Page 16
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 2001 Commission File No. 0-6994
------
NEW BRUNSWICK SCIENTIFIC CO., INC.
State of Incorporation - New Jersey E. I. #22-1630072
-----------
44 Talmadge Road, Edison, N.J. 08818-4005
Registrant's Telephone Number: 732-287-1200
------------
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 twelve (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 ninety (90) days.
Yes X No
--- ---
There are 6,744,257 Common shares outstanding as of November 3, 2001.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statements of Comprehensive Income (Loss) -
Three and Nine Months Ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
PART II. OTHER INFORMATION 17
2
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
------
September 30, December 31,
2001 2000
----------- ------------
Current Assets (Unaudited)
- --------------------------------------------------------
Cash and cash equivalents $ 2,368 $ 2,473
Accounts receivable, net 10,065 10,403
Inventories:
Raw materials and sub-assemblies 7,817 6,325
Work-in-process 2,417 4,344
Finished goods 6,532 6,052
------------ --------
Total inventories 16,766 16,721
Prepaid expenses and other current assets 1,253 1,269
------------ --------
Total current assets 30,452 30,866
------------ --------
Property, plant and equipment, net 5,126 5,936
Excess of cost over net assets acquired, net 4,354 4,552
Deferred income taxes 153 153
Other assets 1,326 1,499
------------ --------
$ 41,411 $43,006
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
Current Liabilities
- --------------------------------------------------------
Current installments of long-term debt $ 7,446 $ 7,598
Accounts payable and accrued expenses 7,176 8,200
------------ --------
Total current liabilities 14,622 15,798
------------ --------
Long-term debt, net of current installments 647 694
Other liabilities 411 572
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par value per share,
authorized 25,000,000 shares; issued and outstanding,
2001 - 6,744,257 and 2000 - 6,115,557 422 383
Capital in excess of par 40,061 36,963
Accumulated deficit (11,850) (9,140)
Accumulated other comprehensive loss (2,845) (2,202)
Notes receivable from exercise of stock options (57) ( 62)
------------ --------
Total shareholders' equity 25,731 25,942
------------ --------
$ 41,411 $43,006
============ ========
See notes to consolidated financial statements.
3
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 13,542 $ 12,771 $ 43,041 $ 35,319
Operating costs and expenses:
Cost of sales 8,500 7,806 26,085 20,984
Selling, general and administrative expenses 3,727 3,671 11,896 11,699
Research, development and engineering expenses 601 773 2,049 2,631
DGI research expenses - 821 1,312 2,616
Non-recurring severance costs - - 260 -
---------- ---------- ----------- ----------
Total operating costs and expenses 12,828 13,071 41,602 37,930
---------- ---------- ----------- ----------
Income (loss) from operations 714 (300) 1,439 (2,611)
Other income (expense):
Interest income 12 15 45 36
Interest expense (141) (166) (437) (468)
Other, net (29) (42) (76) (71)
Writedown of investment - (150) - (950)
---------- ---------- ----------- ----------
(158) (343) (468) (1,453)
---------- ---------- ----------- ----------
Income (loss) before income tax expense (benefit)
and equity in operations of DGI 556 (643) 971 (4,064)
Income tax expense (benefit) 30 (12) 103 (105)
---------- ---------- ----------- ----------
Income (loss) before equity in operations of DGI 526 (631) 868 (3,959)
Equity in operations of DGI (403) - (493) -
---------- ---------- ----------- ----------
Net income (loss) $ 123 $ (631) $ 375 $ (3,959)
========== ========== =========== ==========
Basic earnings (loss) per share $ .02 $ (.09) $ .06 $ (.60)
========== ========== =========== ==========
Diluted earnings (loss) per share $ .02 $ (.09) $ .06 $ (.60)
========== ========== =========== ==========
Basic weighted average number of
shares outstanding 6,744 6,678 6,734 6,619
========== ========== =========== ==========
Diluted weighted average number of
shares outstanding 6,782 6,678 6,754 6,619
========== ========== =========== ==========
See notes to consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2001 2000
------- -------
Cash flows from operating activities:
Net income (loss) $ 375 $ (3,959)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 980 865
Writedown of investment - 950
Equity in operations of DGI 493 -
Change in related balance sheet accounts:
Accounts receivable 163 2,623
Refundable income taxes 151 (210)
Inventories (222) (3,267)
Prepaid expenses and other current assets (164) (195)
Other assets (142) (218)
Accounts payable and accrued expenses 427 (121)
Advance payments from customers (1,383) 1,697
Other liabilities (161) (118)
--------- ---------
Net cash provided by (used in) operating activities 517 (1,953)
--------- ---------
Cash flows from investing activities:
Capital expenditures (518) (289)
Sale of equipment 18 3
Increase in excess of cost over net assets acquired related
to acquisition costs - (205)
--------- ---------
Net cash used in investing activities (500) (491)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (158) (163)
Borrowings under revolving credit facility - 1,000
Proceeds from issue of common stock under stock purchase
and option plans 64 838
Payments on notes receivable related to exercised stock options 5 270
--------- ---------
Net cash provided by (used in) financing activities (89) 1,945
--------- ---------
Net effect of exchange rate changes on cash (33) (139)
--------- ---------
Net decrease in cash and cash equivalents (105) (638)
Cash and cash equivalents at beginning of period 2,473 2,111
--------- ---------
Cash and cash equivalents at end of period $ 2,368 $ 1,473
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 439 $ 443
Income taxes 155 291
Non-cash contribution of equipment to DGI 429 -
See notes to consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $123 $ (631) $ 375 $(3,959)
Other comprehensive income (loss):
Foreign currency translation adjustment 644 (638) (643) (1,367)
---- -------- ------ --------
Net comprehensive income (loss) $767 $(1,269) $(268) $(5,326)
==== ======== ====== ========
See notes to consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Note 1 - Interim results:
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly, the financial position of the Company
as of September 30, 2001 and the results of its operations and cash flows for
the three and nine months ended September 30, 2001 and 2000. Interim results
may not be indicative of the results that may be expected for the year.
In 2000, the Company adopted the provisions of the FASB's Emerging Issues Task
Force (EITF), Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs," which requires the Company to report all amounts billed to a customer
related to shipping and handling as revenue, and to disclose the classification
of costs incurred for shipping and handling costs if such costs are not included
in cost of goods sold. The Company has reclassified such cost amounts, which
were previously netted in sales to cost of sales. As a result of this
reclassification, sales and cost of sales were increased by $174,000 in the 2000
three-month period and by $526,000 in the 2000 nine-month period. All amounts
in 2001 have been classified as cost of goods sold.
Note 2 - Investment in DGI:
On June 14, 2001, an institutional investor invested $5,000,000 in DGI, in
exchange for Series B voting convertible preferred stock of DGI, in fulfillment
of a preliminary commitment made March 30, 2001. The Series B preferred stock
of DGI has certain dividend, liquidation and other rights senior to the Series A
preferred stock of DGI held by the Company. The transaction reduced the
Company's ownership interest in DGI to 47%. Accordingly, effective June 14,
2001, the Company no longer exercises control and ceased consolidating the
operations of DGI but reports its percentage of income or loss in DGI's
operations on the equity method of accounting based upon its continued ability
to exercise significant influence over DGI. The Company is not required to, and
will not record losses from its share of DGI's operations beyond the carrying
value of its investment since it has no further obligations to fund the DGI
operations. As of September 30, 2001, the Company's investment in DGI amounted
to $34,000 and is included in Other Assets in the Company's consolidated balance
sheet.
7
Note 3 - Segment Information as of and for the three and nine months ended
September 30, 2001 and 2000 is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
Laboratory Drug Laboratory Drug
Research Lead Total Research Lead Total
Equipment Discovery Segments Equipment Discovery Segments
--------- --------- -------- --------- --------- --------
2001
--------
Net sales $13,542 $ - $13,542 $42,641 $ 400 $43,041
Percentage of sales 100% - 100% 99.1% 0.9% 100%
Income (loss) from operations 714 - 714 2,351 (912) 1,439
Total assets (1) 41,411 - 41,411 41,411 - 41,411
Capital expenditures 160 - 160 518 - 518
Depreciation and amortization (1) 313 - 313 980 - 980
2000
--------
Net sales $12,678 $ 93 $12,771 $34,991 $ 328 $35,319
Percentage of sales 99.3% 0.7% 100% 99.1% 0.9% 100%
Income (loss) from operations 428 (728) (300) (323) (2,288) (2,611)
Total assets (1) - - - 43,163 369 43,532
Capital expenditures 64 - 64 289 - 289
Depreciation and amortization (1) 187 - 187 865 - 865
<FN>
(1) As described in Note 2, the Company's interest in DGI was reduced to 47% as of June
14, 2001 and subsequent to that date, is reported using the equity method of accounting.
Fixed assets and depreciation related to the Drug Lead Discovery segment were not allocated
to the segment as the assets were owned directly by New Brunswick Scientific Co., Inc. and
were included in the Laboratory Research Equipment Segment. However, rental expense in lieu
of depreciation expense is charged to the Drug Lead Discovery segment through the transaction
date June 14, 2001 (see Note 2), which is comprised of DGI BioTechnologies, Inc.
Note 4 - Income (loss) per share:
Basic income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted income (loss) per share
is calculated by dividing net income (loss) by the sum of the weighted average
number of shares outstanding plus the dilutive effect of stock options which
have been issued by the Company. The number of stock options that are dilutive
are 38,000 and 20,000 for the three and nine-month periods ended September 30,
2001, respectively (none in 2000). The number of options that are antidilutive
is 388,000 for the nine month period ended September 30, 2001.
Note 5 - Long-term debt and credit agreement:
On April 16, 1999, the Company entered into an agreement (the Bank Agreement)
with First Union National Bank for a three year, $31 million secured line of
credit. The Bank Agreement provides the Company with a $5 million revolving
credit facility for both working capital and for letters of credit, a $1 million
Revolving Line of Credit for equipment acquisition purposes, a $15 million
8
Credit line for acquisitions and a $10 million foreign exchange facility. There
are no compensating balance requirements and any borrowings under the Bank
Agreement bear interest at various rates based upon a function of the bank's
prime rate or Libor at the discretion of the Company. The interest rate at
September 30, 2001 is 4.6%. All of the Company's domestic assets, which are not
otherwise subject to lien have been pledged as security for any borrowings under
this Bank Agreement. The Bank Agreement contains various business and financial
covenants including among other things, a debt service coverage ratio, a net
worth covenant, and a ratio of total liabilities to tangible net worth. The
Company was not in compliance with certain financial covenants at December 31,
2000 and March 31, 2001 which non-compliance was waived by the bank. On May 10,
2001, the financial covenants were amended and, as a result, the Company is in
compliance with the amended covenants at September 30, 2001 and expects to be in
compliance for the ensuing twelve months. At September 30, 2001, $7,405,000 was
outstanding under the Bank Agreement.
The Bank Agreement is due to mature on April 16, 2002, however, the Company
expects to hold discussions with the bank during the first quarter of 2002 which
it expects will result in the extension of the Bank Agreement. Nonetheless,
since the Bank Agreement matures within twelve months of September 30, 2001, the
debt under the Bank Agreement has been classified as a current liability as at
September 30, 2001.
As of September 30, 2001, the Company has $1.8 million available under the
revolving credit facility for working capital and for letters of credit, $1.0
million available under the revolving credit facility for equipment
acquisitions, $9.8 million available under the credit line for acquisitions and
$10.0 million available under the foreign exchange facility.
In November 1999, the Company issued notes in the amount of 250,000 ($392,500
at the date of acquisition) in connection with the acquisition of the DJM
Cryo-Research Group. The notes bear interest at 6% which are payable annually
and principal is payable in five equal annual installments commencing November
2004. At September 30, 2001, the balance of the notes was $368,000.
The Company is a party to first and second mortgages on the facility of the
Company's Netherlands subsidiary. At September 30, 2001, an aggregate of
$320,000 was outstanding on both mortgages.
Note 6 - Goodwill:
In July 2001, the FASB issued Statement No. 141, Business Combinations (SFAS
141") and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also specifies
the criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead they will be tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
9
The Company is required to adopt the provisions of SFAS 141 for acquisitions
initiated after June 30, 2001, and SFAS 142 effective January 1, 2002. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized until the Company's adoption of SFAS 142 on
January 1, 2002. Upon adoption SFAS 142 will require the Company to perform an
assessment of whether there is an indication that goodwill is impaired based on
the provisions of SFAS 142. To the extent an indication exists that the
goodwill may be impaired, the Company must measure the impairment loss, if any.
Any impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations. Based on current
goodwill balances, the Company will have approximately $4,307,000 of unamortized
goodwill as of January 1, 2002, which will be subject to the transition
provisions of SFAS 141 and SFAS 142. Amortization expense related to goodwill
was $217,000 and $137,000 for the year ended December 31, 2000 and the nine
months ended September 30, 2001, respectively. After December 31, 2001, the
Company will no longer be amortizing goodwill. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, except for the non
amortization of goodwill, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether any transitional impairment losses will
be required to be recognized as the cumulative effect of a change in accounting
principle.
Note 7 - Stock dividend:
On April 2, 2001 and February 28, 2000, the Company declared a 10% stock
dividend. The April 2, 2001 stock dividend was payable on May 15, 2001 to
shareholders of record as of April 16, 2001. Basic and diluted income (loss)
per share amounts have been retroactively restated to reflect the stock
dividends. The 2001 dividend has been reflected in retained earnings as of
March 31, 2001.
10
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Forward-looking statements, within the meaning of Section 21E of the Securities
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis of Financial Condition and Results of Operations. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements.
The following is Management's discussion and analysis of significant factors
that have affected the Company's operating results and financial condition
during the three and nine-month periods ended September 30, 2001.
Results of Operations
---------------------
Impact of Terrorist Activities and Responses
- -------------------------------------------------
The Company cannot assess at this time whether the terrorist attacks on
September 11, 2001 and subsequent terrorist activities or the response of the
United States and foreign governments to those attacks and activities will have
any specific impact on the Company. The Company notes that its equipment is
used by pharmaceutical and biotechnology companies in the development of
vaccines and antibiotics.
Drug-Lead Discovery Business
- ------------------------------
In October 1995, the Company entered the drug-lead discovery business by forming
a new company to develop a novel, small molecule drug discovery platform. The
company, DGI BioTechnologies, Inc. (DGI), was majority-owned and fully funded by
the Company and occupies specially designed laboratory space at the Company's
headquarters facility in Edison, New Jersey. DGI's operations have had a
significant negative impact on the Company's 2001 and 2000 earnings. During the
nine month period ended September 30, 2001 and 2000, $1,312,000 and $2,616,000,
respectively, of research and development expenses were charged to operations
resulting in operating losses related to DGI of $912,000 in 2001 and $2,288,000
in 2000. On June 14, 2001 an institutional investor invested $5,000,000 in DGI
in exchange for Series B voting convertible preferred stock of DGI. The Series
B convertible preferred stock of DGI has certain dividend, liquidation and other
rights senior to the Series A preferred stock of DGI held by the Company. This
transaction reduced the Company's ownership interest in DGI to 47%.
Accordingly, effective June 14, 2001, as required by accounting principles
generally accepted in the United States of America, the Company no longer
exercises control and ceased consolidating the operations of DGI but reports its
percentage of income or loss in DGI's operations on the equity method of
accounting based upon its continued ability to exercise significant influence
11
over DGI. The Company is not required to, and will not record losses from its
share of DGI's operations beyond the carrying value of its investment since it
has no further obligations to fund the DGI operations. As of September 30,
2001, the Company's investment in DGI amounted to $34,000 and is included in
Other Assets in the Company's consolidated balance sheet.
The Company has entered into a two-year lease with DGI under which DGI will
occupy 8,800 square feet of office and laboratory space for a gross rental of
$211,200 per year. Under the terms of the lease, DGI has the right to cancel
upon providing the Company with 90 days notice. In addition, for a fee, the
Company has agreed to provide certain administrative support services to DGI
until such time as DGI has put into place its own administrative infrastructure.
The lease and support service agreement revenues were established at arm's
length utilizing market value information.
Quarter Ended September 30, 2001 vs. Quarter Ended September 30, 2000.
- --------------------------------------------------------------------------------
For the quarter ended September 30, 2001, net sales were $13,542,000 compared
with net sales of $12,771,000 for the quarter ended September 30, 2000, an
increase of 6.0%. Net income for the 2001 quarter of $123,000 or $.02 per
diluted share compares with a net loss of $631,000 or $.09 per diluted share for
the second quarter of 2000.
The increase in net sales for the 2001-quarter is attributable to higher
shipments of fermentors and custom bioprocess systems. Gross margins decreased
during the 2001 quarter to 37.2% from 38.9% during the quarter ended September
30, 2000 primarily as a result of lower margins realized on custom engineered
bioprocess systems and lower margins generated by the Company's European
subsidiaries due to competitive pressures and the effect of the strong dollar.
Selling, general and administrative expenses remained relatively flat at
$3,727,000 in the 2001 quarter compared with $3,671,000 in 2000. During 2000,
the Company did not incur any significant increases in its selling, general and
administrative expenses. This cost control trend continued into 2001 and the
Company has made certain cost reductions in order to offset normal inflationary
increases in salaries and other expenses.
Research, development and engineering expenses decreased to $601,000 in 2001
from $773,000 during the third quarter of 2000 primarily as a result of an
overall reduction in engineering costs. DGI's research and development expenses
were reduced to zero in the 2001 quarter compared to $821,000 in the 2000
quarter as a result of DGI having received an infusion of funds on June 14, 2001
from an institutional investor as described above and the fact that DGI's
operations are no longer consolidated with those of the Company effective June
14, 2001. On June 29, 2001 the Company announced that it had ceased accepting
orders for large fully custom-engineered bioprocess systems. Custom-engineered
products represent a very small niche business for the Company and accounted for
less than seven percent of 2000 net sales.
During the quarter ended September 30, 2000, the Company recorded a $150,000
writedown in its investment in Organica, Inc. vs. zero in the 2001 quarter
thereby reducing its investment to zero.
12
The Company's tax provision was $30,000 for the three months ended September 30,
2001. The provision is lower than the expected federal rate of 34% primarily
due to the utilization of domestic net operating loss carryforwards.
Excluding the impact of minority-owned DGI BioTechnologies on both periods as
well as the aforementioned nonrecurring items, income before income taxes on a
proforma basis was $556,000 in the 2001 quarter compared with $235,000 in 2000.
Equity in the operations of DGI of $403,000 recorded in the quarter ended
September 30, 2001 compares with zero during last year's third quarter, as the
equity method of accounting has been applied effective June 14, 2001 concurrent
with the reduction in the Company's ownership interest in DGI to 47%.
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000.
- --------------------------------------------------------------------------------
For the nine months ended September 30, 2001, net sales were $43,041,000
compared with net sales of $35,319,000 for the nine months ended September 30,
2000, an increase of 21.9%. Net income for the 2001 period of $375,000 or $.06
per diluted share compares with a net loss of $3,959,000 or $.60 per diluted
share for the comparable 2000 period.
The increase in net sales for the first nine months of 2001 is attributable to
higher shipments of ultra-low temperature freezers, which benefited from the
recent well-received introduction of our new freezer line incorporating vacuum
insulated panel technology. These shipments increased 41% vs. last year's first
nine months. In addition, shipments of fermentors and custom bioprocess systems
increased significantly. Gross margins decreased during the 2001 period to
39.4% from 40.6% during the nine months ended September 30, 2000 primarily as a
result of lower margins realized on custom engineered bioprocess systems and
lower margins generated by the Company's European subsidiaries due to
competitive pressures and the effect of the strong dollar.
Selling, general and administrative expenses remained relatively flat at
$11,896,000 in the 2001 period compared with $11,699,000 in 2000. During 2000,
the Company did not incur any significant increases in its selling, general and
administrative expenses. This cost control trend continued into 2001 and the
Company has made certain cost reductions in order to offset normal inflationary
increases in salaries and other expenses.
Research, development and engineering expenses decreased to $2,049,000 in 2001
from $2,631,000 during the first nine months of 2000 primarily as a result of an
overall reduction in engineering costs and a reduction in force associated with
the Company's decision, announced on June 29, 2001 that it had ceased accepting
orders for large fully custom-engineered bioprocess systems. In connection
therewith, the Company took a charge of $260,000 during the nine months ended
September 30, 2001 for non-recurring severance costs. Custom-engineered
products represent a very small niche business for the Company and accounted for
less than seven percent of 2000 net sales. DGI's research and development
expenses were reduced to $1,312,000 in the first nine months of 2001 compared to
$2,616,000 in the first nine months of 2000 as a result of DGI receiving an
infusion of funds on June 14, 2001 from an institutional investor and the fact
that DGI's operations are no longer consolidated with those of the Company
effective June 14, 2001.
13
During the nine months ended September 30, 2000, the Company recorded a $950,000
writedown in its investment in Organica, Inc. vs. zero in the 2001 period.
The Company's tax provision was $103,000 for the nine months ended September 30,
2001. The provision is lower than the expected federal rate of 34% primarily
due to the utilization of domestic net operating loss carryforwards.
Excluding the impact of DGI BioTechnologies on both periods as well as the
nonrecurring items, income before income taxes on a proforma basis was
$2,143,000 during the 2001 period compared with last year's loss of $826,000.
Equity in the operations of DGI of $493,000 recorded in the nine months ended
September 30, 2001 compares with zero during last year's period as the equity
method of accounting has been applied effective June 14, 2001 concurrent with
the reduction in the Company's ownership interest in DGI to 47%.
Financial Condition
-------------------
Liquidity and Capital Resources
- ----------------------------------
Net income for the nine months ended September 30, 2001 was $375,000 compared
with a net loss of $3,959,000 in 2000.
Working capital increased to $15,830,000 at September 30, 2001 from $15,068,000
at December 31, 2000 and cash and cash equivalents decreased to $2,368,000 from
$2,473,000 at December 31, 2000.
Net cash provided by (used in) operating activities was $517,000 in 2001 as
compared to ($1,953,000) in 2000. The significant change was due to the
improvement in net income and the absence of an investment write-down in the
current period offset by a decrease in accounts payable and accrued expenses and
advance payments from customers of $956,000.
Net cash used in investing activities amounted to $500,000 in 2001 as compared
to $491,000 in 2000. The 2001 and 2000 periods included expenditures for
property, plant and equipment and the 2000 period included additional goodwill
related to acquisition costs of DJM Cryo-Research. The company has no
significant capital projects planned that would significantly increase the
current trend of capital expenditures.
Net cash used in financing activities amounted to $89,000 in 2001 as compared to
net cash provided by financing activities of $1,945,000 in 2000. Both periods
reflect the repayment of long-term debt and the 2000 period includes $1,000,000
from borrowings under the Company's revolving credit facility, $838,000 of
proceeds under stock purchase and option plans and $270,000 of repayments on
notes receivable related to exercised stock options.
On April 16, 1999, the Company entered into an agreement (the Bank Agreement)
with First Union National Bank for a three year, $31 million secured line of
credit. The Bank Agreement provides the Company with a $5 million revolving
14
credit facility for both working capital and for letters of credit, a $1 million
Revolving Line of Credit for equipment acquisition purposes, a $15 million
credit line for acquisitions and a $10 million foreign exchange facility. There
are no compensating balance requirements and any borrowings under the Bank
Agreement bear interest at various rates based upon a function of the bank's
prime rate or Libor at the discretion of the Company. All of the Company's
domestic assets, which are not otherwise subject to lien, have been pledged as
security for any borrowings under this Bank Agreement. The Bank Agreement
contains various business and financial covenants including among other things,
a debt service coverage ratio, a net worth covenant, and a ratio of total
liabilities to tangible net worth. The Company was not in compliance with
certain financial covenants at December 31, 2000 and March 31, 2001 which
non-compliance was waived by the bank. On May 10, 2001, the financial covenants
were amended and, as a result, the Company is in compliance with the amended
covenants at September 30, 2001 and expects to be in compliance for the ensuing
twelve months. At September 30, 2001, $7,405,000 was outstanding under the Bank
Agreement.
The Bank Agreement is due to mature on April 16, 2002, however, the Company
expects to hold discussions with the bank during the first quarter of 2002,
which it expects will result in the extension of the Bank Agreement.
Nonetheless, since the Bank Agreement matures within twelve months of June 30,
2001, the debt under the Bank Agreement has been classified as a current
liability as at September 30, 2001.
As of September 30, 2001, the Company has $1.8 million available under the
revolving credit facility for working capital and for letters of credit, $1.0
million available under the revolving credit facility for equipment
acquisitions, $9.8 million available under the credit line for acquisitions and
$10.0 million available under the foreign exchange facility.
Management believes that the resources available to the Company, including its
line of credit are sufficient to meet its near and intermediate-term needs.
Other Matters
-------------
Recently Issued Accounting Standards
- ---------------------------------------
In July 2001, the FASB issued Statement No. 141, Business Combinations (SFAS
141") and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also specifies
the criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead they will be tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of SFAS 141 for acquisitions
initiated after June 30, 2001, and SFAS 142 effective January 1, 2002. Goodwill
and intangible assets acquired in business combinations completed before July 1,
15
2001 will continue to be amortized until the Company's adoption of SFAS 142 on
January 1, 2002. Upon adoption SFAS 142 will require the Company to perform an
assessment of whether there is an indication that goodwill is impaired based on
the provisions of SFAS 142. To the extent an indication exists that the
goodwill may be impaired, the Company must measure the impairment loss, if any.
Any impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations. Based on current
goodwill balances, the Company will have approximately $4,307,000 of unamortized
goodwill as of January 1, 2002, which will be subject to the transition
provisions of SFAS 141 and SFAS 142. Amortization expense related to goodwill
was $217,000 and $137,000 for the year ended December 31, 2000 and the nine
months ended September 30, 2001, respectively. After December 31, 2001, the
Company will no longer be amortizing goodwill. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
16
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The information required by Item 3 has been disclosed in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. There has been
no material change in the disclosures regarding market risk.
Item 5. Other Information
- -----------------------------
The Board of Directors of the Company expanded the Board from 9 to 10 members
effective September 10, 2001 and appointed James T. Orcutt to serve as a
Director until the 2002 Annual Meeting of Shareholders. Concurrently, Mr.
Orcutt, previously President of the Life Sciences Division was named President
of the Company.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------------
The exhibits to this report are listed on the Exhibit Index included elsewhere
herein.
No reports on Form 8-K have been filed during the quarter ended September 30,
2001.
17
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW BRUNSWICK SCIENTIFIC CO., INC.
--------------------------------------
(Registrant)
Date: November 13, 2001 /s/ David Freedman
--------------------
David Freedman
Chairman
(Chief Executive Officer)
/s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President - Finance
(Principal Accounting Officer)
18