<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 June 30, 1999 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, 1999
----- -------------
Common stock, $ 0.0001 par value 22,961,402
<PAGE>
BIOMATRIX, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 (Unaudited)............................ 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1999 and 1998 (Unaudited).................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (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
</TABLE>
2
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 21.3 $ 16.5
Accounts receivable, less allowance for doubtful accounts ... 8.2 8.9
Inventory ................................................... 9.2 6.8
License fees receivable ..................................... 8.6 7.6
Prepaid expenses and other current assets ................... 2.2 1.5
----- -----
Total current assets ................................. 49.5 41.3
Property, plant and equipment, net ............................. 42.0 37.7
Other assets ................................................... 3.5 4.3
----- -----
Total assets ......................................... $ 95.0 $ 83.3
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 2.5 $ 3.5
Accrued expenses ............................................ 11.3 5.6
Notes payable and capital lease obligations - current ....... 0.6 5.2
----- -----
Total current liabilities ........................... 14.4 14.3
Notes payable and capital lease obligations - long term ........ 17.2 17.6
----- -----
Total liabilities ................................... 31.6 31.9
----- -----
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, 3,000 shares authorized; none issued ....... -- --
Common stock, $.0001 par value; 60,000,000 shares authorized;
23,053,696 and 22,848,358 issued and 22,961,402 and
22,756,064 outstanding in 1999 and 1998, respectively ..... 0.0 0.0
Additional paid-in capital .................................. 76.1 72.8
Notes receivable - related parties .......................... (13.4) (10.6)
Retained earnings (accumulated deficit) ..................... 3.3 (7.7)
Accumulated other comprehensive loss ........................ (1.7) (2.2)
Treasury stock, 92,294 shares of common stock at cost ....... (0.9) (0.9)
----- -----
Total shareholders' equity .......................... 63.4 51.4
----- -----
Total liabilities and shareholders' equity ........... $ 95.0 $ 83.3
===== =====
</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)
(in millions, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales .......................... $ 18.1 $ 9.2 $ 34.6 $ 13.8
Income from licenses, royalties
and research contracts ................... 7.1 0.5 7.2 3.4
------------ ----------- ---------- ----------
Total revenues .................... 25.2 9.7 41.8 17.2
------------ ----------- ---------- ----------
Costs and expenses:
Cost of goods sold ......................... 5.2 2.2 10.1 3.6
Research and development expenses .......... 2.0 2.5 4.2 4.8
Selling, general and administrative expenses 4.6 3.5 8.5 6.4
------------ ----------- ---------- ----------
Total costs and expenses .......... 11.8 8.2 22.8 14.8
------------ ----------- ---------- ----------
Income from operations ..................... 13.4 1.5 19.0 2.4
Interest expense ........................... (0.5) (0.2) (0.9) (0.2)
Interest and miscellaneous income .......... 0.3 0.3 0.6 0.6
------------ ----------- ---------- ----------
Income before taxes ........................ 13.2 1.6 18.7 2.8
Provision for income taxes ................. 5.5 0.5 7.7 0.9
------------ ----------- ---------- ----------
Net income ................................. $ 7.7 $ 1.1 $ 11.0 $ 1.9
============ =========== ========== ==========
Net income per share:
Basic ................................. $ 0.34 $ 0.05 $ 0.48 $ 0.09
============ =========== ========== ==========
Weighted average shares outstanding ... 22,931,602 22,313,454 22,862,843 22,164,324
============ =========== ========== ==========
Diluted ............................... $ 0.31 $ 0.05 $ 0.45 $ 0.08
============ =========== ========== ==========
Weighted average shares outstanding ... 25,315,224 22,410,380 25,240,877 23,245,412
============ =========== ========== ==========
</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)
(in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 11.0 $ 1.9
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization ............................ 1.6 0.5
Stock option compensation ................................ 0.1 0.0
Change in assets and liabilities:
Accounts receivable ................................... 0.9 (3.2)
Inventory ............................................. (2.3) (0.8)
Prepaid expenses and other current assets ............. (1.6) 0.3
Other assets .......................................... 0.1 (1.8)
Accounts payable and accrued expenses ................. 6.4 2.1
----- -----
Net cash provided by (used for) operating activities 16.2 (1.0)
----- -----
Cash flows from investing activities:
Capital expenditures ........................................ (7.2) (12.0)
----- -----
Net cash used for investing activities ............. (7.2) (12.0)
----- -----
Cash flows from financing activities:
Payments of notes payable and capital lease obligations ..... (4.9) (0.1)
Proceeds from issuance of convertible debt, net ............. -- 14.3
Stock options exercised ..................................... 0.7 0.2
----- -----
Net cash (used for) provided by financing activities (4.2) 14.4
----- -----
Effect of exchange rate changes on cash ................ 0.0 0.1
----- -----
Net increase in cash and cash equivalents ............................ 4.8 1.5
Cash and cash equivalents at beginning of period ..................... 16.5 17.4
----- -----
Cash and cash equivalents at end of period ........................... $ 21.3 $ 18.9
===== =====
Non-cash financing activities:
Sale of common stock financed with notes receivable (Note 8) .... $ 2.4 $ 9.8
</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
(unaudited)
NOTE 1 - Basis of Presentation
The condensed consolidated financial statements at June 30, 1999 and
December 31, 1998 and for the three and six months ended June 30, 1999 and 1998
are unaudited, but include all adjustments which the Company considers necessary
for a fair presentation of the financial position at such dates 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, 1998, which
were included as part of the Company's Form 10-K, filed with the Securities and
Exchange Commission. Results for interim periods are not necessarily indicative
of results for the entire year.
Certain amounts in the condensed consolidated financial statements for
the three and six month periods ended June 30, 1998 have been reclassified in
order to conform to the 1999 presentation.
NOTE 2 - Inventories
Inventories at June 30, 1999 and December 31, 1998 consisted of (in
millions):
June 30, December 31,
1999 1998
---- ----
Raw Materials........................... $ 1.4 $ 1.5
Work-in-Process......................... 7.0 4.8
Finished Goods.......................... 0.8 0.5
----- -----
$ 9.2 $ 6.8
===== =====
NOTE 3 - Stock Split
On April 6, 1999 the Company announced a two-for-one common stock split
to be distributed in the form of a 100% stock dividend (the "Stock Split"). As a
result of this action, on April 23, 1999, 23,006,816 shares were distributed to
the shareholders of record on April 16, 1999, of which 92,294 shares represented
treasury stock of the Company. The shares issued, outstanding and in treasury of
11,424,179, 11,378,032 and 46,147 at December 31, 1998 have been restated to
22,848,358, 22,756,064, and 92,294 to reflect the Stock Split. Par value remains
at $0.0001 per share. The par value of the additional shares resulting from the
Stock Split have been reclassified from additional paid-in capital to common
stock. All historical share and per share amounts in the accompanying statements
have been restated to reflect the Stock Split.
NOTE 4 - Convertible Debt
In May 1998, the Company issued $15.0 million 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 $20 per share. 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 5 - Capital Lease Obligation
In June 1999, the Company exercised its option to acquire a 93,000
square foot building in New Jersey in which its U.S. manufacturing operations
reside. The cost of such purchase was approximately $4.6 million. The Company no
longer has a lease agreement for this facility and, therefore, the related
capital lease obligation has been retired.
6
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
NOTE 6 - Comprehensive Income
Components of comprehensive income are net income and all other
non-owner changes in equity, such as the change in the cumulative translation
adjustment. The following table shows comprehensive income for the three and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income...................................... $ 7.7 $ 1.1 $ 11.0 $ 1.9
Change in cumulative translation adjustment..... 0.3 (0.6) 0.5 (0.3)
----- ----- ------ -----
Comprehensive income............................ $ 8.0 $ 0.5 $ 11.5 $ 1.6
===== ===== ====== =====
</TABLE>
NOTE 7 - Net Income Per Common 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 Company has
convertible debt which converts into 750,000 shares of common stock (see Note
4). This instrument has been included in diluted earnings per share for the
three and six months ended June 30, 1999 because its effect would be dilutive;
however this instrument has not been included in diluted earnings per share for
the three and six months ended June 30, 1998 because its effect would have been
anti-dilutive in such periods. A reconciliation of weighted-average shares
outstanding and net income from basic to diluted for the three and six months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average shares outstanding - Basic..... 22,931,602 22,313,454 22,862,843 22,164,324
Dilutive effect of convertible debt instrument.. 750,000 - 750,000 -
Dilutive effect of stock options................ 1,633,622 1,096,926 1,628,034 1,081,088
--------- --------- --------- ---------
Weighted-average shares outstanding - Diluted... 25,315,224 23,410,380 25,240,877 23,245,412
=========== ========== ========== ===========
Net income as reported.......................... $ 7.7 $ 1.1 $ 11.0 $ 1.9
Addback of convertible
debt interest expense, net of tax.............. 0.2 - 0.3 -
----- ----- ------ -----
Net income for diluted earnings per share....... $ 7.9 $ 1.1 $ 11.3 $ 1.9
===== ===== ====== =====
</TABLE>
NOTE 8 - 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 pursuant to the Company's 1997 Restricted Stock Plan. The notes are
with full recourse and are payable with simple interest upon maturity. The
balance of the notes including accrued interest at June 30, 1999 and December
31, 1998 was $13.4 million and $10.6 million, respectively. The notes mature
over a range of dates from May 2007 to March 2009.
7
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
NOTE 9 - Segment Data
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining the reportable business segments using the management reporting
approach. The following data is utilized by the Company's Executive Committee
(the chief operating decision makers) when analyzing the performance of the
Company. The following table presents the segment data for the three months and
six months ended June 30, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product sales:
Synvisc(R):
United States.......................... $ 13.3 $ 6.6 $ 25.9 $ 9.6
Rest of the world...................... 3.8 1.2 7.0 2.0
All other products.......................... 1.0 1.4 1.7 2.2
------ ----- ------ ------
Total product sales......................... $ 18.1 $ 9.2 $ 34.6 $ 13.8
====== ===== ====== ======
June 30, December 31,
1999 1998
Identifiable assets (in millions):
United States................................................. $ 84.7 $ 73.9
Rest of the world............................................. 10.3 9.4
------ ------
Total assets.................................................. $ 95.0 $ 83.3
====== ======
</TABLE>
NOTE 10 - Contingencies
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(R) resulted
from his consultancy. Jarcho seeks compensatory damages of $0.3 million plus a
royalty on the Company's past and future net sales of Hylaform as well as
punitive damages and recovery of attorneys 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. In accordance with
the Company's policy on contingencies, a liability has been recorded in the
accompanying condensed consolidated financial statements for estimated legal
fees expected to be incurred in defending the matter vigorously. The Company has
not made any provisions for any liability that might result from the claims made
by Jarcho.
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, governmental regulation, reimbursement,
dependence on distribution relationships, patents, competition, manufacturing,
rapid growth, dependence upon key personnel, fluctuation in operating results,
product liability, stock price volatility, 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, 1998. 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, 1999 and 1998
Revenues. Total revenues for the three months ended June 30, 1999
were $25.2 million, representing an increase of $15.5 million or 160% over the
same period of the prior year. Net product sales for the three months ended June
30, 1999 were $18.1 million, representing an increase of $8.9 million or 97%
over the same period of 1998. This increase was due to greater sales of
Synvisc(R) to the Company's marketing partners in the United States, Europe and
recently launched international markets. Income from licenses, royalties and
research contracts for the three months ended June 30, 1999 and 1998 was $7.1
million and $0.5 million, respectively. The 1999 results include a
non-refundable sales-related milestone payment of $7.0 million from Wyeth-Ayerst
Laboratories while the 1998 results include a $0.4 million license fee from
Novartis Pharma AG.
Costs and Expenses. Total costs and expenses were $11.8 million for
the three months ended June 30, 1999, representing an increase of $3.6 million
or 44% over the same period of the prior year. Cost of goods sold for the second
quarter of 1999 and 1998 were $5.2 million and $2.2 million, respectively, which
produced gross margins of 71% and 76%, respectively. This decrease in gross
margin percentage is a result of an increase in the mix of shipments from the
Company's new manufacturing facility which is operating below capacity. Research
and development expenses were $2.0 million for the second quarter of 1999,
representing a decrease of $0.5 or 20% over the second quarter of 1998. The
decrease in research and development expenses is primarily related to the fact
that 1998 included non-recurring process development costs associated with the
Company's new U.S. manufacturing facility. Selling, general and administrative
expenses for the second quarter of 1999 were $4.7 million, representing an
increase of $1.1 million or 31%, over the second quarter of 1998. This increase
is a result of higher market development costs related to Synvisc and higher
legal fees related to general corporate matters.
9
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations for the six months ended June 30, 1999 and 1998
Revenues. Total revenues for the six months ended June 30, 1999 were
$41.8 million, representing an increase of $24.6 million or 143% over the same
period of the prior year. Net product sales for the six months ended June 30,
1999 were $34.6 million, representing an increase of $20.8 million or 151% over
the same period of 1998. This increase was due to greater sales of Synvisc to
the Company's marketing partners in the United States, Europe and recently
launched international markets. Income from licenses, royalties and research
contracts for the six months ended June 30, 1999 and 1998 was $7.2 million and
$3.4 million, respectively. The 1999 results include a non-refundable
sales-related milestone payment of $7.0 million from Wyeth-Ayerst Laboratories
and the 1998 results include a $3.1 million license fee from Novartis Pharma AG.
Costs and Expenses. Total costs and expenses were $22.8 million for
the six months ended June 30, 1999, representing an increase of $8.0 million or
54% over the same period of the prior year. Cost of goods sold for the six
months ended June 30, 1999 and 1998 were $10.1 million and $3.6 million,
respectively, which resulted in gross margins of 71% and 74%, respectively.
This decrease in gross margin percentage is a result of an increase in the mix
of shipments from the Company's new manufacturing facility which is operating
below capacity. Research and development expenses were $4.2 million for the
first six months of 1999, representing a decrease of $0.6 million or 13%
over the comparable period in 1998. The decrease in research and development
expenses is primarily related to process development costs associated with the
Company's new U.S. manufacturing facility which were incurred during 1998.
Selling, general and administrative expenses for the first six months of 1999
were $8.5 million, representing an increase of $2.1 million or 33% over the
first six months of 1998. This increase is primarily due to increased staffing
needed to support the scope of the Company's growing global activities.
Income Taxes
The Company recorded federal and state tax provisions totaling $7.7
million and $0.9 million for the six months ended June 30, 1999 and 1998,
respectively. The consolidated effective rate for the first six months of 1999
was 41% as compared to 32% for the first six months of 1998. The effective rate
in 1998 was lower due to the utilization of net operating loss carryforwards.
The Company expects its consolidated effective tax rate in 1999 to continue to
approximate the combined statutory federal and state rate. The effective rate
could potentially exceed the combined statutory federal and state rate in the
future depending on the amount of certain non-deductible foreign losses.
As of June 30, 1999 the Company had $2.8 million of net deferred U.S.
tax assets included in other long term assets on its balance sheet, as it is
more likely than not that the Company will realize the benefit of these assets.
The Company has provided a full valuation allowance on certain foreign-related
deferred tax assets due to their uncertainty of realization.
10
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company had cash and cash equivalents of $21.3 million at June 30,
1999. Overall, the Company's cash position increased by $4.8 million during the
six months ended June 30, 1999.
The Company's operations and capital growth over the past several years
have been financed by up-front non-refundable license fee payments from
corporate partners, the utilization of the Company's cash and investments and
the private placement of debt and equity securities. Since January 1, 1996, the
Company has received funding of $39.4 million from non-refundable license fee
payments and $21.0 million from the private placement of equity and debt
securities.
For the six months ended June 30, 1999 the Company had positive cash
flows from operations of $16.2 million resulting principally from operating
income and an increase in accrued expenses. During the six months ended
June 30, 1999, the Company invested $7.2 million in property, plant, and
equipment, primarily associated with the construction of certain research and
development laboratories. In June 1999, the Company exercised its option to
acquire a 93,000 square foot building in New Jersey in which its U.S.
manufacturing operations reside. The cost of such purchase was approximately $
4.6 million. The Company no longer has a lease agreement for this facility and,
therefore, the related capital lease obligation has been retired.
Subsequent to June 30, 1999, the Company received payment of $7.0
million from Wyeth-Ayerst Laboratories. Such payment was for the sales-related
milestone which was recorded during the second quarter of 1999.
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.
Most 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:
i) Information technology which addresses data, phone and
administrative systems, including personal computers,
telecommunications, local area networks, wide area networks and
business applications. These systems are computer devices and software
that the company wrote or purchased which are not supported by external
vendors. The software systems include applications developed or
purchased by corporate departments and operated by departmental
personnel. The computer devices are desktop personal computers and
server computer equipment including system hardware, firmware, and
installed commercial application software.
ii) Embedded chip technology which addresses manufacturing systems,
laboratory instruments and plant maintenance systems with programmable
logic controllers with date functions. The Process Control and
Environmental Monitoring and Control Systems are used in the Company's
manufacturing and research and development processes, among other
operations. These generally are systems, devices and instruments which
utilize date functionality and generate, send, receive or manipulate
date-stamped data and signals. These systems may be found in data
acquisition/processing software, laboratory instrumentation, and other
equipment with embedded code.
11
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 (continued)
iii) Material suppliers and marketing partners which address third
parties that are critical to the Company's manufacturing process and
distribution of product. The Company has identified critical providers
of information, goods and services in order to assess their Year 2000
compliance/readiness. The Company has sent letters to all critical and
regular suppliers and marketing partners. The Company has received
approximately 75% of all critical responses. Although the Company
cannot control the response time to its letters, it hopes to have
assessed all responses by September 30, 1999. The Company recognizes
that to a certain degree it is relying on information provided by such
third parties regarding their Year 2000 compliance readiness. While the
Company is attempting to evaluate information provided by these third
parties, there can be no assurance that in all instances accurate
information is being provided. Failure of these third parties' systems
to be Year 2000 compliant could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
In order to address the three noted areas, the Company has divided the
project into four phases including awareness, assessment, validation, and
implementation along the functional departments of the Company. The Company has
completed the awareness, assessment and validation phases for all functional
areas. Full implementation and compliance for all functional areas is expected
by September 30, 1999.
The Company is using both internal and external resources to identify,
correct/reprogram, and test its computer systems, equipment and software for
Year 2000 compliance.
The Company estimates that the costs associated with its internal
preparation for 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. To date the Company
estimates that it has spent approximately $0.2 million replacing, upgrading, or
repairing systems or equipment. The aggregate additional costs of the Company's
Year 2000 program cannot be known at this time. However, given the current
status of the project the additional internal preparation costs are expected to
be approximately $0.5 million. The actual additional costs will depend on
numerous factors, including without limitation, the costs of replacing,
upgrading or repairing systems, software and equipment, and consulting fees and
expenses. All costs are expected to be funded through operations.
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. The Company expects to have the contingency plan in place for
critical operations by September 30, 1999.
There can be no assurance that the Company will be able to complete all
of the modifications in the required time frame, that unanticipated events will
not occur or that the Company will be able to identify all Year 2000 issues
before problems arise. Therefore, there can be no assurance that the Year 2000
issue will not a have a material adverse effect on the Company's financial
position, results of operations and cash flows.
The statements set forth herein concerning the Year 2000 problem which
are not historical facts are forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. There can be no guarantee that any estimates or
other forward-looking statements will be achieved and actual results could
differ significantly from those planned or contemplated. The Company plans to
update the status of its Year 2000 program as necessary in its periodic filings
and in accordance with applicable securities laws.
12
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 27, 1999, at the Company's Annual Meeting of Shareholders, the
Company's shareholders met to consider and vote upon the following three
proposals:
(1) A proposal to elect two Class 2 directors to hold office for a three-year
term and until their respective successors have been duly qualified and
elected.
(2) To ratify an amendment of the Company's 1994 Stock Option Plan to increase
the number of shares of Common Stock authorized for issuance under the
plan from 5,000,000 to 6,000,000 shares.
(3) To ratify an amendment of the Company's 1997 Restricted Stock Plan to
increase the number of shares of Common Stock authorized for issuance
under the plan from 1,000,000 to 2,000,000 shares.
Results with respect to the voting on each of the above proposals were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Proposal 1: Janet L. Denlinger, Ph.D. For - 20,564,094 Withheld Authority - 168,504
--- ---------- ------------------ -------
Kurt Mark For - 20,563,958 Withheld Authority - 168,640
--- ---------- ------------------ -------
</TABLE>
Proposal 2: 12,074,936 Votes For
5,202,832 Votes Against
138,500 Abstentions
3,316,330 Broker Non-Votes
Proposal 3: 12,833,818 Votes For
4,442,662 Votes Against
139,788 Abstentions
3,316,330 Broker Non-Votes
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: July 27, 1999 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
