<PAGE>
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 September 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 September 30, 1998
----- ------------------
Common stock, $ 0.0001 par value 11,367,127
<PAGE>
BIOMATRIX, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 (Unaudited)....................... 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 (Unaudited).................. 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 6
Exhibits and Reports on Form 8-K........................................... 13
Signatures................................................................. 14
</TABLE>
2
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 17,769,396 $ 17,387,085
Accounts receivable, less allowance for doubtful accounts
of $25,500 in 1998 and 1997 ............................... 8,644,747 3,517,112
Inventory, at lower of cost or market ....................... 4,490,777 3,111,351
Prepaid expenses and other current assets ................... 1,998,747 1,903,528
------------ ------------
Total current assets ................................. 32,903,667 25,919,076
Property, plant and equipment, net ............................. 32,217,785 17,780,526
Other assets ................................................... 3,519,392 525,045
------------ ------------
Total assets ......................................... $ 68,640,844 $ 44,224,647
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,584,288 $ 784,894
Accrued expenses ............................................ 5,190,753 3,053,770
Current portion of notes payable ............................ 150,319 162,210
Current portion of capital lease obligations ................ 26,837 16,062
------------ ------------
Total current liabilities ........................... 6,952,197 4,016,936
Notes payable less current maturities .......................... 15,728,550 935,478
Capital lease obligations less current maturities .............. 4,642,481 4,663,715
------------ ------------
Total liabilities ................................... 27,323,228 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;
11,413,274 and 11,013,035 issued and 11,367,127 and
10,966,888 outstanding in 1998 and 1997, respectively ..... 1,141 1,101
Additional paid-in capital .................................. 69,819,015 59,813,585
Notes receivable - related parties .......................... (10,203,663) (2,868,538)
Accumulated deficit ......................................... (15,143,210) (19,826,634)
Accumulated other comprehensive loss ........................ (2,214,756) (1,570,085)
Treasury stock, 46,147 shares of common stock at cost ....... (940,911) (940,911)
------------ ------------
Total shareholders' equity .......................... 41,317,616 34,608,518
------------ ------------
Total liabilities and shareholders' equity ........... $ 68,640,844 $ 44,224,647
============ ============
</TABLE>
The accompanying notes are an integral
part of the condensed consolidated financial statements.
3
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales .......................... $ 11,481,193 $ 1,754,041 $ 25,228,181 $ 5,504,366
Income from licenses, royalties
and research contracts ................... 151,499 12,113,256 3,578,373 19,390,588
------------ ------------ ------------ ------------
Total revenues .................... 11,632,692 13,867,297 28,806,554 24,894,954
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales .............................. 2,918,343 558,126 6,736,307 1,987,949
Research and development expenses .......... 2,565,488 1,531,796 7,121,040 4,337,901
Selling, general and administrative expenses 4,068,177 1,968,748 10,508,580 5,269,967
------------ ------------ ------------ ------------
Total costs and expenses .......... 9,552,008 4,058,670 24,365,927 11,595,817
------------ ------------ ------------ ------------
Income from operations ..................... 2,080,684 9,808,627 4,440,627 13,299,137
Interest expense ........................... (315,818) (17,893) (512,314) (73,254)
Interest and miscellaneous income .......... 578,156 257,604 1,225,111 684,206
------------ ------------ ------------ ------------
Income before taxes ........................ 2,343,022 10,048,338 5,153,424 13,910,089
(Benefit from) provision for income taxes .. (405,000) 260,000 470,000 321,000
------------ ------------ ------------ ------------
Net income ................................. $ 2,748,022 $ 9,788,338 $ 4,683,424 $ 13,589,089
============ ============ ============ ============
Net income per share:
Basic ................................. $ 0.24 $ 0.89 $ 0.42 $ 1.26
============ ============ ============ ============
Weighted average shares outstanding ... 11,364,343 10,949,389 11,175,428 10,820,664
============ ============ ============ ============
Diluted ............................... $ 0.23 $ 0.85 $ 0.40 $ 1.21
============ ============ ============ ============
Weighted average shares outstanding ... 12,094,300 11,461,406 11,784,169 11,212,686
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of the condensed consolidated financial statements.
4
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 4,683,424 $ 13,589,089
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization ............................ 922,847 480,024
Stock option compensation ................................ 31,850 56,388
Change in assets and liabilities:
Accounts receivable ................................... (5,282,956) (76,155)
Inventory ............................................. (1,569,435) (2,111,378)
Prepaid expenses and other current assets ............. (155,782) (921,135)
Other assets .......................................... (2,369,975) (150,155)
Accounts payable and accrued expenses ................. 2,887,338 1,465,037
------------ ------------
Net cash (used for) provided by operating activities (852,689) 12,331,715
------------ ------------
Cash flows from investing activities:
Maturity of held-to-maturity securities ..................... -- 9,202,983
Capital expenditures ........................................ (15,601,630) (4,795,278)
------------ ------------
Net cash (used for) provided by investing activities (15,601,630) 4,407,705
------------ ------------
Cash flows from financing activities:
Payments of notes payable and capital lease obligations ..... (163,259) (115,483)
Proceeds from issuance of convertible debt .................. 14,325,000 --
Sale of common stock to related parties ..................... -- 1,890,000
Repayment of note receivable by an officer .................. 2,450,000 --
Purchase of treasury stock .................................. -- (928,951)
Stock options exercised ..................................... 295,620 705,850
------------ ------------
Net cash provided by financing activities .......... 16,907,361 1,551,416
------------ ------------
Effect of exchange rate changes on cash ................ (70,731) (29,228)
------------ ------------
Net increase in cash and cash equivalents ............................ 382,311 18,261,608
Cash and cash equivalents at beginning of period ..................... 17,387,085 3,034,764
------------ ------------
Cash and cash equivalents at end of period ........................... $ 17,769,396 $ 21,296,372
============ ============
Non-cash financing activities:
Sale of common stock financed with notes receivable (Note 3)..... $ 9,785,125 $ 398,250
</TABLE>
The accompanying notes are an integral
part of the condensed consolidated financial statements.
5
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The condensed consolidated financial statements at September 30, 1998
and for the three and nine months ended September 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 September 30, 1998 and December 31, 1997 consisted of:
September 30, December 31,
1998 1997
------------- ------------
Raw Materials........................ $ 1,984,064 $ 912,353
Work-in-Process...................... 1,925,926 1,568,682
Finished Goods....................... 580,787 630,316
----------- ------------
$ 4,490,777 $ 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 collateralized by the shares
of common stock issued and are payable with simple interest upon maturity. The
notes mature in May 2007, January 2008, March 2008, April 2008, and June 2008 in
the amounts of $418,538, $888,750, $560,000, $1,636,375, and $6,700,000,
respectively, plus accrued interest. All notes outstanding are in exchange for
common stock issued pursuant to the Company's 1997 Restricted Stock Plan. In
August 1998, an 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. Prior periods have been restated to reflect the new
standard. The subordinated debt outstanding at September 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. A reconciliation of weighted-average shares outstanding from
basic to diluted for the three and nine months ended September 30, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average shares outstanding - Basic..... 11,364,343 10,949,389 11,175,428 10,820,664
Dilutive effect of stock options................ 729,957 512,017 608,741 392,022
---------- ---------- ---------- ----------
Weighted-average shares outstanding - Diluted... 12,094,300 11,461,406 11,784,169 11,212,686
========== ========== ========== ==========
</TABLE>
6
<PAGE>
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 nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income...................................... $ 2,748,022 $ 9,788,338 $ 4,683,424 $ 13,589,089
Change in cumulative translation adjustment..... ( 340,066) 152,146 (644,671) 7,015
----------- ----------- ----------- ------------
Comprehensive income............................ $ 2,407,956 $ 9,940,484 $ 4,038,753 $ 13,596,104
=========== =========== =========== ============
</TABLE>
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 September 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
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 7 - Start-Up Costs
In April 1998, the American Institute of Certified Public Accountants
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 nine months 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-line
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 the Company's subsidiary 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
<PAGE>
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"), Biomatrix Switzerland GmbH
("Biomatrix Switzerland"), and Biomatrix Germany GmbH ("Biomatrix Germany")
(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, future
operating profits, Year 2000 matters, 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 September 30, 1998 and 1997
Revenues. Total revenues for the three months ended September 30,
1998 were $11,632,692, representing a decrease of $2,234,605 over the same
period of the prior year. Net product sales for the three months ended September
30, 1998 were $11,481,193, representing an increase of $9,727,152 or 555% 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. Food and Drug
Administration in August 1997. The market demand for Synvisc exceeded the
Company's ability to supply product during the third quarter. Income from
licenses, royalties and research contracts was $151,499 for the three months
ended September 30, 1998. The decrease in licenses, royalties and research
contract revenues is due primarily to an up-front, non-refundable license fee
payment of $12,000,000 received from Wyeth-Ayerst Laboratories during the third
quarter of 1997.
9
<PAGE>
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 September 30, 1998 and 1997
(Continued)
Costs and Expenses. Total costs and expenses were $9,552,008 for the
three months ended September 30, 1998, representing an increase of $5,493,338 or
135% over the same period of the prior year. Cost of goods sold for the third
quarter of 1998 and 1997 were $2,918,343 and $558,126, respectively, which
represented 25% and 32% 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
$2,565,488 for the third quarter of 1998, representing an increase of $1,033,692
or 67% over the third 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 coupled with costs related to
pharmacoeconomic trials for one of the Company's products. Selling, general and
administrative expenses for the third quarter of 1998 were $4,068,177,
representing an increase of $2,099,429 or 107%, over the third quarter of 1997.
This increase is due to increased staffing needed to support the scope of the
Company's growing global activities and expenses related to start-up activities.
Results of Operations for the nine months ended September 30, 1998 and 1997
Revenues. Total revenues for the nine months ended September 30, 1998
were $28,806,554, representing an increase of $3,911,600 or 16% over the same
period of the prior year. Net product sales for the nine months ended September
30, 1998 were $25,228,181, representing an increase of $19,723,815 or 358% 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 1997. The
market demand for Synvisc exceeded the Company's ability to supply product
during the first nine months of 1998. Income from licenses, royalties and
research contracts was $3,578,373 for the nine months ended September 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 $16,000,000 from Wyeth-Ayerst
Laboratories and $3,000,000 from Bayer AG which were received during the nine
months ended September 30, 1997.
Costs and Expenses. Total costs and expenses were $24,365,927 for the
nine months ended September 30, 1998, representing an increase of $12,770,110 or
110% over the same period of the prior year. Cost of goods sold for the nine
months ended September 30, 1998 and 1997 were $6,736,307 and $1,987,949,
respectively, which represented 27% and 36% 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 $7,121,040 for the first nine months of 1998, representing an increase of
$2,783,139 or 64% 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 nine months of 1998 were $10,508,580,
representing an increase of $5,238,613 or 99% over the first nine months of
1997. This increase is primarily due to increased staffing needed to support the
scope of the Company's growing global activities.
10
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
standard permits the recognition of deferred tax assets if it is more likely
than not that the future benefit will be realized. During the third quarter of
1998, the Company determined that it is more likely than not that it will
realize net deferred tax assets on future tax returns, principally from the
generation of future domestic operating profits. This decision was made based on
the Company's recent history of income and future projections of taxable income.
Therefore, in the third quarter of 1998, the Company recognized certain net
deferred tax assets of approximately $1.0 million. As a result, the Company
reported a combined federal and state tax benefit of $405,000 for the three
months ended September 30, 1998. Excluding the one-time benefit related to
recognizing these net deferred tax assets, the effective rate for the nine
months ended September 30, 1998 would have been approximately 29%. The effective
rate of 29% is lower than the statutory rate due to the estimated utilization
of certain net operating losses and tax credits in the current year's tax
return.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $17,769,396 at September
30, 1998. Overall, the Company's cash position increased by $382,311 during the
nine months ended September 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 and convertible debt
securities. Since January 1, 1995, the Company has received funding of
$36,980,000 from non-refundable license fee payments, $8,170,900 from the
private placement of equity securities, and $14,325,000 from the private
placement of a convertible debt security.
For the nine months ended September 30, 1998, the Company had cash
outflows from operations of $852,689 which primarily resulted from the timing of
collection of license fees and increased working capital requirements
attributable to the increased sales and production levels. These outflows were
partially offset by the timing of payments made to vendors. During the nine
months ended September 30, 1998, the Company invested $15,601,630 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.
The Company has completed the construction of the initial phase of its
manufacturing capacity in the U.S. During the remainder of 1998, the Company
expects to invest an additional $2,600,000 of capital to ready the facility for
its intended use. The Company is currently in the process of validating the U.S.
facility. Upon completion of the validation and receipt of regulatory approvals
the Company will be able to ship product from the U.S. facility. The Company
plans to seek mortgage and equipment financing which, if obtained, could fund a
portion of these capital costs.
The Company has also commenced construction of new research facilities
as part of the same project at an estimated cost of $7,000,000. The Company
expects to complete these facilities by early 1999. The Company plans to seek
mortgage and equipment financing which, if obtained, could fund a portion of
these capital costs.
11
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
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 additional 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.
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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Some
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including a
temporary inability to process transactions, send invoices, or engage in normal
business and operating activities.
Some of the Company's systems are Year 2000 compliant. The Company has
a program in place to assess the remaining software and systems and bring them
into Year 2000 compliance in time to minimize any significant detrimental
effects on operations. The program focuses on three main functional areas,
including; i) information technology which addresses data, phone and
administrative systems, ii) embedded chip technology which addresses
manufacturing systems, laboratory instruments and plant maintenance systems with
programmable logic controllers with date functions, and iii) critical material
suppliers and marketing partners which address third parties that are critical
to the Company's manufacturing process and distribution of product. The Company
expects to complete the assessment of these phases by early 1999 and plans to
have each phase implemented and validated by September 30, 1999.
The Company estimates that the costs associated with the Year 2000
issue will not be material, and as such will not have a significant impact on
the Company's financial position or operating results. However, the failure to
correct a material Year 2000 problem could result in an interruption in certain
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. The Company believes that, with the implementation of the Year 2000
program, the possibility of significant interruptions of normal operations will
be reduced.
The Company is also developing a contingency plan to address a
situation in which Year 2000 problems do cause an interruption in normal
business activities. Once developed, contingency plans and related cost
estimates will be continually refined as additional information becomes
available.
12
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
13
<PAGE>
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: November 6, 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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000747952
<NAME> BIOMATRIX, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 17,769,396
<SECURITIES> 0
<RECEIVABLES> 8,644,747
<ALLOWANCES> 25,500
<INVENTORY> 4,490,777
<CURRENT-ASSETS> 32,903,667
<PP&E> 37,256,655
<DEPRECIATION> (5,038,870)
<TOTAL-ASSETS> 68,640,844
<CURRENT-LIABILITIES> 6,952,197
<BONDS> 20,548,187
0
0
<COMMON> 69,820,156
<OTHER-SE> (18,298,877)
<TOTAL-LIABILITY-AND-EQUITY> 68,640,844
<SALES> 25,228,181
<TOTAL-REVENUES> 28,806,554
<CGS> 6,736,307
<TOTAL-COSTS> 24,365,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512,314
<INCOME-PRETAX> 5,153,424
<INCOME-TAX> 470,000
<INCOME-CONTINUING> 4,683,424
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,683,424
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
