FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarterly Period Ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
For Quarter Ended
&n
Commission File Number
June 30, 1999
&n
0-12716
Novitron International, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
&n
04-2573920
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
One Gateway Center, Suite 411, Newton, MA. 02458
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (617) 527-9933
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 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 of common stock outstanding as of August 2, 1999 is 1,440,125.
Novitron
International, Inc.
AND SUBSIDIARIES
FORM 10-Q
Index
Page
Part I: FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Consolidated balance sheets at June 30, 1999 and March 31, 1999
1
Unaudited consolidated statements of operations for the three months ended June 30,
1999 and 1998
3
Consolidated statements of stockholders’ investment for the years ended March 31,
1998, and 1999 and
the three months ended June 30, 1998 (unaudited)
4
Unaudited consolidated statements of cash flows for the three months ended June 30,
1999 and 1998
5
Notes to unaudited consolidated financial statements
6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results
of Operations
10
Item 3: Quantitative and Qualitative Disclosure about Market Risk
12
Part II: OTHER INFORMATION
&n
13
SIGNATURE
&n
13
Novitron International,
Inc . AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
|
June 30, 1999 |
March 31, 1999 |
| CURRENT ASSETS: |
|
|
Cash and cash
equivalents |
$ 533,687 |
$ 1,287,073 |
Accounts
receivable, less reserves of $64,000 and
$79,000at June 30 and March 31, 1999, respectively |
2,315,374 |
2,883,384 |
Inventories |
3,084,086 |
3,018,573 |
Prepaid
expenses |
295,984 |
408,479 |
| Other current assets |
170,510 |
163,275 |
|
Total current assets |
6,399,641 |
7,760,784 |
|
|
|
EQUIPMENT,
at cost: |
|
|
Manufacturing
and computer equipment |
2,416,834 |
2,440,124 |
Furniture and
fixtures |
389,010 |
388,471 |
| Leasehold improvements |
326,214 |
338,380 |
| Vehicles |
65,599 |
63,503 |
|
3,197,657 |
3,230,478 |
| Less: Accumulated depreciation and
amortization |
2,257,670 |
2,262,255 |
|
939,987 |
968,223 |
|
|
|
| OTHER ASSETS, net |
829,528 |
929,803 |
|
$
8,169,156 |
$
9,658,810 |
The accompanying notes are an integral part of
these consolidated financial statements.
Novitron International, Inc.
AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
(Continued)
| |
June 30, 1999 |
March 31, 1999 |
| CURRENT LIABILITIES: |
|
|
| |
|
|
Short-term notes payable
and current portion of long-term
debt |
$ 87,131 |
$ 3,735 |
Accounts payable |
1,848,248 |
2,842,104 |
Accrued expenses |
1,948,789 |
2,205,531 |
Customer advances |
32,968 |
114,913 |
| Accrued income taxes |
16,608 |
- |
| Total current liabilities |
3,933,744 |
5,166,283 |
| LONG-TERM DEBT, net of current portion |
23,032 |
23,272 |
| MINORITY INTEREST |
8,012 |
- |
| DEFERRED TAXES |
151,913 |
169,000 |
| |
|
|
| COMMITMENTS AND CONTINGENCIES:
(Note 6) |
|
|
| |
|
|
| STOCKHOLDERS’ INVESTMENT: |
|
|
Preferred stock, $.01 par
value,
Authorized: 1,000,000 shares
Issued and outstanding: none |
-
|
-
|
Common stock, $.01 par
value,
Authorized: 6,000,000 shares
Issued and outstanding: 1,454,425 at June 30, and March
31, 1999, respectively (Note 3) |
14,544 |
14,544 |
Capital in excess of par
value |
4,881,066 |
4,881,066 |
Cumulative translation
adjustment |
(276,702) |
(147,736) |
Retained deficit |
(544,954) |
(437,442) |
| Treasury stock, 14,300 and 5,500 shares, at
cost, at June 30, and March 31, 1999, respectively |
(21,499) |
(10,177) |
| Total stockholders’ investment |
4,052,455 |
4,300,255 |
| |
$
8,169,156 |
$
9,658,810 |
The accompanying notes are an integral part of these
consolidated financial statements.
Novitron International, Inc.
AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
| |
1999 |
1998 |
REVENUES |
$ 3,056,936 |
$ 3,488,417 |
COST OF REVENUES |
2,082,598 |
2,581,983 |
Gross profit |
974,338 |
906,434 |
OPERATING EXPENSES: |
|
|
Sales and marketing |
173,807 |
235,374 |
Research and development |
516,520 |
456,856 |
General and administrative |
385,081 |
431,048 |
Restructuring |
38,352 |
- |
| |
1,113,760 |
1,123,278 |
Loss from operations |
(139,422) |
(216,844) |
Interest expense |
(1,333) |
(14,825) |
Interest income |
2,550 |
2,626 |
Other income |
28,272 |
9,261 |
| |
(109,933) |
(219,782) |
Benefit from income taxes |
(3,109) |
(47,863) |
| |
(106,824) |
(171,919) |
Minority interest |
(688) |
- |
Net loss |
$ (107,512) |
$ (171,919) |
Basic and Diluted Net loss
per share |
$ (0.07) |
$ (0.12) |
Weighted average common
shares outstanding |
1,444,403 |
1,454,420 |
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT FOR THE YEARS
ENDED MARCH 31, 1998, AND 1999 AND FOR THE THREE MONTHS ENDED JUNE 30,
1999
|
Common
Stock |
|
|
|
|
|
|
Number of
Shares |
Par Value |
Capital in Excess
of Par Value |
Treasury Stock |
Retained Earnings
(Deficit) |
Accumulated Other Comprehensive
Income (Loss) |
Comprehensive Income (Loss) |
| BALANCE at March 31, 1997 |
1,322,005 |
$13,220 |
$ 4,882,390 |
$
- |
$ (71,238) |
$148,696
|
$
- |
| Issuance of common stock
inconnection with a 10% stockdividend of March 27, 1998 |
132,206 |
1,322 |
(1,322) |
- |
- |
- |
- |
| Translation adjustment |
|
|
|
|
|
(436,080) |
(436,080) |
| Net income |
- |
- |
- |
- |
103,950 |
|
103,950
|
| Total comprehensive loss |
|
|
|
|
|
|
$(332,130) |
| BALANCE at March 31, 1998 |
1,454,211 |
14,542 |
4,881,068 |
- |
32,712 |
(287,384) |
|
| Further issuance of common stockin
connection with a 10% stockdividend of March 27, 1998 |
214 |
2 |
(2) |
- |
- |
- |
- |
| Purchase of treasury stock |
- |
- |
- |
(10,177) |
- |
- |
- |
| Translation adjustment |
- |
- |
- |
- |
- |
139,648 |
139,648 |
| Net loss |
- |
- |
- |
- |
(470,154) |
|
(470,154) |
| Total comprehensive loss |
|
|
|
|
|
|
$(330,506) |
| BALANCE at March 31, 1999 |
1,454,425 |
14,544 |
4,881,066 |
(10,177) |
(437,442) |
(147,736) |
|
| Purchase of treasury stock |
- |
- |
- |
(11,322) |
- |
- |
|
| Translation adjustment |
- |
- |
- |
- |
- |
(128,966) |
(128,966) |
| Net loss |
- |
- |
- |
- |
(107,512) |
- |
(107,512) |
| Total Comprehensive Loss |
|
|
|
|
|
|
$ (236,478) |
| BALANCE at June 30, 1999 |
1,454,425 |
$ 14,544 |
$4,881,066 |
$ (21,499) |
$(544,954) |
$(276,702) |
|
The accompanying notes are an integral part of these consolidated
financial statements.
Novitron International, Inc
. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
| |
1999 |
1998 |
CASH FLOWS FROM
OPERATING ACTIVITIES: |
|
|
Net loss |
$ (107,512) |
$ (171,919) |
Adjustments to reconcile
net lossto net cash provided by (used in)operating activities - |
|
|
Depreciation and
amortization |
80,777 |
91,756 |
Minority interest |
7,957 |
- |
Capitalization of
research costs |
- |
(32,135) |
Deferred income
taxes |
(10,911) |
36,580 |
Changes in Current Assets
and Liabilities- |
|
|
Accounts receivable |
469,262 |
11,875 |
Inventories |
(184,736) |
101,194 |
Prepaid expenses |
99,596 |
61,929 |
Other current assets |
(6,837) |
(2,624) |
Accounts payable |
(907,054) |
(185,931) |
Accrued expenses |
(180,997) |
(151,090) |
Customer advances |
(79,432) |
- |
Accrued income taxes |
9,846 |
(87,508) |
Net cash
used in operating activities |
(810,041) |
(327,873) |
| |
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES: |
|
|
Decrease in other assets |
59,681 |
129 |
Purchases of equipment |
(71,343) |
(28,522) |
Other, including foreign
exchange effects
on cash |
(6,566) |
(27,413) |
Net cash used in investing activities |
(18,228) |
(55,806) |
| |
|
|
CASH FLOWS FROM
FINANCING
ACTIVITIES: |
|
|
Proceeds from short- term
notes payable |
85,543 |
18,318 |
Proceeds from (payments on) |
|
|
long-term debt |
662 |
(4,186) |
Purchase of treasury stock |
(11,322) |
- |
Net cash provided by financing activities |
74,883 |
14,132 |
| |
|
|
NET DECREASE IN CASH AND
CASH EQUIVALENTS |
(753,386) |
(369,547) |
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR |
1,287,073 |
1,229,918 |
CASH AND CASH EQUIVALENTS
AT JUNE 30, 1999 and 1998 |
$ 533,687 |
$ 860,371 |
The accompanying notes are an integral part of these
consolidated financial statements.
Novitron International, Inc.
AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(1) Operations and Accounting Policies
Novitron International, Inc. ("the Company") is a
multinational company which, through its subsidiaries, designs, manufactures and markets
instrumentation used in clinical and analytical laboratories and in process monitoring in
industry. The Company’s Dutch subsidiary, Vital Scientific NV, designs and
manufactures scientific instrumentation, including blood chemistry analyzers. NovaChem BV,
another Dutch subsidiary, develops and markets process analyzers used in the production of
petrochemicals and pharmaceuticals and in environmental monitoring.
The accompanying consolidated financial statements reflect the
application of certain accounting policies described in this and other notes to the
consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries: Clinical Data BV, Clinical Data (Australia), Pty. Ltd. (95%
owned subsidiary – see Note 3), NovaChem BV, Spectronetics NV, and Vital Scientific
NV. All significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates
market, and consist of cash and marketable financial instruments with original maturities
of 90 days or less.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, include material, labor and manufacturing overhead, and consist of the following
at June 30, and March 31, 1999:
|
June 30, 1999 |
March 31, 1999 |
Raw materials |
$ 1,897,919 |
$ 1,774,146 |
Work-in-process |
332,524 |
421,680 |
| Finished goods |
853,643 |
822,747 |
| |
$3,084,086 |
$3,018,573 |
(d) Revenue Recognition
The Company generally recognizes revenue from the sale of products and
supplies at the time of shipment.
(e) Depreciation and
Amortization of Equipment and Intangibles
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate the cost of
equipment and intangibles over their estimated useful lives. The estimated useful lives,
by asset classification, are as follows:
| |
|
Asset
Classification |
Useful Lives |
Manufacturing
and computer equipment |
3-7 years |
Furniture and
fixtures |
3-7 years |
Leasehold
improvements |
Life of lease |
Vehicles |
3-5 years |
Goodwill |
20 years |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Continued)
(1) Operations and Accounting Policies (continued)
(e) Depreciation and Amortization of
Equipment and Intangibles (continued)
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," requires the Company to continually evaluate whether events and
circumstances have occurred which indicate that the estimated remaining useful life of
long-lived assets and such intangibles as goodwill may warrant revision or that the
carrying value of these assets may be impaired. To compute whether assets have been
impaired, the estimated gross cash flows for the estimated remaining useful life of the
asset are compared to the carrying value. To the extent that the gross cash flows are less
than the carrying value, the assets are written down to the estimated fair value of the
asset. At June 30, 1999 and 1998, the Company’s remaining goodwill relates to its
investment in Vital Scientific NV. Based on an analysis of other assets at June 30, 1999,
the Company does not believe impairment exists.
(f) Net (Loss) Income Per Share
The Company applies the provisions of SFAS No. 128, "Earnings per
Share," for computing and presenting earnings per share. Basic net (loss) income per
share is determined by dividing net (loss) income by the weighted average shares of common
stock outstanding during the year. Diluted net (loss) income per share has been calculated
on the same basis as basic earnings per share because the Company’s potentially
dilutive securities, stock options, are antidilutive. At June 30, 1999 and 1998, there
were 99,834 and 104,818 weighted average common equivalent shares, respectively, which
were not included in the diluted weighted average shares outstanding, as they were
antidilutive.
(g) Foreign Currency
Translation
The Company accounts for foreign currency transaction and translation
gains and losses in accordance with SFAS No. 52, "Foreign Currency Translation."
The functional currency of Clinical Data BV, Vital Scientific NV and Spectronetics NV is
the Dutch Guilder. The functional currency of Clinical Data Australia is the Australian
dollar and NovaChem BV uses the United States dollar as its functional currency. Gains and
losses from translating assets and liabilities that are denominated in currencies other
than the respective functional currency are included in other income in the consolidated
statements of operations. The translation adjustment required to report those subsidiaries
whose functional currency is other than the United States dollar into U.S. dollars is
credited or charged to cumulative translation adjustment, included as a separate component
of stockholders’ investment in the accompanying consolidated balance sheets.
Foreign currency transaction gains and losses are included in other
expense in the consolidated statements of operations.
(h) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(i) Management’s Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
(j) Warranty Policy
The Company provides a one-year warranty on its manufactured products,
which covers parts and materials. The Company reserves for this warranty at the time of
sale.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Continued)
(1) Operations and Accounting Policies (continued)
(k) Financial Instruments
The estimated fair value of the Company’s financial instruments,
which include cash equivalents, marketable securities, accounts receivable, accounts
payable and long-term debt, approximates their carrying value.
(l) Concentration of Credit
Risk
SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," requires disclosure of any significant off-balance-sheet and credit
risk concentrations. The Company has no significant off-balance-sheet credit risk such as
foreign exchange contracts, option contracts or other foreign hedging arrangements. The
Company maintains the majority of its cash balances with large financial institutions. See
Note 4 for financial information by segment.
(m) Software Development Costs
In connection with the development of software included as a
significant component of a new analysis product, the Company has applied the provisions of
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." SFAS No. 86 requires the Company to capitalize those costs
incurred for the development of computer software that will be sold, leased or otherwise
marketed once technological feasibility has been established up to the time at which the
product is available for sale to the customer. These capitalized costs are subject to an
ongoing assessment of the recoverability based on anticipated future revenues and changes
in hardware and software technologies.
During the three months ended June 30, 1998, the Company capitalized
approximately $32,000, under SFAS No. 86, which is included as a component of other assets
in the accompanying consolidated balance sheet. There were no capitalized software
development costs during the first quarter of fiscal year 2000.
Amortization of the capitalized software development costs begins when
the product is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not exceeding
five years or the sales ratio method. Unamortized capitalized software development costs
determined to be in excess of net realizable value of the product are expensed
immediately. The Company began to amortize the software costs capitalized during fiscal
years 1998 and 1997 over the sales ratio method during the year ended March 31, 1998.
During fiscal year 1999, the Company began to amortize the software costs capitalized
during 1999 over three years using the straight-line method. Total amortization recorded
during the three months ended June 30, 1999 and 1998 was approximately $2,600 and $18,900,
respectively, which is included in cost of revenues in the accompanying consolidated
statements of income.
(n) Comprehensive Income
Effective April 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources.
(o) Segment Information
Effective for the year ended March 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The requirements of this standard are presented in Note 4 of the Notes to Unaudited
Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Continued)
(2) Restructuring
During the fourth quarter of fiscal 1999, the Company began
implementation of a restructuring plan at its Vital Scientific subsidiary. As of June 30,
1999, the Company had notified five (5) employees about termination under the
restructuring. Management anticipates the restructuring will be completed in the first
half of fiscal year 2000 with an amount of approximately $40,000 to be charged in the
three (3) month period ending September 30, 1999. At June 30, 1999, a total of $89,298 has
been charged and is comprised entirely of severance related costs.
(3) Investment in Clinical Data (Australia) Pty. Ltd.
The Company, as part of an incentive program, entered into a restricted
stock purchase agreement whereby a Company officer may purchase up to 7.5% (16,575 shares
of common stock) of the Company’s wholly-owned subsidiary, Clinical Data Australia.
The sale of such shares is at par value. On May 19, 1999, the officer purchased 7.5% of
Clinical Data Australia, of which 5% vested on such date. The minority interest as shown
in the financial statements reflects such vested equity.
(4) Segment Data
Effective for the fiscal year ended March 31, 1999, the Company has
adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to stockholders. SFAS
No. 131 also establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company’s chief decision-maker, as defined
under SFAS No. 131, is the Chief Executive Officer. To date, the Company has viewed its
operations and manages its business as principally three operating segments: the
manufacture and sale of scientific instrumentation (Vital Scientific), the design and
marketing of process monitoring instrumentation (NovaChem) and the sale of instruments and
consumables in Australia (Clinical Data Australia). The Company evaluates the performance
of its operating segments based on income before income taxes, accounting changes, and
nonrecurring items. Intersegment sales and transfers are not significant. The "All
Other" column includes corporate related items, results of insignificant operations
and, as it relates to segment profit (loss), income and expense not allocated to
reportable segments.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Continued)
(4) Segment Data (continued)
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates performance based
on the sales, operating costs, net income and total assets. Revenues are attributed to the
subsidiary from which derived. Segment information for the three months ended June 30,
1999 and 1998 is as follows:
| |
Instrument
Manufacture |
Sales
Distribution |
Process Monitoring |
All Other |
Consolidated |
| Sales |
|
|
|
|
|
| June 30, 1999 |
$2,507,003 |
$ 475,515 |
$ 74,418 |
$ - |
$ 3,056,936 |
| June 30, 1998 |
3,141,002 |
347,415 |
- |
- |
3,488,417 |
| |
|
|
|
|
|
| Operating Costs |
|
|
|
|
|
| June 30, 1999 |
$2,674,878 |
$ 424,073 |
$ 58,885 |
$ 38,522 |
$ 3,196,358 |
| June 30, 1998 |
3,304,057 |
319,285 |
47,068 |
34,851 |
3,705,261 |
| |
|
|
|
|
|
| Net Income (Loss) |
|
|
|
|
|
| June 30, 1999 |
$ (130,776) |
$ 52,015 |
$ (26,569) |
$ ( 2,182) |
$ (107,512) |
| June 30, 1998 |
(81,446) |
7,949 |
(16,450) |
(81,972) |
(171,919) |
| |
|
|
|
|
|
| Total Assets |
|
|
|
|
|
| June 30, 1999 |
$7,203,175 |
$ 622,868 |
$ 122,863 |
$220,250 |
$ 8,169,156 |
| June 30, 1998 |
8,328,729 |
585,637 |
(75,455) |
330,874 |
9,169,785 |
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition and Liquidity
The Company used approximately $810,000 of cash in operations during
the first three months of fiscal year 2000. The decrease in funds comes from the increase
in inventory levels and the decrease in accounts payable and accrued expenses offset by a
decrease in accounts receivable and prepaid expenses. During the quarter, the Company used
$18,000 in investing activities, chiefly for the purchase of equipment. Approximately
$75,000 was generated by financing activities which came primarily from an increase in
short-term debt.
In April 1999, the Company entered a new relationship with a major
Dutch bank, which provides for a 4,000,000 Dutch Guilder (approximately $1,873,000) line
of credit. Interest on this facility is set at 1.25% above the base rate as reported by
the Netherlands Central Bank, presently 3.75%. Trade receivables and inventory of Vital
Scientific are provided as security for this facility. The line continues as long as
certain capital covenants are met. As of June 30, 1999, the Company is in full compliance
with all capital covenants of the credit line and no amounts are outstanding.
In May 1999, Clinical Data Australia entered into an agreement for a
450,000 Australian dollar (approximately $300,000) line of credit with an Australian bank.
Interest on this facility is set at prime plus 3%; the prime rate is presently 8.5%. Trade
receivables and inventory of Clinical Data Australia are provided as security for this
facility; the line also requires the maintenance of certain covenants. As of June 30,
1999, the Company is in full compliance with all capital covenants of the credit line.
The Company’s sources of cash include cash balances and the
aforementioned lines of credit from Dutch and Australian banks. The Company believes that
available funds will provide it with sufficient working capital through fiscal year 2000.
The effect of foreign currency transaction exchange on the result of
operations is included in other income and expense and is not material to the financial
statements. Any impact on the Company’s liquidity is largely dependent on the
exchange rates in effect at the time the predominant foreign functional currency, Dutch
Guilders, is translated into U.S. dollars. Approximately $182,000 of the June 30, 1999
balance of $534,000 of cash and cash equivalents is denominated in U.S. dollars. The
effect of foreign currency exchange rate fluctuations upon translation into U.S. dollars
is included in cumulative translation adjustment which is a separate component of
stockholders’ investment in the balance sheet. The effects of currency exchange rates
on future quarterly or fiscal periods on the results of operations are difficult to
estimate.
There are no formal hedging procedures employed by the Company. The
primary risk is to the monetary assets and liabilities denominated in currencies other
than the U.S. Dollar. Approximately $6.36 million of $6.40 million of current assets
reside in the Company’s foreign subsidiaries.
Results of Operations
First Quarter ended June 30, 1999 compared to the First Quarter ended
June 30, 1998
Consolidated revenues decreased 12.4% as compared to the prior year
which resulted primarily from lower than expected unit sales of the HYTEC 288 and of the
Selectra by Vital Scientific, but offset by an increase in sales at NovaChem and Clinical
Data Australia. Of the 12.4% reduction, 3.1% may be accounted for by the weakening of the
Company’s primary functional currency, the Dutch Guilder against the U.S. dollar.
The gross profit margin increased from 26.0% at June 30, 1998 to 31.9%
at June 30, 1999 reflecting better margins at all three operating subsidiaries. The
increase is primarily due to a change in the product mix.
Sales and marketing expenses decreased $61,600 or 26.2% from the same
period last year. The decrease is primarily the result of a program of cost containment
and expense reduction.
Research and development expenses as shown on the June 30, 1999
consolidated statement of operations increased $59,700 or 13.1% from the same quarter last
year. The Company expended an additional $31,900 during the three months ended June 30,
1998 which was capitalized onto the consolidated balance sheet. The actual increase in
research and development expenses was $27,800 or 5.7% as compared to the same period in
fiscal year 1999. The increase results from a project compensated by a third party.
General and administrative expenses decreased $46,000 or 10.7% from the
same period last year. The decrease is due to expense reduction and cost containment
programs.
During the fourth quarter of fiscal 1999, the Company began
implementation of a restructuring plan at its Vital Scientific subsidiary. As of June 30,
1999, the Company had notified an aggregate of five (5) employees about termination under
the restructuring. Management anticipates the restructuring will be completed in the first
half of fiscal year 2000 with the future amount of the restructuring charge to be
approximately $40,000. At June 30, 1999, the accrual was $168,000 and is comprised
entirely of severance related costs.
For the first three months of fiscal 2000, interest expense decreased
$13,500 reflecting the decreased reliance on borrowed funds. Interest income also
decreased due to fewer funds for investment. Other income and expense is predominantly
composed of foreign currency transaction gains and losses on the results of operations.
The minority interest on the June 30, 1999 financial statements
represents five percent (5%) of Clinical Data Australia sold to an officer of the Company
on May 19, 1999.
Year 2000
The Company has completed the process of evaluating its product lines
and information technology infrastructure to assess its exposure to the "Year 2000
compliance" issue. "Year 2000 compliance" means that the date-based
performance and functionality of the product or system so identified will be the same for
dates prior to, during, and after the year 2000, including the recognition of the year
2000 as a leap year.
The Company believes that based on its evaluation, no critical software
or hardware systems will be impacted by the compliance issue. To date the costs associated
with its "Year 2000 compliance" have been under $50,000. The Company does not
anticipate any significant future costs to be incurred with respect to "Year 2000
compliance".
In the first quarter of fiscal year 1999, the Company and its operating
subsidiaries developed a testing and compliance program to determine whether and to what
extent the Company needed to update its product lines and operations to become "Year
2000 compliant". Based on that work completed in the period ended December 31, 1998,
the Company has determined that the basic functionality of all tested products, including
all the products presently being sold as well as certain discontinued products, is not
affected by the "Year 2000" date change. The Company’s newly introduced
products have been determined to be "Year 2000 compliant". In a few instances,
certain minor problems in the least significant category of the standard classification of
"Year 2000" problems, which is designated as "noticeable and
inconvenient", were found in certain older instruments. For these, easy "work
around" instructions have been prepared and were made available to users. The Company
does not intend to modify discontinued products, and does not foresee any material
financial exposure arising from this decision.
The financial reporting systems currently used by the Company are
"Year 2000 compliant".
The Company is accumulating information regarding the "Year 2000
compliance" status of its main customers and suppliers. Based on information to date,
the Company’s major customers and suppliers will not be adversely affected by the
"Year 2000" problem, which will in turn adversely effect the Company.
In order to avoid such material adverse effects, the Company will
continue to seek business relationships only with those entities that are actively and
successfully addressing "Year 2000" issues. In the inability of certain existing
vendors or customers to successfully address "Year 2000" issues begins to
present adverse business effects for the Company, management may elect to suspend such
business relationships until such time that such vendors or customers become fully
compliant.
Based on the foregoing, the Company presently believes that the
"Year 2000" issue will not have a material impact on the Company’s business
operations or financial condition. There are no assurances, however, that as yet
unidentified "Year 2000" problems will not cause the Company to incur material
expenses in responding to such problems or otherwise have a material adverse effect on the
Company’s business, operating results or financial condition.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Foreign Exchange The accounts of the Company’s foreign
subsidiaries are translated in accordance with SFAS No. 52, "Foreign Currency
Translation". In translating the accounts of the foreign subsidiaries into U.S.
dollars, assets and liabilities are translated at the rate of exchange in effect at June
30, 1999, while stockholders’ equity is translated at historical rates. Revenue and
expense accounts are translated using the weighted average exchange rate in effect during
the three months ended June 30, 1999. Gains and losses from translating assets and
liabilities that are denominated in currencies other than the subsidiaries’
respective functional currency are included in other income in the consolidated statements
of operations. The translation adjustment required to report those subsidiaries whose
functional currency is other than the United States dollar into U.S. dollars is credited
or charged to cumulative translation adjustment, included as a separate component of
stockholders’ equity in the accompanying consolidated balance sheets. Substantially
all of the Company’s sales were denominated in foreign currencies during the
three-month periods ended June 30, 1999 and 1998. The Company recognized a loss of
approximately $277,000 related to such foreign currency transactions and translations as
of June 30, 1999 which is included in cumulative translation adjustment in the
accompanying consolidated statements of stockholders’ investment.
Investment Portfolio The Company does not invest in derivative
financial investments that meet the high quality standards, as specified in the
Company’s investment policy guidelines; the policy also limits the amount of credit
exposure of any issue, issuer, and type of investment. See Note 1 – Summary of
Significant Accounting Policies – in the Notes to Unaudited Consolidated Financial
Statements.
Part II. OTHER INFORMATION
Item 1. Legal proceedings: None
Items 2 - 6: None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
&
Novitron International, Inc.
&n
(Regsitrant)
&
Israel M. Stein MD
Date: August 9, 1999
&n
Israel M. Stein MD
&n
President
