacture and
market pharmaceutical products, with the exception of antibiotics, from the
Intercantonal Office for the Control of Medications ("IKS") in Switzerland
and is still in the process of validating the plant's equipment and processes
for approval by the United States Food and Drug Administration ("FDA"). These
activities have consumed a substantial amount of the Company's resources,
including proceeds from its initial public offering, proceeds from an
offshore placement of equity securities and issuance of convertible notes in
August 1997, proceeds from its line of credit, and from its recent sales of
common stock -see note 4. In addition, sales of the Company's oncology
products are dependent upon the successful outcome of these compliance
activities, which are expected to continue into at least the first quarter of
1999. Based upon the foregoing, the Company does not anticipate the Bigmar
manufacturing facility in Barbengo, Switzerland will produce sales in
sufficient volume to generate positive cash flow during 1998. However, the
Company anticipates that the terms of the existing $6.0 million line of
credit, together with cash flow from operations, will be sufficient to fund
its operations through the first quarter of 1999. As a result, the Company
anticipates that it will require additional financing in order to complete
the validation process and to continue to fund its operations. Management is
discussing additional financing with a number of third parties, however,
there is no assurance that such financing will be available on terms
acceptable to the Company, if at all. In addition, there are no assurances
that the Company will be able to manufacture its
7
<PAGE>
proposed products or that the Company's targeted customers will accept such
products. These factors raise substantial doubt about the Company's ability
to continue as a going concern. No adjustments have been made to reflect the
recoverability or classification of recorded asset amounts or the
classification of liabilities should the Company be unable to continue as a
going concern.
(2) INVENTORIES
The components of inventory at September 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------- ----------------------
<S> <C> <C>
Raw Materials 616,548 $572,276
Finished Goods 644,337 317,973
------------- ------------
Total $1,260,885 $890,249
------------- ------------
</TABLE>
(3) PREFERRED STOCK WARRANTS
On May 28, 1998, the Company, in consideration of a guarantee for a $6.0
million line of credit from a commercial institution, delivered warrants to
Jericho II L.L.C. ("Jericho") to purchase 1,000,000 shares of convertible
preferred stock ("the Preferred Stock") at a price equal to $2.5625 and
having a term of 10 years ("the Warrants"). The Preferred Stock is
convertible to Common Stock on a one-to-one basis, with such conversion rate
to adjust to reflect dilutive issuances of equity securities by the Company
and also to adjust for stock splits, dividends, combinations and similar
events. The Preferred Stock shall be entitled to five votes per share and
shall vote together with the Common Stock in addition to having certain
special approval rights. The Preferred Stock has a liquidation preference
equal to the purchase price per share. The Warrants include a net exercise
clause and the shares issuable on exercise shall be entitled to piggyback
registration rights, subject to standard underwriter's cutback. John G.
Tramontana, Chairman of the Board, President and Chief Executive Officer of
the Company, has a 50% ownership interest in Jericho.
The line of credit is in the form of a demand note payable. Accordingly, the
fair value of the warrants of $958,000, determined using the Black-Scholes
model, has been recognized in the accompanying consolidated condensed
statement of operations for the nine months ended September 30, 1998.
(4) COMMON STOCK ISSUED
On August 28, 1998, the Company, issued 150,000 shares of common stock to Banca
del Gottardo, a Swiss bank, for $2.00 per share via a private placement. The
Company filed
8
<PAGE>
a Form S-3 with the United States Securities and Exchange Commission ("SEC")
which was declared effective on November 4, 1998, pursuant to its request to
the resale of said stock. The proceeds of $300,000 will be used for working
capital and other general corporate purposes.
On October 22, 1998, the Company issued 3,692,308 shares of common stock to
Jericho for $1.625 per share via a Stock Purchase Agreement dated October 20,
1998. Proceeds from the sale of shares totaled $6,000,000, and will be used to
repay debt and for working capital.
Jericho owns beneficially 5,192,308 shares of Bigmar Common Stock. These
shares include (i) a Common Stock Warrant for the purchase of 500,000 shares
at a price of $5.00 per share, (ii) a Preferred Stock Warrant for the
purchase of 1,000,000 shares at a price of $2.5625 per share, and (iii)
3,692,308 shares of Common Stock. In the aggregate, assuming exercise of the
Warrants, Jericho may thus be deemed the beneficial owner of approximately
54.5% of the aggregate of (i) the 4,335,000 shares of Bigmar Common Stock
outstanding on September 30, 1998 plus (ii) the 1,500,000 shares issuable on
exercise of the Warrants, plus (iii) the 3,692,308 shares acquired pursuant
to the Stock Purchase Agreement dated October 20, 1998.
(5) RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
The Company has adopted Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income". FASB Concepts Statement No. 6 defines
comprehensive income as "the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners."
Comprehensive income is comprised of net income plus other comprehensive
income. Other comprehensive income includes items previously recorded
directly in equity under FASB Statement No. 52, "Foreign Currency
Translation", FASB Statement No. 80, "Accounting for Future Contracts", FASB
Statement No. 87, "Employers' Accounting for Pensions", and FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
The Consolidated Balance Sheet has been restated to conform to the
requirements of this Statement by replacing "Cumulative translation
adjustment" with "Accumulated other comprehensive income" in the equity
section. In addition, "Consolidated Statements of Comprehensive Income
(Loss)" have been added to this quarterly report for the quarters and nine
months ended September 30, 1998 and 1997.
The Company has adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
issued in September 1997. Since this is the initial year of application, the
Company has elected not to provide the interim period disclosures, as
permitted by the Statement.
9
<PAGE>
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits". This Statement, which is effective for fiscal years beginning
after December 15, 1997, amends the disclosure requirements of Statements 87,
88, and 106. Adoption of this standard is not expected to have a material
impact on the Company's financial statements or results of operations.
On September 16, 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is effective for fiscal
years beginning after September 15, 1999. The Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this Statement is not expected
to have a material impact on the Company's financial statements or results of
operations.
10
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Bigmar, Inc. and subsidiaries, (the "Company") is engaged in manufacturing
and marketing various pharmaceutical products in Europe. Its strategy is to
supply world markets with a full line of high quality, affordably priced,
generic pharmaceutical products, focusing on oncology products. The Company
intends to manufacture, in its state of the art facilities in Switzerland,
off-patent generic oncology drugs and additional oncology drugs as their
patents expire. It will then market these products through pharmaceutical
company partners in Europe and the United States. Bigmar currently has
distribution rights to more than 20 generic oncology products.
Bigmar was incorporated in Delaware in September 1995 and has three wholly
owned subsidiaries: Bigmar Pharmaceuticals, SA, Bioren, SA and Bigmar
Therapeutics, Inc. Bigmar Pharmaceuticals and Bioren are both Swiss
corporations and Bigmar Therapeutics is a Delaware corporation.
Certain statements under this caption constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding future cash requirements.
Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied in such forward-looking statements. Such factors and
risks include, but are not limited to, delays in product development,
problems with clinical testing, failure to receive regulatory approvals, lack
of proprietary rights, or changes in business strategy, as well as other
risks described from time to time in the Company's filings with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Third quarter 1998 net sales amounted to $2.0 million, a 35% increase from
third quarter 1997. Sales of IV Solutions and related products increased
approximately $190,000 over the prior year, while sales of Oncology Products
decreased by approximately $52,000. Net sales were also negatively impacted
by unfavorable foreign currency impacts of approximately $2,000.
Net sales for the nine months ended September 30, 1998 amounted to $4.9
million, a 4% increase from the same period in 1997. Sales of IV Solutions
and related products increased approximately $374,000 versus the previous
year and sales of Raw Materials and Oncology Products decreased by
approximately $200,000 and $166,000, respectively.
11
<PAGE>
Gross margin amounted to $.5 million or 27% for the third quarter of 1998
versus $.5 million or 37% for the same period in 1997. Gross margin for the
nine months ended September 30, 1998 was $1.3 million or 27% of net sales,
compared to $1.4 million or 30% for the same period last year. The decline
relates primarily to sales of lyophilized oncology products that have higher
production costs.
Operating expenses decreased approximately $2.7 million from third quarter
1997 to third quarter 1998. Research and development expenses decreased by
approximately $.3 million, due to lower personnel costs and favorable foreign
currency impacts. Selling, general and administrative expenses decreased by
approximately $2.4 million, mainly due to a one time charge of $2.1 million
in third quarter 1997 for re-assignment of U.S. marketing rights.
Nine month operating expenses decreased $1.4 million from 1997 to 1998.
Research and development costs increased by $.9 million and selling, general
and administrative costs decreased by approximately $2.3 million. The R&D
increase relates to increased activities with respect to the Company's
efforts to obtain FDA approval of its manufacturing facility and its efforts
to develop new drug products. The SG&A decrease is due to a one time charge
of $2.1 million in 1997 for re-assignment of U.S. marketing rights.
Other income/(expense) for the nine months ended September 30, 1998 decreased
by approximately $.2 million from the 1997 amount, due primarily to sales of
machinery and equipment in the first nine months of 1997.
Interest expense increased $.2 million and $.5 million from the third quarter
and nine months, respectively, of 1997 to 1998, due to interest on
convertible notes and interest on a line of credit and partly due to the fact
that a portion of interest expense was capitalized in 1997, but not in 1998.
Also during the second quarter of 1998, the Company recorded expense of
$958,000 in conjunction with the issuance of preferred stock warrants to
Jericho II L.L.C. ("Jericho") in exchange for Jericho's guarantee of a $6
million credit line with a commercial institution. Jericho is a private
investment company, 50% owned by the Company's principal shareholder and CEO,
John Tramontana.
Foreign exchange gains amounted to approximately $.8 million in the third
quarter of this year compared to zero in the prior year. Foreign exchange
gains for the nine months ended September 30, 1998 were approximately $.5
million compared to zero for the same period during 1997. The income
represents gains due to exchange rate fluctuations on certain intercompany
accounts receivable denominated in Swiss francs. The full year 1997 exchange
rate fluctuations on these accounts receivable were accounted for by the
Company in the fourth quarter, as the impact on the results of operations for
the individual quarters of 1997 was not material.
As a result of all of the foregoing, the Company's net loss for the third
quarter 1998 amounted to approximately $.6 million or $0.14 per share, compared
to $3.8 million or
12
<PAGE>
$0.94 per share for the third quarter 1997. Net loss for the nine months
ended September 30, 1998 was $5.2 million or $1.23 per share versus $5.4
million or $1.34 per share during the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $205,547 and $643,232, respectively. The Company's working
capital (deficit) amounted to ($7.1) million and ($2.5) million at September
30, 1998 and December 31, 1997, respectively. The Company has incurred and
will continue to incur substantial expenditures for research and development
activities related to bringing its products to commercial market. The Company
intends to devote significant additional funds to product development,
formulation, clinical testing, manufacturing validation, product
registration, and other activities required for regulatory review of generic
oncological products. The amount required to complete such activities depends
upon the outcome of regulatory reviews. The regulatory bodies may require
more testing than is currently planned by the Company. There can be no
assurance that the FDA or any foreign government agency will approve the
Company's generic oncological products for sale or that these products will
achieve market success.
Property, plant and equipment totaled approximately $18.5 million at
September 30, 1998 and $17.2 million at December 31, 1997. Additions of
approximately $1.5 million and foreign currency translation effects of $1.1
million were offset by depreciation ($1.3 million).
As of September 30, 1998, the Company had various notes, bonds, mortgages and
other borrowings totaling approximately $18.1 million including $7.5 million
that is short term in nature. These monies were used to partially fund the
acquisition of Bioren, to acquire, construct, and equip the manufacturing
facility and to fund ongoing research and development and product
registration activities.
On May 28, 1998, the Company, in exchange for the issuance of warrants to
purchase convertible preferred stock, received a guarantee from Jericho,
which allowed it to increase its existing $3.5 million line of credit with
Citizens Bank of Saginaw, Michigan to $6.0 million. The line of credit is
being used for ongoing research and development and general working capital
purposes.
On August 28, 1998, the Company, in a private placement, sold 150,000 shares
of common stock to Banca del Gottardo, a Swiss bank, for $2.00 per share. The
proceeds of $300,000 are being used for working capital and general corporate
purposes.
On October 22, 1998, the Company sold 3,692,308 shares of common stock to
Jericho for $1.625 per share in a private placement. Proceeds of $6.0 million
were used to pay off the credit line (approximately $5.7 million) and for
working capital (approximately $.3 million).
13
<PAGE>
Jericho owns beneficially 5,192,308 shares of Bigmar Common Stock. These
shares include (i) a Common Stock Warrant for the purchase of 500,000 shares
at a price of $5.00 per share, (ii) a Preferred Stock Warrant for the
purchase of 1,000,000 shares at a price of $2.5625 per share, and (iii)
3,692,308 shares of Common Stock. In the aggregate, assuming exercise of the
Warrants, Jericho may thus be deemed the beneficial owner of approximately
54.5% of the aggregate of (i) the 4,335,000 shares of Bigmar Common Stock
outstanding on September 30, 1998 plus (ii) the 1,500,000 shares issuable on
exercise of the Warrants, plus (iii) the 3,692,308 shares acquired pursuant
to the Stock Purchase Agreement dated October 20, 1998.
During the third quarter of 1998, the Company received a notice from the
Nasdaq Stock Market, Inc. that the Company no longer met the requirements for
continued listing. In accordance with the National Association of
Securities Dealers Automated Quotation ("NASDAQ") SmallCap Market ("NASDAQ
SmallCap") rules, securities listed on NASDAQ SmallCap, in addition to other
requirements, must maintain a minimum net asset base of $2.0 million to be
eligible for continued listing. On October 14, 1998, the Company was
informed by NASDAQ that, based on the Company's current operating losses and
not withstanding proceeds from proposed equity financing, the Company's
securities would be delisted. The Company intends to contest the delisting of
its securities and has filed a request with the NASDAQ Hearings Department
for a hearing. The Company's request for a hearing stays the delisting until
a determination by the NASDAQ hearing panel. A date for the hearing has not
been set as of the date of this report. While there can be no assurance
regarding the outcome of such hearing, the Company believes the $6.0 million
in proceeds received from the sale of common stock to Jericho on October 22,
1998, which raised the net assets of the Company above the $2.0 million
minimum requirement set by NASDAQ, will be sufficient to satisfy NASDAQ's
requirements for continued listing.
At this time the Company does not anticipate the Bigmar manufacturing
facility in Barbengo, Switzerland will produce sales in sufficient volume to
generate positive cash flow during 1998. However, the Company anticipates
that the terms of the existing $6.0 million line of credit, together with
cash flow from operations, will be sufficient to fund its operations through
the first quarter of 1999. As a result, the Company will be required to
supplement its cash position through additional financing (debt or equity) or
by entering into development, marketing, or other collaborative arrangements.
The Company anticipates supplementing its cash position during the fourth and
first quarters of 1998 and 1999, respectively with additional financing
through third party arrangements, although there can be no assurance that the
Company will be able to obtain such additional financing or that such
financing, if available, will be on acceptable terms.
The Swiss Federal Code of Obligation provides that at least 5% of a Swiss
company's net income each year must be appropriated to a legal reserve until
such time as this reserve is equal to 20% of the company's paid-in share
capital. In addition, 10% of any distribution made by a company in excess of
a 5% dividend must also be appropriated to the legal reserve. The reserve of
up to 5% of share capital is not available for distribution to stockholders.
Changes in exchange rates between currencies may negatively impact the
Company's results of operations, specifically, net sales and gross profit
margins from international operations. In addition, the dollar-value
equivalent of anticipated cash flows could also be adversely affected. When
the Company determines that this risk has become significant, the Company may
attempt to manage that risk by using hedging techniques.
YEAR 2000 ISSUE
Many computer systems currently record years in a two-digit format. Such
systems, if not modified, will be unable to recognize and properly process
information with dates beyond the year 1999. The potential problems arising
out of this inability are commonly referred to as the "Year 2000 Issue" or
"Y2K" and will affect virtually all companies, government agencies and other
organizations to some degree.
14
<PAGE>
During 1997, the Company performed an assessment of its computer systems to
determine whether or not they were in compliance with Year 2000 requirements.
The Swiss operations' computer systems were found to be in compliance with
such requirements. The U.S. operations computer applications include an
accounting package and a document management system. Although these systems
do not yet comply with Y2K requirements, it has been determined to the best
of management's knowledge and belief that the systems will be upgraded by
second quarter 1999, and the costs to bring them into compliance will be less
than $20,000.
The Company is in the process of contacting vendors and others on whom it
relies to assure that their systems will be Year 2000 compliant. The Company
has contacted its critical raw material and manufacturing related suppliers
and has received assurances from these vendors that they will be Year 2000
compliant. Other vendors who provide primarily administrative services to the
Company will be contacted before the end of calendar year 1998 to determine
if they are Year 2000 compliant. However, there can be no assurance that the
systems of other companies on which the Company relies will be timely
converted or that any such failure to convert by another company would not
have an adverse effect on the Company's systems.
The Company does not currently have a contingency plan in place to address a
Year 2000 disruption, but intends to create a plan outlining how to address
the most reasonably likely worst case scenarios by the end of 1st quarter
1999. Furthermore, no assurance can be given that any or all of the Company's
systems are or will be Year 2000 compliant, or that the ultimate costs
required to address the Year 2000 issue or the impact of any failure to
achieve substantial Year 2000 compliance will not have a material adverse
effect on the Company's financial condition.
15
<PAGE>
BIGMAR, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 2 (c) CHANGES IN SECURITIES - RECENT SALES OF UNREGISTERED SECURITIES
On August 28, 1998, in a private placement transaction exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, the Company issued
and sold to Banca del Gottardo, a banking organization organized under the laws
of Switzerland, 150,000 shares of common stock at a price of $2.00 per share
(aggregate proceeds of $300,000). In compliance with its obligations under the
purchase agreement, the Company subsequently registered such shares for resale
pursuant to a registration statement on Form S-3, which was declared effective
on November 4, 1998.
On October 20, 1998, pursuant to a private placement transaction under Rule 506
of Regulation D, the Company issued and sold to Jericho II, LLC, a Michigan
limited liability company, 3,692,308 shares of common stock at a price of $1.625
per share (aggregate proceeds of $6,000,000).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter, 1998.
16
<PAGE>
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.
November 13, 1998
BIGMAR, INC.
-------------
REGISTRANT
By: /s/ MICHAEL K. MEDORS
---------------------------
Michael K. Medors
TREASURER
(PRINCIPAL ACCOUNTING OFFICER)
17
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