HBIO

Business Context and Reporting Period

Company: Harvard Bioscience, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2003
Business Overview: A global developer and marketer of specialized scientific instruments for drug discovery research. The company operates through three primary channels: a catalog for lower-priced items, distributor relationships (e.g., Amersham Biosciences) for mid-range products, and a direct sales force for high-value instrumentation. Approximately 48% of revenues are derived from international operations.

Key Financial Metrics

Note: Debt increased significantly due to a $6.0 million bridge loan entered into in March 2003 to fund the GeneMachines acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 63% ($7.5 million) year-over-year. Approximately $7.1 million of this increase is attributed to acquired revenues from companies purchased since Q1 2002.
• Acquisitions: The company completed two major acquisitions in Q1 2003:
  • BTX Division (Jan 31, 2003): Acquired for $4.1 million cash. Focuses on electroporation products.
  • GeneMachines (Mar 12, 2003): Acquired for $8.6 million cash. Focuses on high-throughput instrumentation for DNA/protein microarrays. Partially funded by a $6.0 million bridge loan.
• Expense Increases:
  • Sales & Marketing: Increased 142% ($2.1 million) primarily due to the direct sales force costs associated with the Genomic Solutions acquisition.
  • Amortization: Doubled to $625,000 due to new intangible assets from acquisitions.
• Liquidity: Cash and cash equivalents decreased by $6.0 million ($15.3M to $9.3M) primarily due to funding the BTX and GeneMachines acquisitions.

Guidance, Outlook, Risks, and Contingencies

• Capital Resources: Management expects available cash, operating cash flow, and debt capacity (including a negotiated $12.0 million revolving credit facility) to be sufficient for at least 12 months. However, there is no assurance the revolving facility will close, which could force repayment of the $6.0 million bridge loan on unfavorable terms.
• Legal Proceedings:
  • Grindle Arbitration: The company prevailed in an arbitration regarding the 1996 Harvard Apparatus purchase. The former owner is seeking to vacate the decision in Massachusetts Superior Court; the matter is pending.
  • Affymetrix Litigation: Genomic Solutions' claims against Affymetrix were dismissed via summary disposition. Affymetrix's counter-claim for $1.45 million in damages has been fully reserved in the financial statements. The company is evaluating an appeal.
  • Oxford Gene Technology: A patent infringement suit was settled in May 2003 with a nominal payment and marketing notice requirements.
• Stock-Based Compensation: The company uses the intrinsic-value method (APB 25). If the fair-value method (SFAS 123) were applied, pro forma net income for Q1 2003 would have been a loss of $57,000.
• Integration Risks: Significant risks exist regarding the integration of Genomic Solutions, BTX, and GeneMachines, including potential disruption of operations and failure to realize anticipated synergies.

Investor Verification Checklist

• Debt Covenants & Refinancing: Verify the status of the $12.0 million revolving credit facility negotiations and the terms of the $6.0 million Brown Brothers Harriman bridge loan.
• Acquisition Valuation: Confirm the final purchase price allocation for BTX and GeneMachines, as the Q1 filing notes these were estimated and not finalized.
• Legal Exposure: Monitor the outcome of the Grindle appeal and the potential appeal of the Affymetrix summary disposition ruling.
• Genomic Solutions Profitability: Assess the subsidiary's path to profitability, given its history of significant losses and the high costs of its direct sales model.
• Foreign Currency Impact: Review the sensitivity of future earnings to exchange rate fluctuations, given that 48% of revenue is international.