Harvard Bioscience, Inc.
HARVARD BIOSCIENCE INC (Form: 10-Q, Received: 08/09/2005 16:13:26)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2005

o

 

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 000-31923

HARVARD BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(508) 893-8999

04-3306140

(State or Other Jurisdiction of Incorporation or Organization)

(Registrant’s telephone number,
including area code)

(IRS Employer
Identification No.)

 

84 October Hill Road, Holliston, MA

01746

 

(Address of Principal Executive Offices)

(Zip 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.   x   YES   o   NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   x   YES   o   NO

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At August 1, 2005 there were 30,461,859 shares of Common Stock, par value $0.01 per share, outstanding.

 




HARVARD BIOSCIENCE, INC.

Form 10-Q
For the Quarter Ended June 30, 2005

INDEX

PART I—FINANCIAL INFORMATION

 

2

 

Item 1. Consolidated Financial Statements (unaudited)

 

2

 

Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 (unaudited)

 

2

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)

 

3

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (unaudited)

 

4

 

Notes to Unaudited Consolidated Financial Statements

 

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

Cautionary Factors

 

30

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

42

 

Item 4. Controls and Procedures

 

42

PART II—OTHER INFORMATION

 

43

 

Item 4. Submission of Matters to a Vote of Security Holders

 

43

 

Item 6. Exhibits

 

43

SIGNATURES

 

44

 

1




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)

 

 

June 30,
2005

 

December 31,
2004

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,245

 

 

$

13,867

 

 

Accounts receivable, net of allowance for doubtful accounts of $1,252 and $853, respectively

 

14,641

 

 

18,519

 

 

Inventories

 

20,660

 

 

25,465

 

 

Deferred income tax assets

 

485

 

 

495

 

 

Other receivables and other assets

 

2,714

 

 

2,963

 

 

Total current assets

 

51,745

 

 

61,309

 

 

Property, plant and equipment, net

 

6,213

 

 

7,143

 

 

Deferred tax income assets

 

 

 

810

 

 

Amortizable intangible assets, net

 

17,097

 

 

27,403

 

 

Goodwill and other indefinite lived intangible assets

 

31,867

 

 

42,535

 

 

Other assets

 

557

 

 

681

 

 

Total assets

 

$

107,479

 

 

$

139,881

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

27

 

 

$

20

 

 

Accounts payable

 

5,474

 

 

6,251

 

 

Deferred revenue

 

2,142

 

 

2,159

 

 

Accrued income taxes payable

 

3,979

 

 

1,886

 

 

Accrued expenses

 

4,177

 

 

4,802

 

 

Other liabilities

 

718

 

 

946

 

 

Total current liabilities

 

16,517

 

 

16,064

 

 

Long-term debt, less current installments

 

15,200

 

 

16,520

 

 

Deferred income tax liabilities

 

569

 

 

1,507

 

 

Other liabilities

 

953

 

 

1,433

 

 

Total liabilities

 

33,239

 

 

35,524

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 5,000,000 shares authorized

 

 

 

 

 

Common stock, par value $0.01 per share, 80,000,000 shares authorized; 35,120,505 and 35,052,449 shares issued and 30,459,721 and 30,391,665 shares outstanding, respectively

 

351

 

 

351

 

 

Additional paid-in-capital

 

173,636

 

 

173,469

 

 

Accumulated deficit

 

(103,439

)

 

(76,262

)

 

Accumulated other comprehensive income

 

4,360

 

 

7,467

 

 

Treasury stock, 4,660,784 common shares, at cost

 

(668

)

 

(668

)

 

Total stockholders’ equity

 

74,240

 

 

104,357

 

 

Total liabilities and stockholders’ equity

 

$

107,479

 

 

$

139,881

 

 

 

See accompanying notes to unaudited consolidated financial statements.

2




HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Product revenues

 

$

21,616

 

$

22,108

 

$

43,820

 

$

43,990

 

Research revenues

 

108

 

352

 

339

 

635

 

Total revenues

 

21,724

 

22,460

 

44,159

 

44,625

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product revenues(1)

 

14,859

 

11,178

 

26,248

 

22,766

 

Sales and marketing expenses(1)

 

4,346

 

4,288

 

8,772

 

8,586

 

General and administrative expenses(1)

 

4,299

 

3,394

 

7,630

 

6,654

 

Research and development expenses(1)

 

1,615

 

1,747

 

3,502

 

3,416

 

Asset abandonments and impairments

 

17,923

 

 

17,923

 

 

Restructuring expenses

 

967

 

157

 

967

 

421

 

Amortization of intangible assets

 

892

 

1,089

 

1,788

 

2,012

 

Total costs and expenses

 

44,901

 

21,853

 

66,830

 

43,855

 

Operating income (loss)

 

(23,177

)

607

 

(22,671

)

770

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Foreign currency loss

 

(179

)

(26

)

(327

)

(168

)

Interest expense

 

(232

)

(191

)

(491

)

(378

)

Interest income

 

53

 

44

 

119

 

106

 

Other, net

 

7

 

(18

)

167

 

(65

)

Other income (expense), net

 

(351

)

(191

)

(532

)

(505

)

Income (loss) before income taxes

 

(23,528

)

416

 

(23,203

)

265

 

Income tax expense

 

(3,851

)

(118

)

(3,974

)

(18

)

Net income (loss)

 

$

(27,379

)

$

298

 

$

(27,177

)

$

247

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.90

)

$

0.01

 

$

(0.89

)

$

0.01

 

Diluted

 

$

(0.90

)

$

0.01

 

$

(0.89

)

$

0.01

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

30,432

 

30,243

 

30,423

 

30,203

 

Diluted

 

30,432

 

31,163

 

30,423

 

31,367

 


(1)           Components of stock compensation expense:

Cost of product revenues

 

$

 

$

15

 

$

 

$

59

 

General and administrative expense

 

 

9

 

 

10

 

Sales and marketing expense

 

 

13

 

 

14

 

Total

 

$

 

$

37

 

$

 

$

83

 

 

See accompanying notes to unaudited consolidated financial statements.

3




HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(27,177

)

$

247

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Stock compensation expense

 

 

83

 

Depreciation

 

1,311

 

1,222

 

Abandonment and impairment of assets

 

17,923

 

 

Restructuring charges

 

3,685

 

 

Amortization of catalog costs

 

94

 

58

 

Loss (gain) on sale of property, plant and equipment

 

25

 

(3

)

Amortization of intangible assets

 

1,788

 

2,012

 

Amortization of deferred financing costs

 

54

 

54

 

Deferred income taxes

 

(52

)

(89

)

Changes in operating assets and liabilities, net of effects of business acquisitions:

 

 

 

 

 

Change in accounts receivable

 

3,258

 

3,028

 

Change in inventories

 

239

 

(529

)

Change in other receivables and other assets

 

84

 

(106

)

Change in trade accounts payable

 

(487

)

(1,391

)

Change in accrued income taxes payable

 

2,209

 

(715

)

Change in accrued expenses

 

(780

)

494

 

Change in deferred revenue

 

50

 

594

 

Change in other liabilities

 

(424

)

46

 

Net cash provided by operating activities

 

1,800

 

5,005

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(733

)

(1,023

)

Additions to catalog costs

 

(2

)

(351

)

Proceeds from sales of fixed assets

 

28

 

13

 

Acquisition of businesses, net of cash acquired

 

 

(6,776

)

Net cash used in investing activities

 

(707

)

(8,137

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from long-term debt

 

 

6,950

 

Repayments of long-term debt

 

(1,312

)

(1,994

)

Net proceeds from issuance of common stock

 

167

 

539

 

Net cash provided by (used in) financing activities

 

(1,145

)

5,495

 

Effect of exchange rate changes on cash

 

(570

)

(71

)

Increase (decrease) in cash and cash equivalents

 

(622

)

2,292

 

Cash and cash equivalents at the beginning of period

 

13,867

 

8,223

 

Cash and cash equivalents at the end of period

 

$

13,245

 

$

10,515

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

489

 

$

336

 

Cash paid for income taxes

 

$

1,748

 

$

839

 

 

See accompanying notes to unaudited consolidated financial statements.

4




HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (the “Company”) as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2004, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004.

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of June 30, 2005, and results of operations and cash flows for the three and six months ended June 30, 2005 and 2004, as applicable, have been made. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

During the quarter ended June 30, 2005, the Company realigned its lines of business for financial reporting purposes into two business segments, the Apparatus and Instrumentation Business Segment and the Capital Equipment Business Segment. The Company had previously been arranged in a single segment for financial reporting purposes. See note 11 Segment Information.

Certain reclassifications to prior year balances have been made to conform to current year presentations.

Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004, filed with the SEC.

2. Recently Issued Accounting Pronouncements

In November 2004, Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs: an Amendment of ARB No. 43, Chapter 4 , was issued. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material by requiring those items to be recognized as current-period charges. The Statement is effective for fiscal years beginning after June 15, 2005. The Company does not believe that adoption of this Statement will have a material impact on its consolidated results of operations or financial position.

In December 2004, SFAS No. 123R, Share-Based Payments, a revision of SFAS No. 123, Accounting for Stock-Based Compensation , was issued. SFAS No. 123R addresses financial accounting and reporting for costs associated with stock-based compensation. SFAS No. 123R will require the Company to recognize compensation expense in an amount equal to the fair value of share-based payments related to unvested

5




share-based awards over the applicable vesting period. The Statement is effective for annual periods beginning after June 15, 2005. The Company is currently evaluating the impact that the adoption of this Statement will have on its consolidated results of operations and financial position.

3.  Stock-Based Compensation

The Company has adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123, and continues to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. If the Company had elected to recognize compensation cost for all of the plans based upon fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, net income and earnings per share would have been changed to the pro forma amounts indicated below:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands, except per share data)

 

Net income (loss), as reported

 

$

(27,379

)

$

298

 

$

(27,177

)

$

247

 

Add: stock-based employee compensation expense included in reported net income, net of tax

 

 

37

 

 

83

 

Deduct: total stock-based employee compensation expense determined under fair-value based method for all awards, net of tax

 

(895

)

(1,493

)

(1,697

)

(2,381

)

Pro forma net income (loss)

 

$

(28,274

)

$

(1,158

)

$

(28,874

)

$

(2,051

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic as reported

 

$

(0.90

)

$

0.01

 

$

(0.89

)

$

0.01

 

Basic pro forma

 

$

(0.93

)

$

(0.04

)

$

(0.95

)

$

(0.07

)

Diluted as reported

 

$

(0.90

)

$

0.01

 

$

(0.89

)

$

0.01

 

Diluted pro forma

 

$

(0.93

)

$

(0.04

)

$

(0.95

)

$

(0.07

)

 

The fair value of each option grant for the Company’s stock option plans is estimated on the date of the grant using the Black-Scholes valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single value of the Company’s stock options and may not be representative of the future effects on reported net income or the future stock price of the Company.

4. Goodwill and Other Intangible Assets

During the second quarter of 2005, the asset groups that comprise the Company’s Capital Equipment Business Segment, experienced a significant decrease in revenues and operating profit margins. As a result, with the assistance of third party independent appraisers the Company re-evaluated the long-lived assets associated with these asset groups in accordance with SFAS No. 144, Accounting for Impairments or Disposal of Long-Lived Assets and determined that certain intangible assets within these asset groups were impaired as of June 30, 2005. The Company recorded abandonment and impairment charges within the Capital Equipment Business Segment totaling approximately $8.0 million for long-lived assets during the second quarter of 2005.

6




Also, as a result of the significant decrease in revenues and operating profit margins experienced by the Capital Equipment Business Segment during the second quarter, in accordance with SFAS No. 142, Goodwill and Other Intangible Asset s, the Company, with the assistance of third party independent appraisers, re-evaluated the goodwill associated with the Genomic Solutions and Union Biometrica reporting units for impairment as of June 30, 2005.  As a result of this goodwill impairment testing, the Company recorded impairment charges within the Capital Equipment Business Segment of approximately $9.9 million for goodwill during the second quarter of 2005.

Intangible assets consist of the following:

 

 

As of June 30,

 

As of December 31,

 

 

 

 

 

2005

 

2004

 

Weighted

 

 

 

Gross

 

Accumulated
Amortization

 

Gross

 

Accumulated
Amortization

 

Average
Life (a)

 

 

 

(in thousands)

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Existing technology

 

$

15,649

 

 

$

(2,993

)

 

$

29,631

 

 

$

(7,584

)

 

9.1 years

 

Tradename

 

920

 

 

(342

)

 

1,680

 

 

(493

)

 

9.5 years

 

Distribution agreement/customer relationships

 

4,753

 

 

(896

)

 

4,753

 

 

(591

)

 

7.9 years

 

Patents

 

9

 

 

(3

)

 

9

 

 

(2

)

 

10.8 years

 

Total amortizable intangible assets

 

$

21,331

 

 

$

(4,234

)

 

$

36,073

 

 

$

(8,670

)

 

 

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

30,463

 

 

 

 

 

$

41,083

 

 

 

 

 

 

 

Other indefinite lived intangible assets

 

1,404

 

 

 

 

 

1,452

 

 

 

 

 

 

 

Total goodwill and other indefinite lived intangible assets

 

$

31,867

 

 

 

 

 

$

42,535

 

 

 

 

 

 

 

Total intangible assets

 

$

53,198

 

 

 

 

 

$

78,608

 

 

 

 

 

 

 


(a)            Weighted average life is as of June 30, 2005

The change in the carrying amount of goodwill for the six months ended June 30, 2005 is as follows (in thousands):

Goodwill rollforward

 

 

 

Balance at December 31, 2004

 

$

41,083

 

Impairments.

 

$

(9,899

)

Effect of change in foreign currencies

 

(721

)

Balance at June 30, 2005

 

$

30,463

 

 

Intangible asset amortization expense for the three months ended June 30, 2005 and 2004 was $0.9 million and $1.1 million, respectively.  Intangible asset amortization expense for the six months ended June 30, 2005 and 2004 was $1.8 million and $2.0 million, respectively. Amortization expense of existing amortizable intangible assets is estimated to be $2.8 million for the year ending December 31, 2005, $2.2 million for the years ending December 31, 2006 and 2007, $2.1 million for the year ending December 31, 2008, $1.8 million for the year ending December 31, 2009, and $1.7 million for the year ended December 31, 2010.

7




5. Income Per Share

Basic income per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted net income per share assumes conversion of stock options into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands)

 

Basic

 

30,432

 

30,243

 

30,423

 

30,203

 

Effect of assumed conversion of employee stock options

 

 

920

 

 

1,164

 

Diluted

 

30,432

 

31,163

 

30,423

 

31,367

 

 

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 4.0 million shares of common stock for the three and six months ended June 30, 2005, as the impact of these shares would be anti-dilutive. Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 2.2 million shares of common stock for the three and six months ended June 30, 2004, as the impact of these shares would be anti-dilutive.

6. Inventories

Inventories consist of the following:

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(in thousands)

 

Finished goods

 

$

6,976

 

 

$

9,390

 

 

Work in process

 

3,172

 

 

3,746

 

 

Raw materials

 

10,512

 

 

12,329

 

 

 

 

$

20,660

 

 

$

25,465

 

 

 

7. Restructuring and Other Exit Costs

During 2004, the Company announced restructuring activities at its Genomic Solutions subsidiary related to the closure of a manufacturing facility and realignment of its cost structure. Total restructuring charges for 2004 were approximately $0.4 million. During 2005, the Company reviewed and modified this plan to include the closure of another manufacturing facility and to discontinue certain product lines due to product rationalization decisions made during the second quarter. Total restructuring charges during the six months ended June 30, 2005 for the Genomic Solutions subsidiary were $4.0 million. These charges related primarily to the write-off of inventory for rationalized products of $3.5 million, severance costs of $0.2 million, facility closure costs of $0.2 million and other costs of $0.1 million. The remaining $0.5 million of restructuring charges recorded during the second quarter of 2005 were related to a decision to consolidate our Union Biometrica US manufacturing facility into our Holliston, MA facility (approximately $0.2 million) and the realignment of personnel at our Biochrom, Scie-Plas and Hoefer subsidiaries (approximately $0.3 million).

The cost of sales component of the 2005 restructuring charges was approximately $3.5 million and related to the write-off of certain inventory in the Capital Equipment Business Segment. The remaining $1.0 million related to severance and other facility closure costs.

8




Restructuring charges are as follows:

 

 

Severance and
related

 

Inventory

 

Facility
Closure Costs

 

Other

 

Total

 

 

 

(in thousands)

 

Restructuring charges

 

 

$

483

 

 

 

$

3,535

 

 

 

$

287

 

 

$

197

 

$

4,502

 

Cash payments

 

 

(400

)

 

 

0

 

 

 

(48

)

 

(77

)

(525

)

Non-cash charges

 

 

0

 

 

 

(3,535

)

 

 

(30

)

 

(120

)

(3,685

)

June 30, 2005 accrual balance

 

 

$

83

 

 

 

$

 

 

 

$

209

 

 

$

 

$

292

 

 

8. Income Taxes

The amount recorded as gross deferred tax assets as of June 30, 2005 represents the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. Management reviews the recoverability of deferred tax assets during each reporting period.

The total valuation allowance for deferred tax assets as of June 30, 2005 was $14.0 million of which $4.2 million was charged against income tax expense while $9.8 million was charged against acquisition-goodwill and intangible assets. The total valuation allowance increased by $3.5 million from December 31, 2004 due to the Company’s determination that a portion of the gross deferred tax assets do not meet the “more likely than not” standard of realization as outlined in SFAS No. 109, Accounting for Income Taxes as a result of the decrease in revenues and operating profit margins in our Capital Equipment Business Segment during the second quarter of 2005. If the valuation allowance is fully realized, $9.8 million will reduce goodwill and intangible assets and the balance will reduce income tax expense.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act creates a one-time incentive for U.S. corporations to repatriate undistributed earnings from their international subsidiaries by providing an 85% dividends-received-deduction for certain international earnings. The deduction is available to corporations during the tax year that includes October 22, 2004 or in the immediately subsequent year. The Company is in the process of evaluating whether it will repatriate international earnings under the provisions of the Act.

9. Warranty

Warranties are estimated and accrued for at the time sales are recorded. A rollforward of product warranties is as follows:

 

 

Beginning
Balance

 

Payments

 

Additions(a)

 

Ending
Balance

 

 

 

( in thousands )

 

Year ended December 31, 2004

 

 

$

993

 

 

 

(841

)

 

 

608

 

 

 

$

760

 

 

Six Months Ended June 30, 2005

 

 

$

760

 

 

 

(298

)

 

 

243

 

 

 

$

705

 

 


(a)            Includes additions of acquired companies

10. Comprehensive Income

Accumulated other comprehensive income, a component of stockholders’ equity, as of June 30, 2005 and December 31, 2004, consists of cumulative foreign currency translation adjustments of $5.0 million and $8.1 million, respectively, and a minimum additional pension liability, net of tax, of ($0.6) million.

9




The components of total comprehensive income (loss) were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands)

 

Net Income (Loss)

 

$

(27,379

)

$

298

 

$

(27,177

)

$

247

 

Other Comprehensive Income (Loss)

 

(2,264

)

(506

)

(3,107

)

442

 

Comprehensive Income (Loss)

 

$

(29,643

)

$

(208

)

$

(30,284

)

$

689

 

 

Other comprehensive income (loss) for the three and six months ended June 30, 2005 and 2004 consists of foreign currency translation adjustments.

11. Employee Benefit Plans

Certain of the Company’s United Kingdom subsidiaries, Harvard Apparatus Limited and Biochrom Limited, maintain contributory, defined benefit or defined contribution pension plans for substantially all of their employees. The components of the Company’s defined benefit pension expense were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

108

 

$

99

 

$

220

 

$

199

 

Interest cost

 

171

 

153

 

347

 

308

 

Expected return on plan assets

 

(182

)

(167

)

(369

)

(336

)

Net amortization loss

 

40

 

31

 

82

 

62

 

Net periodic benefit cost

 

$

137

 

$

116

 

$

280

 

$

233

 

 

For the three months ended June 30, 2005, the Company has contributed approximately $0.1 million to the defined benefit plans. For the six months ended June 30, 2005, the Company has contributed approximately $0.3 million to the defined benefit plans. The Company expects to contribute approximately $0.6 million to the defined benefit plans during 2005.

12. Segment Information

During the quarter ended June 30, 2005, the Company realigned its lines of business for financial reporting purposes into two business segments, the Apparatus and Instrumentation Business Segment and the Capital Equipment Business Segment. Corporate costs are not allocated for purposes of segment reporting. The Company had previously been arranged in a single segment.

Apparatus and Instrumentation

The Company’s Apparatus and Instrumentation Business Segment represents approximately 73% of our total revenues for the six months ended June 30, 2005. The products sold by the Apparatus and Instrumentation Business Segment are typically priced under $10,000 and are sold through a comprehensive catalog and web site, through distributors including GE Healthcare (formerly Amersham Biosciences) and Fisher Scientific, or in some cases through direct sales people. The products include syringe pumps, ventilators, isolated organ systems and amino acid analyzers, spectrophotometers, plate readers and gel electrophoresis units. The Company’s end user customers are typically research scientists at pharmaceutical and biotechnology companies, universities and government laboratories world wide.

10




Capital Equipment

The Company’s Capital Equipment Business segment represents approximately 27% of our total revenues for the six months ended June 30, 2005. The products sold by our Capital Equipment Business Segment are typically priced over $25,000 and often over $100,000 and are typically sold through a direct sales organization which consists of sales and marketing personnel, customer service, technical support, field application support and service. The products include the COPAS flow cytomerter, MIAS automated microscope, microarrayers, and nanolitre dispensers. The Company’s end user customers are typically research scientists at pharmaceutical and biotechnology companies, universities and government laboratories worldwide.

Corporate costs are not allocated for purposes of segment reporting. Information on these business segments is summarized as follows:

 

 

Apparatus and
Instrumentation

 

Capital
Equipment

 

Corporate

 

Eliminations

 

Total

 

 

 

(in thousands)

 

Three months ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customer

 

 

$

16,277

 

 

 

$

5,447

 

 

 

$

 

 

 

$

 

 

$

21,724

 

Intersegment

 

 

23

 

 

 

1

 

 

 

 

 

 

(24

)

 

 

Total Revenues

 

 

16,300

 

 

 

5,448

 

 

 

 

 

 

(24

)

 

21,724

 

Cost of product revenues

 

 

8,306

 

 

 

6,577

 

 

 

 

 

 

(24

)

 

14,859

 

Sales and marketing expenses

 

 

2,041

 

 

 

2,305

 

 

 

 

 

 

 

 

4,346

 

General and administrative expenses

 

 

1,757

 

 

 

1,285

 

 

 

1,257

 

 

 

 

 

4,299

 

Research and development expenses

 

 

704

 

 

 

911

 

 

 

 

 

 

 

 

1,615

 

Asset abandonments and impairments

 

 

 

 

 

17,923

 

 

 

 

 

 

 

 

17,923

 

Restructuring expenses

 

 

302

 

 

 

665

 

 

 

 

 

 

 

 

967

 

Amortization of intangible assets

 

 

418

 

 

 

474

 

 

 

 

 

 

 

 

892

 

Operating income (loss)

 

 

2,772

 

 

 

(24,692

)

 

 

(1,257

)

 

 

 

 

(23,177

)

Other income (expense), net

 

 

(111

)

 

 

(109

)

 

 

(131

)

 

 

 

 

(351

)

Segment assets (as of June 30, 2005)

 

 

70,780

 

 

 

36,699

 

 

 

 

 

 

 

 

107,479

 

Three months ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customer

 

 

$

15,626

 

 

 

$

6,834

 

 

 

$

 

 

 

$

 

 

$

22,460

 

Intersegment

 

 

25

 

 

 

9

 

 

 

 

 

 

(34

)

 

 

Total Revenues

 

 

15,651

 

 

 

6,843

 

 

 

 

 

 

(34

)

 

22,460

 

Cost of product revenues

 

 

7,975

 

 

 

3,237

 

 

 

 

 

 

(34

)

 

11,178

 

Sales and marketing expenses

 

 

1,839

 

 

 

2,449

 

 

 

 

 

 

 

 

4,288

 

General and administrative expenses

 

 

1,643

 

 

 

778

 

 

 

973

 

 

 

 

 

3,394

 

Research and development expenses

 

 

696

 

 

 

1,051

 

 

 

 

 

 

 

 

1,747

 

Asset abandonments and impairments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring expenses

 

 

 

 

 

157

 

 

 

 

 

 

 

 

157

 

Amortization of intangible assets

 

 

591

 

 

 

498

 

 

 

 

 

 

 

 

1,089

 

Operating income (loss)

 

 

2,907

 

 

 

(1,327

)

 

 

(973

)

 

 

 

 

607

 

Other income (expense), net

 

 

(108

)

 

 

(17

)

 

 

(66

)

 

 

 

 

(191

)

 

11




 

 

 

Apparatus and
Instrumentation

 

Capital
Equipment

 

Corporate

 

Eliminations

 

Total

 

 

 

(in thousands)

 

Six months ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customer

 

 

$

32,412

 

 

 

$

11,747

 

 

 

$

 

 

 

$

 

 

$

44,159

 

Intersegment

 

 

34

 

 

 

 

 

 

 

 

 

(34

)

 

 

Total Revenues

 

 

32,446

 

 

 

11,747

 

 

 

 

 

 

(34

)

 

44,159

 

Cost of product revenues

 

 

16,795

 

 

 

9,487

 

 

 

 

 

 

(34

)

 

26,248

 

Sales and marketing expenses

 

 

4,091

 

 

 

4,681

 

 

 

 

 

 

 

 

8,772

 

General and administrative expenses

 

 

3,454

 

 

 

1,822

 

 

 

2,354

 

 

 

 

 

7,630

 

Research and development expenses

 

 

1,574

 

 

 

1,928

 

 

 

 

 

 

 

 

3,502

 

Asset abandonments and impairments

 

 

 

 

 

17,923

 

 

 

 

 

 

 

 

17,923

 

Restructuring expenses

 

 

302

 

 

 

665

 

 

 

 

 

 

 

 

967

 

Amortization of intangible assets

 

 

842

 

 

 

946

 

 

 

 

 

 

 

 

1,788

 

Operating income (loss)

 

 

5,388

 

 

 

(25,705

)

 

 

(2,354

)

 

 

 

 

(22,671

)

Other income (expense), net

 

 

(222

)

 

 

(140

)

 

 

(170

)

 

 

 

 

(532

)

Six months ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customer

 

 

$

30,812

 

 

 

$

13,813

 

 

 

$

 

 

 

$

 

 

$

44,625

 

Intersegment

 

 

43

 

 

 

107

 

 

 

 

 

 

(150

)

 

 

Total Revenues

 

 

30,855

 

 

 

13,920

 

 

 

 

 

 

(150

)

 

44,625

 

Cost of product revenues

 

 

15,781

 

 

 

7,135

 

 

 

 

 

 

(150

)

 

22,766

 

Sales and marketing expenses

 

 

3,693

 

 

 

4,893

 

 

 

 

 

 

 

 

8,586

 

General and administrative expenses

 

 

3,251

 

 

 

1,575

 

 

 

1,828

 

 

 

 

 

6,654

 

Research and development expenses

 

 

1,321

 

 

 

2,095

 

 

 

 

 

 

 

 

3,416

 

Asset abandonments and impairments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring expenses

 

 

 

 

 

421

 

 

 

 

 

 

 

 

421

 

Amortization of intangible assets

 

 

1,023

 

 

 

989

 

 

 

 

 

 

 

 

2,012

 

Operating income (loss)

 

 

5,786

 

 

 

(3,188

)

 

 

(1,828

)

 

 

 

 

770

 

Other income (expense), net

 

 

(244

)

 

 

(99

)

 

 

(162

)

 

 

 

 

(505

)

 

13. Subsequent Event

During July 2005, the Company announced plans to divest its Capital Equipment Business Segment. The decision to divest this business segment is based on the fact that market conditions for the Capital Equipment Business Segment have been such that this business has not met the Company’s expectations and the Company’s decision to focus Company resources on the Apparatus and Instrumentation Business Segment. As of June 30, 2005, the Company did not qualify for held for sale accounting treatment under SFAS No. 144 and as a result the operating results for the Capital Equipment Business Segment are presented as part of continuing operations.

12




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, our plans to divest the Capital Equipment Business Segment, our business strategy, our ability to raise capital or borrow funds to consummate acquisitions and the availability of attractive acquisition candidates, our expectations regarding future costs of product revenues, our estimates regarding our capital requirements, our expenses of complying with the Sarbanes-Oxley Act of 2002, our anticipated compliance with the covenants contained in our credit facility, the adequacy of our financial resources and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could, “ “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in detail under the heading “Cautionary Factors” beginning on page 17 of this Quarterly Report on Form 10-Q. You should carefully review all of these factors, as well as other risks described in our public filings, and you should be aware that there may be other factors, including factors of which we are not currently aware, that could cause these differences. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.

Overview

During the quarter ended June 30, 2005, the Company realigned its lines of business for financial reporting purposes into two business segments, the Apparatus and Instrumentation Business Segment and the Capital Equipment Business Segment. Corporate costs are not allocated for purposes of segment reporting. The Company had previously been arranged in a single segment.

During July 2005, the Company announced plans to divest its Capital Equipment Business Segment. The decision to divest this business segment is based on the fact that market conditions for the Capital Equipment Business Segment have been such that this business has not met the Company’s expectations and the Company’s decision to focus Company resources on our Apparatus and Instrumentation Business Segment. As of June 30, 2005, the Company did not qualify for held for sale accounting treatment under SFAS No. 144 and as a result the operating results for the Capital Equipment Business Segment are presented as part of continuing operations.

From 1997 to 2004 our revenues grew at an annual compounded growth rate of approximately 35%. This was achieved by implementing our three-part growth strategy of new product development, strategic partnerships and acquisitions. This strategy has provided us with strong organic growth in good economic times, and in tough economic times, such as we experienced in 2002, 2003, and 2004, it has provided us with strong growth through acquisition. For 2005, without taking into account the planned divestiture of the Capital Equipment Business Segment, the Company expects revenue growth without further acquisitions to be below historic levels or to slightly decline. During the six months ended June 30, 2005, revenue decreased approximately 1% compared to the same period in 2004.

13




Apparatus and Instrumentation Business Segment

The Company’s Apparatus and Instrumentation Business Segment represents approximately 73% of our total revenues for the six months ended June 30, 2005. The products sold by the Apparatus and Instrumentation Business Segment are typically priced under $10,000 and are sold through a comprehensive catalog and web site, through distributors including GE Healthcare (formerly Amersham Biosciences) and Fisher Scientific, or in some cases through direct sales people. The products include syringe pumps, ventilators, isolated organ systems and amino acid analyzers, spectrophotometers, plate readers and gel electrophoresis units. The Company’s end user customers are typically research scientists at pharmaceutical and biotechnology companies, universities and government laboratories world wide.

Capital Equipment Business Segment

The Company’s Capital Equipment Business Segment represents approximately 27% of our total revenues for the six months ended June 30, 2005. The products sold by our Capital Equipment Business Segment are typically priced over $25,000 and often over $100,000 and are typically sold through a direct sales organization which consists of sales and marketing personnel, customer service, technical support, field application support and service. The products include the COPAS flow cytomerter, MIAS automated microscope, microarrayers, and nanolitre dispensers. The Company’s end user customers are typically research scientists at pharmaceutical and biotechnology companies, universities and government laboratories worldwide.

With the acquisitions of Union Biometrica in May 2001, Genomic Solutions in October 2002, GeneMachines in March 2003 and BioRobotics in September 2003, an increasing portion of our revenues is the result of sales of relatively high-priced products, considered to be capital equipment. These products lines are included in our Capital Equipment Business Segment. The capital equipment market has been volatile and is much more seasonal compared to our Apparatus and Instrumentation Business Segment, and, as such, we believe we have experienced, and we believe we will continue to experience, substantial fluctuations in our quarterly revenues from our Capital Equipment Business Segment. Reduced demand, delays in purchase orders, receipt, manufacture or shipment of products or receivables collection of these relatively high-priced products have led to substantial variability from quarter to quarter in our revenues, operating results and working capital requirements.

Additionally, the cyclical buying pattern of the capital equipment purchasing market could mask or exaggerate the economic trends underlying the market for our capital equipment product lines. Specifically, a decline in any quarter that is typically a quarter that we would expect to contribute less than one-quarter of projected revenue for the year, could be misinterpreted if the decline is instead attributable to a negative trend in the market and/or in the demand for our products. Conversely, an increase in capital equipment purchasing in any quarter that is typically a quarter which we would expect to contribute less than one-quarter of projected revenue for the year, could be misinterpreted as a favorable trend in the market and/or in the demand for our products.

Financing

During 2003 we entered into a $20 million credit facility with Brown Brothers Harriman & Co., under which we had drawn down approximately $15.2 million as of June 30, 2005. We believe that the financial covenants contained in the credit facility involving income, debt coverage and cash flow, as well as minimum working capital requirements are covenants that we will continue to be in compliance with under current operating plans.  The credit facility also contains limitations on our ability to incur additional indebtedness. Additionally, the facility requires creditor approval for acquisitions funded with cash in excess of $6 million and for those which may be funded with equity in excess of $10 million. We do not

14




believe that these requirements will be a significant constraint on our operations or on the acquisition portion of our growth strategy.

Historically, we have funded acquisitions with debt, capital raised by issuing equity and cash flow from operations. In order to continue the acquisition portion of our three part growth strategy beyond what our current cash balances and cash flow from operations can support we will need to raise more capital, either by incurring additional debt, issuing equity or a combination or through the sale of our Capital Equipment Business Segment. Currently, we are prohibited from accessing the public debt or equity markets until we are able to provide historical audited financial statements for a previous acquisition or until such financial statements are no longer required to be provided by SEC regulations. Until this matter is resolved, our ability to raise capital may be limited to private equity transactions, and/or the sale of our Capital Equipment Business Segment, additional borrowing and may result in entering into an agreement on less than favorable terms.

To the extent we receive some or all of the proceeds in cash from the planned divestiture of the Capital Equipment Business Segment, we intend to apply any cash proceeds to the repayment of debt, to continue our tuck-under acquisition strategy within the Apparatus and Instrumentation Business Segment, and we may consider other uses.

Components of Operating Income

Revenues .   We generate revenues by selling instruments, devices and consumables through our catalog, our direct sales force, our distributors and our website.

For products primarily priced under $10,000, every one to three years, we intend to distribute a new, comprehensive catalog initially in a series of bulk mailings, first to our existing customers, followed by mailings to targeted markets of potential customers. Over the life of the catalog, distribution will also be made periodically to potential and existing customers through direct mail and trade shows and in response to e-mail and telephone inquiries. From time to time, we also intend to distribute catalog supplements that promote selected areas of our catalog or new products to targeted subsets of our customer base. Future distributions of our comprehensive catalog and our catalog supplements will be determined primarily by the incidence of new product introductions, which cannot be predicted. Our end user customers are typically research scientists at pharmaceutical and biotechnology companies, universities and government laboratories worldwide. Revenue from catalog sales in any period is generally a function of time elapsed since the last mailing of the catalog, the number of catalogs mailed and the number of new items included in the catalog. We launched our latest comprehensive catalog in March 2004, with approximately 1,100 pages and approximately 70,000 copies printed. Revenues direct to end users, derived through our catalog and the electronic version of our catalog on our website, represented approximately 22% of our revenues for the year ended December 31, 2004 and approximately 21% for the six months ended June 30, 2005, respectively. We do not currently have the capability to accept purchase orders through our website.

Products sold under brand names of distributors including GE Healthcare (formerly Amersham Biosciences), are typically priced in the range of $5,000-$15,000. They are mainly scientific instruments like spectrophotometers and plate readers that analyze light to detect and quantify a very wide range of molecular and cellular processes or apparatus like gel electrophoresis units. We also use distributors for both our catalog products and our higher priced products, for sales in locations where we do not have subsidiaries or where we have distributors in place for acquired businesses. For the year ended December 31, 2004 approximately 53% of our revenues were derived from sales to distributors. For the six months ended June 30, 2005, approximately 58% our revenues were derived from sales to distributors.

For our higher priced products, which are typically priced over $25,000, we have a direct sales organization which consists of sales and marketing personnel, customer service, technical support, field application support and service. These organizations have been structured to attend to the specific needs

15




associated with the promotion and support of higher priced capital equipment customers. The combined expertise of both our sales and technical support staff provide a balanced skill set when promoting the relevant products at seminars, on-site demonstrations and exhibitions which are done routinely. The expertise of our field service personnel provides complete post-sale customer support for instrument specific service, repair and maintenance, and applications support. For the year ended December 31, 2004, approximately 25% of our revenues were derived from sales by our direct sales force. For the six months ended June 30, 2005, approximately 21%, respectively, of our revenues were derived from sales by our direct sales force.

For the year ended December 31, 2004, approximately 92% of our revenues were derived from products we manufacture or from collaboration and research grant projects. The remaining 8% of our revenues for the year ended December 31, 2004 were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment. For the six months ended June 30, 2005, approximately 93% of our revenues were derived from products we manufacture or from collaboration and research grant projects. The remaining 7% of our revenues for the six months ended June 30, 2005, were derived from complementary products we distribute. For the year ended December 31, 2004 and the three and six months ended June 30, 2005, approximately 46% and 47%, respectively, of our revenues were derived from sales made by our non-U.S. operations. A large portion of our international sales during this period consisted of sales to GE Healthcare, the distributor for our spectrophotometers, some of our plate readers and 1-D gel electrophoresis products. GE Healthcare distributes these products to customers around the world, including to many customers in the United States, from its distribution center in Uppsala, Sweden. As a result, we believe our international sales would have been a lower percentage of our revenues if we had shipped our products directly to our end users.

Cost of product revenues.   Cost of product revenues includes material, labor and manufacturing overhead costs, obsolescence charges, packaging costs, warranty costs, shipping costs and royalties. Our cost of product revenues may vary over time based on the mix of products sold. We sell products that we manufacture and products that we purchase from third parties. The products that we purchase from third parties have higher cost of goods sold because the profit is effectively shared with the original manufacturer. We anticipate that our manufactured products will continue to have a lower cost of product revenues as a percentage of revenues as compared with the cost of non-manufactured products for the foreseeable future. Additionally, our cost of product revenues as a percent of product revenues will vary based on mix of direct to end user sales and distributor sales, mix by product line and mix by geography.

General and administrative expense .   General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology and human resource functions. Other costs include, facility costs, professional fees for legal and accounting services, investor relations, insurances and provision for doubtful accounts.

Sales and marketing expense .   Sales and marketing expense consists primarily of salaries and related expenses for personnel in sales, marketing and customer support functions. We also incur costs for travel, trade shows, demonstration equipment, public relations and marketing materials, consisting primarily of the printing and distribution of our approximately 1,100 page catalog, supplements and various other specialty catalogs, and the maintenance of our websites. We may from time to time expand our marketing efforts by employing additional technical marketing specialists launching additional catalogs or web-sites or adding distributors. We may also from time to time expand our direct sales organizations in an effort to increase and/or support sales of our higher priced capital equipment instruments or to concentrate on key accounts or promote certain product lines.

16




Research and development expense .   Research and development expense consists primarily of salaries and related expenses for personnel and resources used to develop and enhance our products and to support collaboration agreements. Other research and development expense includes fees for consultants and outside service providers, and material costs for prototype and test units. We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue to make these investments in order to realize the potential of new technologies that we develop, license or acquire.

Results of Operations

Three months ended June 30, 2005 compared to three months ended June 30, 2004:

Revenues.

 

 

Three Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

16,277

 

$

15,626

 

$

651

 

 

4.2

%

 

Capital Equipment

 

5,447

 

6,834

 

(1,387

)

 

- 20.3

%

 

Total

 

21,724

 

22,460

 

(736

)

 

- 3.3

%

 

 

Apparatus and Instrumentation.   Revenues increased $0.7 million, or 4.2%, to $16.3 million for the three months ended June 30, 2005 from $15.6 million for the three months ended June 30, 2004. The increase in sales at Harvard Apparatus of approximately $0.2 million was primarily due to the increase in sales across various domestic product lines. Revenues increased approximately $0.4 million at our Biochrom subsidiary primarily due to the establishment of additional European distribution channels, increased sales to G.E. Healthcare, and an increase in sales at our Asys subsidiary. Also contributing to the increase in revenues for the second quarter of 2005 was a positive impact on sales denominated in foreign currencies of approximately $0.1 million.

Capital Equipment.   Revenues decreased $1.4 million, or 20.3%, to $5.4 million for the three months ended June 30, 2005 from $6.8 million for the three months ended June 30, 2004. The decrease in revenues for the three months ended June 30, 2005 compared to the same period of 2004 was primarily due to general decline in business across a variety of product lines at our Genomic Solutions, Union Biometrica and MAIA Scientific subsidiaries.

Cost of product revenues.

 

 

Three Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Cost of product sales

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

8,283

 

$

7,950

 

$

333

 

 

4.2

%

 

Capital Equipment

 

6,576

 

3,228

 

3,348

 

 

103.7

%

 

Total

 

14,859

 

11,178

 

3,681

 

 

32.9

%

 

 

Apparatus and Instrumentation.   Cost of product revenues increased $0.3 million, or 4.2%, to $8.3 million for the three months ended June 30, 2005 from $8.0 million for the three months ended June 30, 2004. The increase in cost of product revenue is directly attributed to the increase in revenues described above.

17




Capital Equipment.   Cost of product revenues increased $3.4 million, or 103.7%, to $6.6 million for the three months ended June 30, 2005 from $3.2 million for the three months ended June 30, 2004. The increase in cost of product sales is primarily related to the write-off of inventory for rationalized products of $3.5 million (see Restructuring Charges below).

Sales and marketing expense.

 

 

Three Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Sales and marketing expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

2,041

 

$

1,839

 

 

$

202

 

 

 

11.0

%

 

Capital Equipment

 

2,305

 

2,449

 

 

(144

)

 

 

- 5.9

%

 

Total

 

4,346

 

4,288

 

 

58

 

 

 

1.4

%

 

 

Apparatus and Instrumentation.   Sales and marketing expenses increased $0.2 million, or 11.0%, to $2.0 million for the three months ended June 30, 2005 from $1.8 million for the three months ended June 30, 2004. The increase in sales and marketing expenses of $0.2 million is primarily due to increased investment in direct marketing at Harvard Apparatus.

Capital Equipment.   Sales and marketing expenses decreased $0.1 million, or 5.9%, to $2.3 million for the three months ended June 30, 2005 from $2.4 million for the three months ended June 30, 2004. The decrease in sales and marketing expenses is primarily related to a decrease in commission expense due to a decrease in revenue levels during the second quarter of 2005 compared to the same period in 2004.

General and administrative expense.

 

 

Three Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

1,757

 

$

1,643

 

 

$

114

 

 

 

6.9

%

 

Capital Equipment

 

1,285

 

778

 

 

507

 

 

 

65.2

%

 

Corporate

 

1,257

 

973

 

 

284

 

 

 

29.2

%

 

Total

 

4,299

 

3,394

 

 

905

 

 

 

26.7

%

 

 

Apparatus and Instrumentation.   General and administrative expenses increased $0.1 million, or 6.9%, to $1.7 million for the three months ended June 30, 2005 from $1.6 million for the three months ended June 30, 2004. The increase in general and administrative expense is primarily due to the increased investment noted above at Harvard Apratus.

Capital Equipment.   General and administrative expenses increased $0.5 million, or 65.2%, to $1.3 million for the three months ended June 30, 2005 from $0.8 million for the three months ended June 30, 2004. The increase in general and administrative expenses is primarily related to an increase of $0.7 million in our allowance for doubtful accounts as a customer of our Genomic Solutions UK subsidiary filed for insolvency. This increase was offset by decreased payroll and payroll related expenses at our Genomic Solutions subsidiary.

Corporate.   General and administrative expenses increased $0.3 million, or 29.2%, to $1.3 million for the three months ended June 30, 2005 from $1.0 million for the three months ended June 30, 2004. The increases in general and administrative expenses are primarily due to costs associated with Sarbanes-Oxley compliance.

18




Research and development expense.

 

 

Three Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Research and development expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

704

 

$

696

 

 

$

8

 

 

 

1.1

%

 

Capital Equipment

 

911

 

1,051

 

 

(140

)

 

 

- 13.3

%

 

Total

 

1,615

 

1,747

 

 

(132

)

 

 

- 7.6

%

 

 

Apparatus and Instrumentation.   Research and development expenses of $0.7 million for the three months ended June 30, 2005, were relatively consistent with the same period of 2004.

Capital Equipment.   Research and development expenses decreased $0.2 million, or 13.3%, to $0.9 million for the three months ended June 30, 2005 from $1.1 million for the three months ended June 30, 2004. The decrease primarily relates to a decrease in salary and salary related expenses which was the result of 2004 restructuring activities.

Asset abandonments and impairments.

During the second quarter of 2005, the asset groups that comprise the Company’s Capital Equipment Business Segment, experienced a significant decrease in revenues and operating profit margins. As a result, with the assistance of third party independent appraisers the Company re-evaluated the long-lived assets associated with these asset groups in accordance with SFAS No. 144, Accounting for Impairments or Disposal of Long-Lived Assets and determined that certain intangible assets within these asset groups were impaired as of June 30, 2005. The Company recorded abandonment and impairment charges within the Capital Equipment Business Segment totaling approximately $8.0 million for long-lived assets during the second quarter of 2005.

Also, as a result of the significant decrease in revenues and operating profit margins experienced by the Capital Equipment Business Segment during the second quarter, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company, with the assistance of third party independent appraisers, re-evaluated the goodwill associated with the Genomic Solutions and Union Biometrica reporting units for impairment as of June 30, 2005. As a result of this goodwill impairment testing, the Company recorded impairment charges within the Capital Equipment Business Segment of approximately $9.9 million for goodwill during the second quarter of 2005.

Restructuring charges.

Restructuring charges were $4.5 million for the three months ended June 30, 2005 compared to $0.2 million for the same period in 2004. The cost of sales component of the 2005 restructuring charges was approximately $3.5 million and related to the write-off of inventory. The remaining $1.0 million related to severance and other facility closure costs.

During 2004, the Company announced restructuring activities at its Genomic Solutions subsidiary related to the closure of a manufacturing facility and realignment of its cost structure. Total restructuring charges for 2004 were approximately $0.4 million. During 2005, the Company reviewed and modified this plan to include the closure of another manufacturing facility and to discontinue certain product lines due to product rationalization decisions made during the second quarter. Total restructuring charges during the six months ended June 30, 2005 for the Genomic Solutions subsidiary were $4.0 million. These charges related primarily to the write-off of inventory for rationalized products of $3.5 million, severance costs of $0.2 million, facility closure costs of $0.2 million and other costs of $0.1 million. The remaining $0.5 million of restructuring charges recorded during the second quarter of 2005 were related to a decision to

19




consolidate our Union Biometrica US manufacturing facility into our Holliston, MA facility (approximately $0.2 million) and the realignment of personnel at our Biochrom, Scie-Plas and Hoefer subsidiaries (approximately $0.3 million).

Amortization of intangible assets.

Amortization of intangibles was $0.9 million and $1.1 million for the three months ended June 30, 2005 and 2004, respectively.

Other income (expense), net.

Other expense, net, for the three months ended June 30, 2005 was $0.4 million compared to $0.2 million for the same period of 2004. Other expense, net included approximately $0.2 million interest expense for the three months ended June 30, 2005 and 2004. Other expense, net, for the three months ended June 30, 2005 and 2004 included foreign exchange losses of $0.2 million and $26,000, respectively. These exchange losses were primarily the result of currency fluctuations on net payables and receivables between our subsidiaries.

Income taxes.

Income tax expense increased $3.8 million to $3.9 million for the three months ended June 30, 2005 from $0.1 million for the three months ended June 30, 2004. The increase in income tax expense is primarily due to an increase in our valuation allowance for deferred tax assets. The increase in our valuation allowance is the result of the Company’s determination that a portion of the gross deferred tax assets do not meet the “more likely than not” standard of realization based on the Company’s ability to generate sufficient future taxable income. This is the result of the decrease in revenues and operating profit margins in our Capital Equipment Business Segment during the second quarter of 2005. The valuation allowance was determined in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes .

Six months ended June 30, 2005 compared to six months ended June 30, 2004:

Revenues.

 

 

Six Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

32,412

 

$

30,812

 

$

1,600

 

 

5.2

%

 

Capital Equipment

 

11,747

 

13,813

 

(2,066

)

 

- 15.0

%

 

Total

 

44,159

 

44,625

 

(466

)

 

- 1.0

%

 

 

Apparatus and Instrumentation.   Revenues increased $1.6 million, or 5.2% to $32.4 million for the six months ended June 30, 2005 from $30.8 million for the six months ended June 30, 2004. The increase in revenues of approximately $1.6 million was primarily due to an increase of approximately $0.7 million due to the acquisition of the KD Scientific business and of approximately $0.8 million in our Biochrom reporting unit primarily due to the establishment of additional European distribution channels and an increase in sales at our Asys subsidiary. Also contributing to the increase in revenues for the first six months of 2005 was a positive impact on sales denominated in foreign currencies of approximately $0.3 million.

20




Capital Equipment.   Revenues decreased $2.1 million, or 15.0%, to $11.7 million for the six months ended June 30, 2005 from $13.8 million for the six months ended June 30, 2004. The decrease in revenues for the six months ended June 30, 2005 compared to the same period of 2004 was primarily due to general decline in business across a variety of product lines at our Genomic Solutions, Union Biometrica and MAIA Scientific subsidiaries.

Cost of product revenues.

 

 

Six Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Cost of product sales

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

16,760

 

$

15,738

 

$

1,022

 

 

6.5

%

 

Capital Equipment

 

9,488

 

7,028

 

2,460

 

 

35.0

%

 

Total

 

26,248

 

22,766

 

3,482

 

 

15.3

%

 

 

Apparatus and Instrumentation.   Cost of product revenues increased $1.0 million, or 6.5%, to $16.8 million for the six months ended June 30, 2005 from $15.7 million for the six months ended June 30, 2004. The increase in cost of product sales is directly attributed to the increase in revenues described above and an increase in sales of products with lower gross margins at our Biochrom subisidiary.

Capital Equipment.   Cost of product revenues increased $2.5 million, or 35.0%, to $9.5 million for the six months ended June 30, 2005 from $7.0 million for the six months ended June 30, 2004. The increase in cost of product sales is related to the write-off of inventory for rationalized products of $3.5 million (see restructuring charges below) offset in part by a decrease in cost of product revenues due to a decrease in sales volumes.

Sales and marketing expense.

 

 

Six Months Ended
June 30,

 

Dollar

 

Percent

 

 

 

2005

 

2004

 

Change

 

Change

 

 

 

(in thousands)

 

Sales and marketing expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparatus and Instrumentation

 

$

4,091

 

$

3,693

 

 

$

398

 

 

 

10.8

%

 

Capital Equipment

 

4,681

 

4,893

 

 

(212

)

 

 

- 4.3

%

 

Total

 

8,772

 

8,586