================================================================================ 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 June 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 number 000-21615 ------------ BOSTON BIOMEDICA, INC. (Exact name of Registrant as Specified in its Charter) Massachusetts 04-2652826 - ------------------------ ---------------------- (State or other (I.R.S. Employer Jurisdiction of Identification No.) Incorporation or Organization) 375 West Street, West Bridgewater, Massachusetts 02379-1040 - ------------------------ ---------------------- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code (508) 580-1900 -------------- Indicate by check 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 Registrant's only class of common stock as of July 31, 1998 was 4,665,426. ================================================================================ Part I. Financial Information Item 1. Financial Statements BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, -------------------------- ------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ----------- REVENUE: Products $3,316,804 $2,416,956 $ 6,380,163 $4,543,912 Services 3,066,328 2,231,998 6,275,764 4,314,091 ------------ ------------ ------------ ----------- Total revenue 6,383,132 4,648,954 12,655,927 8,858,003 COSTS AND EXPENSES: Cost of product sales 1,674,837 1,271,662 3,446,588 2,327,084 Cost of services 1,999,019 1,456,194 4,322,230 2,931,726 Research and development 583,592 256,995 1,015,981 493,745 Acquired research and development - - 850,000 - Selling and marketing 926,015 775,594 1,854,627 1,388,954 General and administrative 983,075 694,875 2,013,011 1,374,082 ------------ ------------ ------------ ----------- Total operating costs and expenses 6,166,538 4,455,320 13,502,437 8,515,591 Income (loss) from operations 216,594 193,634 (846,510) 342,412 Interest (expense) income, net (660) 99,184 22,899 196,670 ------------ ------------ ------------ ----------- Income (loss) before income taxes 215,934 292,818 (823,611) 539,082 (Provision for) benefit from income taxes (82,055) (117,128) 312,972 (215,634) ------------ ------------ ------------ ----------- Net income (loss) $ 133,879 $ 175,690 $ (510,639) $ 323,448 ============ ============ ============ =========== Net income (loss) per share, basic $ 0.03 $ 0.04 $ (0.11) $ 0.07 Net income (loss) per share, diluted $ 0.03 $ 0.04 $ (0.11) $ 0.07 Number of shares used to calculate net income per share Basic 4,652,519 4,403,277 4,642,343 4,391,715 Diluted 4,865,593 4,839,407 4,642,343 4,824,731
See Notes to Consolidated Financial Statement 2 BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, ------------ ------------ 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 123,527 $ 2,772,360 Accounts receivable, less allowances of $579,142 in 1998 and $446,517 in 1997 5,563,699 5,558,710 Inventories 6,603,413 5,902,821 Prepaid expense and other 640,555 288,481 Deferred income taxes 378,458 328,562 ------------ ------------ Total current assets 13,309,652 14,850,934 ------------ ------------ Property and equipment, net 5,783,730 4,980,164 OTHER ASSETS: Long term investment 1,482,500 1,482,500 Goodwill and other intangibles, net 2,126,745 2,212,220 Notes receivable and other 108,365 124,178 ------------ ------------ 3,717,610 3,818,898 ------------ ------------ TOTAL ASSETS $22,810,992 $23,649,996 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long term debt $ 14,831 $ 14,878 Accounts payable 1,650,345 2,218,685 Accrued compensation 1,046,658 1,103,837 Accrued income taxes - 132,802 Other accrued expenses 585,486 498,247 Deferred revenue 884,317 1,249,024 ------------ ------------ Total current liabilities 4,181,637 5,217,473 ------------ ------------ LONG-TERM LIABILITIES: Long term debt, less current liabilities 535,726 26,820 Deferred rent and other liabilities 321,503 189,117 Deferred income taxes 142,887 149,333 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 20,000,000 shares in 1998 and 1997; issued and outstanding 4,660,426 in 1998 and 4,622,566 in 1997 46,604 46,226 Additional paid-in capital 16,101,296 16,029,049 Retained earnings 1,481,339 1,991,978 ------------ ------------ Total stockholders' equity 17,629,239 18,067,253 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $22,810,992 $23,649,996 ============ ============ See Notes to Colsolidated Financial Statements 3 BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, ------------------------- 1998 1997 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (510,639) $ 323,448 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 607,252 353,843 Provision for doubtful accounts 103,036 77,781 Deferred rent and other liabilities 132,386 (53,916) Deferred income taxes (56,342) (31,655) Acquired research and development 850,000 - Changes in operating assets and liabilities: Accounts receivable (108,025) (51,366) Other assets - (27,083) Inventories (700,592) (380,593) Prepaid expenses (352,074) (76,392) Accounts payable (568,340) 83,043 Accrued compensation and other expenses (102,742) (402,705) Deferred revenue (364,707) 274,938 ----------- ------------ Net cash (used in) provided by operating activities (1,070,787) 89,343 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquired research and development (850,000) - Payments for additions to property and equipment (1,325,097) (839,364) Purchase of intangible assets (246) - Advances under notes receivable and other assets 15,813 (893,005) Purchase of long term investment - (750,000) ----------- ------------ Net cash used in investing activities (2,159,530) (2,482,369) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long term debt 508,906 - Repayments of long-term debt (47) (6,255) Proceeds of common stock issued 72,625 93,687 ----------- ------------ Net cash provided by financing activities 581,484 87,432 ----------- ------------ DECREASE IN CASH AND CASH EQUIVALENTS: (2,648,833) (2,305,594) Cash and cash equivalents, beginning of period 2,772,360 8,082,642 ----------- ------------ Cash and cash equivalents, end of period $ 123,527 $ 5,777,048 =========== ============ See Notes to Consolidated Financial Statements 4 BOSTON BIOMEDICA, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation - ------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report of Form 10-K filing for the fiscal year ended December 31, 1997 for Boston Biomedica, Inc. and Subsidiaries ("the Company" or "Boston Biomedica"). Certain prior years' amounts in the consolidated financial statements may have been reclassified to conform to the current year's presentation. (2) Use of Estimates - --------------------- In conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses for the periods presented. Such estimates include reserves for uncollectable accounts receivable as well as the net realizable value of its inventory. Actual results could differ from the estimates and assumptions used by management. (3) Inventories - ---------------- Inventories consisted of the following: June 30, December 31, 1998 1997 ------------ ------------ Raw materials..........$2,170,155 $2,033,040 Work-in-process.........1,629,171 1,190,567 Finished goods..........2,804,087 2,679,214 ------------ ------------ $6,603,413 $5,902,821 ============ ============ (4) Comprehensive Income - ------------------------- Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 in the first quarter of fiscal year ended December 31, 1998. Adoption of this statement has had no impact on the Company's consolidated financial position and results of operations as comprehensive income (loss) is the same as net income (loss). (5) Acquired Research and Development - -------------------------------------- In March 1998, the Company acquired from BioSeq, Inc.("BioSeq"), the sole and exclusive worldwide right to development stage technology, including the use of BioSeq technical information, licensed processes and improvements to develop, manufacture, market and sell or sublicense products or services in the field of human in vitro immunodiagnostics. Under this agreement, the Company will pay BioSeq an annual royalty based on net sales to customers and sublicensees. The agreement is effective March 20, 1998 and ends on the date the last patent expires, which is approximately 16 years. In accordance with accounting standards for development stage technology, the purchase price, minimum royalty payments and acquisition costs totaling $850,000, were expensed in the first quarter. 5 BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Computation of Net Income per Share - ---------------------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 establishes a different method of computing net income per share than was required under the provisions of the previous standard-Accounting Principles Board opinion No. 15. The following illustrates the computation of basic and diluted net income per share. Three Months Six Months Ended June 30, Ended June 30, ---------------------- ----------------------- 1998 1997 1998 1997 ---------- ----------- ---------- ------------ Average common stock outstanding 4,652,519 4,403,277 4,642,343 4,391,715 Net effect of dilutive common stock equivalents- based on treasury stock method using average market price * 213,074 436,130 - 433,016 ---------- ----------- ---------- ------------ 4,865,593 4,839,407 4,642,343 4,824,731 ========== =========== ========== ============ Net income (loss) 133,879 175,690 (510,639 323,448 Net income (loss) per share 0.03 0.04 (0.11) 0.07 * Potentially dilutive securities of 228,875 were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the six months ended June 30, 1998. (7) Extension of Line of Credit - -------------------------------- Effective June 30, 1998, the maturity date of the revolving line of credit agreement was extended from June 30, 1999 to June 30, 2000. Accordingly, the balance borrowed against the line as of June 30, 1998 is classified as long term debt. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Three Months Ended June 30, 1998 and 1997 Total revenue increased 37.3%, or $1,734,000, to $6,383,000 for the three months ended June 30, 1998 from $4,649,000 in the prior year period. This increase was the result of an increase in product sales of 37.2%, or $900,000, to $3,317,000 from $2,417,000 and an increase in specialty laboratory services of 37.4%, or $834,000, to $3,066,000 from $2,232,000. The inclusion of BBI Source Scientific ("Source") in the second quarter results added to product and service revenue in the amounts of $614,000 and $392,000, respectively. The remaining increase in product revenue was the result of significant increases in Accurun(r) controls and OEM panel sales. The remaining increase in service revenue was the result of a significant increase in billed labor on government contracts for R&D services at the Company's new facility in Gaithersburg, MD. The Company also realized increased revenue from immunology testing including Hepatitis C and tickborne diseases. Gross profit increased 41.0%, or $788,000, to $2,709,000 for the current three months from $1,921,000 in the prior year period. Overall gross margin increased to 42.4% from 41.3%. All of the increase was attributable to product sales. The gross margin on products increased to 49.5% from 47.4%, as the sales growth was in Accurun(r) and OEM panel products, which carry higher margins. Research and development expenses increased 127.1%, or $327,000, to $584,000 for the current three months from $257,000 in the prior year period. The increase is primarily the result of the inclusion of Source and its development efforts in the laboratory instrumentation product line, including the PlateMate( and reflectance reader projects. Also contributing to the increase was additional spending on molecular tests and Quality Control Products. Selling and marketing expenses increased 19.4%, or $150,000, to $926,000 for the current three months from $776,000 in the prior year period. This increase was primarily the result of the first time inclusion of Source. General and administrative expenses increased 41.5%, or $288,000, to $983,000 for the current three months from $695,000 in the prior year period. The inclusion of Source accounted for $173,000 of this increase. The remaining increase relates to the addition of human resource, collection, and administrative support personnel. Net interest expense was $660 for the current quarter compared to net interest income of $99,000 in the prior year period. The Company has productively employed the proceeds from its initial public offering and, at the end of the quarter, began to borrow funds under its line of credit to continue its infrastructure investments. Based on current tax planning, the Company provided taxes at the combined federal and state statutory rate of 38% in the current quarter versus 40% in the prior year period. Six Months Ended June 30, 1998 and 1997 Total revenue increased 42.9%, or $3,798,000, to $12,656,000 for the six months ended June 30, 1998 from $8,858,000 in the prior year period. This increase was the result of an increase in product sales of 40.4%, or $1,836,000, to $6,380,000 from $4,544,000 and an increase in specialty laboratory services of 45.5%, or $1,962,000, to $6,276,000 from $4,314,000. The inclusion of Source added to product and service revenue in the amounts of $1,081,000 and $1,124,000, respectively. The remaining increase in product revenue is due to a doubling of Accurun(r) sales and a significant increase in OEM panel sales. The remaining increase in specialty laboratory services is attributable to an increase in clinical testing and contract research revenue. Gross profit increased 35.8%, or $1,288,000, to $4,887,000 for the current six months from $3,599,000 in the prior year period. The gross profit margin decreased to 38.6% for the current six months versus 40.6% in the prior year period. This is due primarily to lower margins on Source instruments and the impact of higher fixed overhead at BBI Biotech as a result of its move to its new facility in Gaithersburg, MD, both adversely affecting the first quarter. 7 Research and development expenses increased 105.8%, or $522,000, to $1,016,000 for the current six months from $494,000 in the prior year period. The increase is primarily the result of the inclusion of Source's development efforts for new laboratory instruments as well as additional spending on molecular tests and Quality Control Products. There was an accounting charge of $850,000, in the first quarter, related to the acquisition of the worldwide exclusive rights to BioSeq Inc's immunodiagnostic research and development technology as noted in footnote 5. Selling and marketing expenses increased 33.5%, or $466,000, to $1,855,000 for the current six months from $1,389,000 in the prior year period. The inclusion of Source added $130,000. The remaining increase was attributable to increased personnel costs associated with the expansion of the TQS sales, marketing and technical support staff as well as additions to the clinical laboratory sales staff. General and administrative expenses increased 46.5%, or $639,000, to $2,013,000 for the current six months from $1,374,000 in the prior year period. This increase was a result of the first time inclusion of Source as well as additional human resource, MIS, collection, and administrative support personnel. Net interest income decreased 88.3%, or $174,000 to $23,000 for the current six months from $197,000 in the prior year period. The Company has productively employed its proceeds from its initial public offering and, at the end of the six month period, began to borrow funds from its revolving line of credit to continue its infrastructure investments. Based on current tax planning, the Company provided taxes at the combined federal and state statutory rate of 38% in the current quarter versus 40% in the prior year period. Liquidity and Financial Condition At June 30, 1998, the Company had cash and cash equivalents of approximately $124,000 and working capital of $9,128,000. Both of these items have decreased significantly from year end as the Company continued its planned capital expenditures. The Company has financed its operations to date through cash flow from operations, borrowings from banks and issuance of common stock. The Company expects its cash flow, current cash position and its $7.5 million uncollateralized revolving line of credit to meet its working capital needs. Net cash used for operations for the six months ended June 30, 1998 was ($1,071,000) as compared to cash provided by operations of $89,000 in the prior year period. This decrease in cash flow was primarily attributable to the net loss for the period, increased purchases of strategic inventory for its Quality Control Products, a reduction in current liabilities, and the delay, until July, in settlement of a large receivable.. Cash used in investing activities for the six months ended June 30, 1998 was $2,160,000 as compared to $2,482,000 in the prior year period. The cash used relates to the acquired BioSeq research and development as described above, as well as continued improvements at its Massachusetts and Maryland facilities. Cash provided by financing activities for the six months ended June 30, 1998 was $581,000 as compared to $87,000 in the prior year period. The cash received was from borrowing against the revolving line of credit and the exercise of stock options during the period. The Company anticipates capital expenditures for the expansion of the West Bridgewater facility and additional improvements in its Maryland facility as a result of recently awarded contracts to be completed by the end of 1998. The Company also expects to replace its business information software over the next twelve months at a cost of approximately $750,000. The Company believes that existing cash balances, the borrowing capacity available under its revolving line of credit and cash generated from operations are sufficient to fund operations and 8 anticipated capital expenditures for the foreseeable future. Except for purchase orders and contracts in connection with the expansion and the business information software, there were no material financial commitments for capital expenditures as of June 30, 1998. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for fiscal years beginning after December 15, 1997. SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt SFAS 132 in the fiscal year ended December 31, 1998, although no impact on operating results of financial position is expected. Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding the inability of certain computer programs to process date information beyond year 1999. These concerns focus on the impact of the Year 2000 problem on business operations and the potential costs associated with identifying and addressing the problem. The Company is in the process of evaluating and taking steps to deal with the potential impact of this problem in areas under its control, including its products and sources of supply, as well as its operations management, administration and financial systems. Based on its review to date, the Company believes that its products are "Year 2000 compliant." The Company has confirmed with existing software vendors that year 2000 compliant versions either exist or will be available to upgrade or replace its operations management, administrative and financial systems. The Company plans to begin a program to survey major suppliers to determine the status and schedule for their Year 2000 compliance. Where it believes that a particular supplier's situation poses unacceptable risks, the Company plans to identify an alternative source. Based upon its review, the Company does not believe that the Year 2000 problem will have a material adverse effect on the Company. However, there can be no assurances that failure to comply with Year 2000 by parties outside its control will not have a material adverse affect on the Company. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements concerning the Company's financial performance and business operations. The Company wishes to caution readers of this Quarterly Report on Form 10-Q that actual results might differ materially from those projected in any forward-looking statements. Factors which might cause actual results to differ materially from those projected in the forward-looking statements contained herein include the following: inability of the Company to develop the end user market for quality control products; inability of the Company to integrate the business of Source Scientific, Inc. into the Company's business; inability of the Company to grow the sales of Source Scientific, Inc. to the extent anticipated; the renewal and full funding of contracts with National Institutes of Health (NIH), National Heart, Lung and Blood Institute (NHLBI) and other government agencies; a material adverse change in the business, financial condition or prospects of BioSeq, Inc., an early stage biotechnology company in which the Company has made a significant investment, including inability to develop its technology to the level of commercial utilization; inability of the Company to obtain an adequate supply of the unique and rare specimens of plasma and serum necessary for certain of its products; significant reductions in purchases by any of the Company's major customers; and the potential insufficiency of Company resources, including human resources, plant and equipment and management systems, to accommodate any future growth. Certain of these and other factors which might cause actual results to differ materially from those projected are more fully set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-1 (SEC File No. 333-10759). 9 BOSTON BIOMEDICA, INC. Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders. The Company held its Annual Meeting of Stockholders of May 21, 1998 (the"Meeting"). A total of 3,749,521 shares, or 81%, of the Common Stock issued and outstanding as of the record date, were represented at the meeting in person or by proxy. At the Meeting, the only matter to be acted upon was the election of directors. The results of the election were as follows: Henry Malkasian was elected as a Class II Director of the Company, to serve as such until the Year 2001 Annual Meeting of Stockholders and until his successor has been duly elected and qualified:, with 3,732,115 shares voting in favor, 17,406 votes withheld. The terms of office of Richard T. Schumacher, Kevin W. Quinlan, Calvin A. Saravis, and Francis E. Capitanio, continued after the Meeting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Reference ----------- --------- 3.1 Amended and Restated Articles of Organization of the Company A** 3.2 Amended and Restated Bylaws of the Company A** 4.1 Specimen Certificate for Shares of the Company's Common Stock A** 4.2 Description of Capital Stock (contained in the Restated Articles of Organization of the Company filed as Exhibit 3.1) A** 10.1 Contract, dated July 1, 1998, between the National Institutes of Health and the Company (NO1-AI-85341) Filed herewith 10.2 Contract, dated June 15, 1998, between the National Heart Lung and Blood Institute and the Company (NO1-HB-87144) Filed herewith 21.1 Subsidiaries of the Company B** 27 Financial Data Schedule Filed herewith _______________________ A Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-10759)(the "Registration Statement"). The number set forth herein is the number of the Exhibit in said registration statement. B Incorporated by reference to the Company's Annual Report on Form 10K for the fiscal year ended December 31, 1997. ** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. (b) Reports on Form 8-K None 10 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. BOSTON BIOMEDICA, INC. Date: August 14, 1998 By /s/ KEVIN W. QUINLAN --------------- --------------------------- Kevin W. Quinlan, Chief Financial Officer (Principal Financial Officer) 11