Page 20
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, 2002 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 7,767,456 Common shares outstanding as of November 11, 2002.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PAGE NO.
----------
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Loss) -
Three and Nine Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
PART II. OTHER INFORMATION 18
2
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
ASSETS
------
September 30, December 31,
2002 2001
--------------- --------------
Current Assets (Unaudited)
- --------------------------------------------------------
Cash and cash equivalents $ 7,630 $ 3,794
Accounts receivable, net 9,021 12,811
Inventories:
Raw materials and sub-assemblies 5,656 6,704
Work-in-process 1,817 2,647
Finished goods 6,562 5,817
--------------- --------------
Total inventories 14,035 15,168
Deferred Income Taxes 1,162 1,162
Prepaid expenses and other current assets 1,057 856
--------------- --------------
Total current assets 32,905 33,791
--------------
Property, plant and equipment, net 4,598 4,868
Excess of cost over net assets acquired, net 4,585 4,256
Other assets 2,072 1,628
--------------- --------------
$ 44,160 $ 44,543
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
Current Liabilities
- --------------------------------------------------------
Current installments of long-term debt $ 284 $ 266
Accounts payable and accrued expenses 6,185 9,136
--------------- --------------
Total current liabilities 6,469 9,402
--------------- --------------
Long-term debt, net of current installments 5,343 6,751
Other liabilities 2,071 2,094
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par value per share,
authorized 25,000,000 shares; issued and outstanding,
2002 - 7,763,796 and 2001 - 6,761,892 485 423
Capital in excess of par 47,845 40,124
Accumulated deficit (14,670) (10,014)
Accumulated other comprehensive loss (3,338) (4,180)
Notes receivable from exercise of stock options (45) ( 57)
--------------- --------------
Total shareholders' equity 30,277 26,296
--------------- --------------
$ 44,160 $ 44,543
=============== ==============
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,
-------------------- -------------------
2002 2001 2002 2001
-------------------- ------------------- ---------- ------------
Net sales $ 13,057 $ 13,542 $ 42,433 $ 43,041
Operating costs and expenses:
Cost of sales 7,498 8,500 24,757 26,085
Selling, general and administrative expenses 4,028 3,727 12,446 11,896
Research, development and engineering expenses 795 601 2,117 2,049
DGI research expenses - - - 1,312
Non-recurring severance costs - - - 260
-------------------- ------------------- ---------- ------------
Total operating costs and expenses 12,321 12,828 39,320 41,602
-------------------- ------------------- ---------- ------------
Income from operations 736 714 3,113 1,439
Other income (expense):
Interest income 15 12 32 45
Interest expense (115) (141) (351) (437)
Other, net (8) (29) 6 (76)
-------------------- ------------------- ---------- ------------
(108) (158) (313) (468)
-------------------- ------------------- ---------- ------------
Income before income tax expense
and equity in operations of DGI 628 556 2,800 971
Income tax expense 220 30 980 103
-------------------- ------------------- ---------- ------------
Income before equity in operations of DGI 408 526 1,820 868
Equity in operations of DGI (150) (403) (150) (493)
-------------------- ------------------- ---------- ------------
Net Income $ 258 $ 123 $ 1,670 $ 375
==================== =================== ========== ============
Basic earnings per share $ .03 $ .02 $ .22 $ .05
==================== =================== ========== ============
Diluted earnings per share $ .03 $ .02 $ .21 $ .05
==================== =================== ========== ============
Basic weighted average number of
shares outstanding 7,717 7,418 7,614 7,407
==================== =================== ========== ============
Diluted weighted average number of
shares outstanding 7,836 7,460 7,829 7,429
==================== =================== ========== ============
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,
-------------------
2002 2001
------------------- --------
Cash flows from operating activities:
Net income $ 1,670 $ 375
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 859 980
Tax benefit from exercise of stock options 303 -
Equity in operations of DGI 150 493
Change in related balance sheet accounts:
Accounts and notes receivable 4,119 163
Refundable income taxes 50 151
Inventories 1,358 (222)
Prepaid expenses and other current assets (217) (164)
Other assets (444) (142)
Accounts payable and accrued expenses (1,864) 427
Advance payments from customers (1,393) (1,383)
Other liabilities (23) (161)
------------------- --------
Net cash provided by operating activities 4, 568 517
------------------- --------
Cash flows from investing activities:
Capital expenditures (462) (518)
Sale of equipment - 18
------------------- --------
Net cash used in investing activities (462) (500)
------------------- --------
Cash flows from financing activities:
Repayment of long-term debt (190) (158)
Repayment of revolving credit facility (1,250) -
Proceeds from issue of common stock under stock purchase and
option plans 1,154 64
Loan to DGI (150) -
Payments on notes receivable related to exercised stock options 12 5
------------------- --------
Net cash used in financing activities (424) (89)
------------------- --------
Net effect of exchange rate changes on cash 154 (33)
------------------- --------
Net increase (decrease) in cash and cash equivalents 3,836 (105)
Cash and cash equivalents at beginning of period 3,794 2,473
------------------- --------
Cash and cash equivalents at end of period $ 7,630 $ 2,368
=================== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 352 $ 439
Income taxes 903 155
Non-cash contribution of equipment to DGI - 429
Exchange of mature shares upon exercise of options 506 -
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,
-------------------- ------------------
2002 2001 2002 2001
------- ------ ------- ------
Net income $ 258 $ 123 $1,670 $ 375
Other comprehensive income (loss):
Foreign currency translation adjustment (60) 644 842 (643)
-------- ------ ------- ------
Net comprehensive income (loss) $ 198 $ 767 $2,512 $(268)
====== ======= ======= ======
See notes to consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2002 and the results of its operations for the three and
nine months ended September 30, 2002 and 2001 and its cash flows for the nine
months ended September 30, 2002 and 2001. Interim results may not be indicative
of the results that may be expected for the year.
Note 2 - Investment in DGI:
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 until June 14, 2001 at which time BankInvest, 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 over DGI. During the period from June 14,
2001 to December 31, 2001, the carrying value of the Company's investment in DGI
was reduced to zero through the application of the equity method. The Company
is not required to, and has not recorded losses from its share of DGI's
operations beyond the carrying value of its investment since it has no further
obligation to fund the DGI operations. At December 31, 2001 and September 30,
2002, the Company's investment in DGI is zero. Accordingly, no losses have been
recorded in 2002.
On September 27, 2002, the Company and BankInvest, DGI's two major shareholders,
provided DGI with a bridge loan in order to sustain its operations until DGI's
anticipated closing of a financing transaction with an investment group, which
DGI management has informed the Company that it expects to be consummated before
December 31, 2002. The Company made the loan solely as a means of allowing DGI
more time to complete its financing. The Company had no obligation to make this
loan and has no obligation to provide any future financing or support to DGI.
However, should the anticipated round of financing be consummated, the Company
expects to receive shares in DGI in lieu of future rent payments. As
compensation for making the loans, the Company and BankInvest will each
receiveSeries B Convertible Preferred shares in DGI in proportion to their
respective share of the loan. Consequently, the Company's ownership interest in
DGI at September 30, 2002 was reduced from 47.0% to 41.3%. The $150,000 portion
advanced to DGI by the Company has been expensed as a charge to equity in
operations of DGI due to the uncertainty surrounding DGI's ability to consummate
7
the equity financing and the resulting uncertainty as to the ability of DGI to
repay the loan, absent the procurement of financing. Under the terms of the
loan agreement, should the financing be consummated, the Company will be repaid
in full from the proceeds. Such repayment would then be recorded as income from
equity in operations of DGI in the Company's consolidated statement of
operations. In the event DGI is unable to obtain additional financing, the
Company may be required to fund up to $152,000 related to DGI equipment leases
guaranteed by the Company when DGI was majority-owned.
Note 3 - Segment information:
Effective June 14, 2001, as a result of the Company's reduction in ownership in
DGI to below 50%, the Company ceased consolidating the operations of DGI and,
accordingly, has only one segment (Laboratory Research Equipment). Segment
Information as of and for the three and nine months ended September 30, 2001 is
as follows: (in thousands)
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% .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
<FN>
(1) As described in Note 2, the Company's interest in DGI was reduced to 47% (41.3% as of September 30, 2002) 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 per share:
Basic income per share is calculated by dividing net income by the weighted
average number of shares outstanding. Diluted income per share is calculated by
dividing net income 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 using the treasury stock method. Antidilutive options are excluded
from the calculation of diluted income per share. Information related to
dilutive and antidilutive stock options is as follows: (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------------------ ----------------- ---- ----
Dilutive effect 119 42 215 22
Antidilutive options - 388 - 388
8
Note 5 - Long-term debt and credit agreement:
On March 15, 2002, the Company and First Union National Bank (the Bank) entered
into an amendment to extend their agreement (the Bank Agreement) by three years
to May 31, 2005. The amendment to the Bank Agreement did not change the
maturity date of the acquisition credit line component which remains at December
1, 2006. No other provisions of the Bank Agreement were materially amended. The
$29.5 million secured line of credit provides the Company with a $5 million
revolving credit facility for both working capital and letters of credit, a $2
million Revolving Line of Credit for equipment acquisition purposes, a $12.5
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 other than the fixed term acquisition debt, bear
interest at the bank's prime rate less 125 basis points or libor plus 125 basis
points, at the discretion of the Company. At September 30, 2002, the bank's
prime rate was 4.75% and libor was 1.79%. The Company is in compliance with its
covenants pursuant to the Bank Agreement at September 30, 2002.
At September 30, 2002, $4,933,000 was outstanding under the Bank Agreement
related to acquisition loans bearing fixed interest at 8% per annum, $278,000
was being utilized for letters of credit and $52,000 for foreign exchange
transactions. The following amounts were available at September 30, 2002 under
the Bank Agreement: $4,722,000 for working capital and letters of credit,
$2,000,000 for equipment acquisitions, $7,567,000 for acquisitions and
$9,948,000 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 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, 2002 the balance of the notes was $392,000.
The Company is a party to first and second mortgages on the facility of the
Company's Netherlands subsidiary, which bear interest at 5.50% and 5.45%
respectively, per annum. At September 30, 2002, an aggregate of $302,000 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 requires 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 also requires
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.144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
9
The Company has adopted the provisions of SFAS 141 for acquisitions initiated
after June 30, 2001, and SFAS 142 effective January 1, 2002. Goodwill acquired
in business combinations completed before July 1, 2001 pertains to the
laboratory research equipment segment and has been amortized through December
31, 2001. Effective January 1, 2002, as part of the adoption of SFAS 142 the
Company is no longer amortizing goodwill. SFAS 142 requires that the Company
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. The Company has determined that there is no impairment to its goodwill
balance of $4,585,000 as of January 1, 2002 and the Company will test for
impairment at December 31 each year. Amortization expense related to goodwill
was $46,000 and $137,000 for the three and nine months ended September 30, 2001,
respectively.
The following as adjusted amounts exclude the effects of amortization of
goodwill recognized in prior periods: (in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
2002 2001 2002 2001
------------------- ------------------ ------- -----
Reported net income $ 258 $ 123 $ 1,670 $ 375
Addback: goodwill amortization - 46 - 137
------------------- ------------------ ------- -----
Adjusted net income $ 258 $ 169 $ 1,670 $ 512
=================== ================== ======= =====
Basic income per share:
Reported net income $ .03 $ .02 $ .22 $ .05
Goodwill amortization - - - .02
------------------- ------------------ ------- -----
Adjusted net income $ .03 $ .02 $ .22 $ .07
=================== ================== ======= =====
Diluted income per share:
Reported net income $ .03 $ .02 $ .21 $ .05
Goodwill amortization - - - .02
------------------- ------------------ ------- -----
Adjusted net income $ .03 $ .02 $ .21 $ .07
=================== ================== ======= =====
Note 7 - Stock dividend:
On February 12, 2002 and April 2, 2001, respectively, the Company declared 10%
stock dividends. The February 12, 2002 stock dividend was paid on May 15, 2002
to shareholders of record as of April 15, 2002. All share and per share amounts
for the three and nine month periods ended September 30, 2001, have been
restated to reflect such dividend.
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 Results of Operations and Financial Condition . 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, 2002 which should be
read in conjunction with the Company's December 31, 2001 financial statements.
Results of Operations
---------------------
Quarter Ended September 30, 2002 vs. Quarter Ended September 30, 2001
- -------------------------------------------------------------------------------
For the quarter ended September 30, 2002, the Company had net income of $258,000
or $.03 per diluted share on net sales of $13,057,000 compared with net income
of $123,000 or $.02 per diluted share on net sales of $13,542,000 for the third
quarter of 2001.
Net sales decreased $485,000 from $13,542,000 to $13,057,000 for the quarter
ended September 30, 2002 as compared to the corresponding quarter of the prior
year. Net sales for the third quarter of 2001 included $1,242,000 from fully
custom-engineered bioprocess equipment (orders received prior to June 29, 2001),
a product line for which the Company ceased accepting orders effective June 29,
2001. If the sales related to custom engineered equipment are excluded from the
2001 results, net sales of core products increased 6.2%. Net sales for the 2002
quarter benefited from increased shipments of ultra low temperature freezers
and shakers, some of which were the result of manufacturing improvements which
have increased the Company's capacity to fulfill orders in a shorter period of
time.
Sales of the Company's equipment to foreign companies, institutions and
governments may be affected by United States export control regulations. The
Company believes that as a result of the September 11, 2001 terrorist attacks,
these regulations are going to be made more restrictive. The impact of these
anticipated regulations cannot be determined at this time.
Gross profit for the 2002 quarter of $5,559,000 is up 10.3% from the $5,042,000
reported in the third quarter of 2001 due primarily to a more profitable product
mix in 2002 including the absense of low margin custom equipment. Consolidated
gross margins increased to 42.6% for the 2002 quarter from 37.2% for the third
11
quarter of 2001. The margin increase is primarily attributable to a larger
percentage of the Company's sales coming from the U.S. domestic market, which
has traditionally provided higher margins than foreign sales and from
improvements in manufacturing efficiencies.
Selling, general and administrative expenses increased 8.1% to $4,028,000 in
2002 compared with $3,727,000 in the 2001 quarter primarily as a result of
additions to the Company's field sales force, higher computer software and legal
expenses as well as normal salary, wage, benefits and other cost increases.
Research, development and engineering expenses increased 32.3% to $795,000 in
2002 from $601,000 in the 2001 quarter due primarily to normal increases and
expenditures related to the Company's product development program including the
cost of prototypes and consultants.
Interest income increased to $15,000 in the 2002 quarter from $12,000 in the
prior year quarter due to higher average invested cash, albeit at lower interest
rates.
Interest expense decreased to $115,000 in the 2002 quarter from $141,000 in 2001
due primarily to lower average interest rates than in 2001 as well as to lower
average outstanding bank debt.
Income tax expense for the three months ended September 30, 2002 was $220,000,
an effective rate of 35% and compares with income tax expense of $30,000 in
2001, an effective rate of 5.4%. The increase in the effective tax rate in 2002
is due to the Company no longer having the benefit of DGI's losses and,
additionally, the Company has utilized most of its tax carry-forward losses.
Consequently, the Company is now subject to more traditional tax rates. In 2001
the Company provided no tax on its U.S. operations since losses associated with
DGI offset otherwise taxable income.
Equity in operations of DGI was a loss of $150,000 in 2002 compared with a loss
of $403,000 for the third quarter of 2001, which in 2001 represented the
Company's equity in DGI's losses. The $150,000 charge in 2002 is related to a
loan made by the Company on September 27, 2002 as further described below under
"Other Matters".
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001
- --------------------------------------------------------------------------------
For the nine months ended September 30, 2002, the Company had net income of
$1,670,000 or $.21 per diluted share on net sales of $42,433,000 compared with
net income of $375,000 or $.05 per diluted share on net sales of $43,041,000 for
the first nine months of 2001.
For the nine months ended September 30, 2002 net sales decreased $608,000
compared with the comparable 2001 period. Net sales for the 2001 nine months
included $4,901,000 from fully custom-engineered bioprocess equipment (orders
received prior to June 29, 2001), a product line for which the Company ceased
accepting orders effective June 29, 2001. In addition, the 2001 period included
$400,000 of revenues from DGI BioTechnologies, Inc. whose operations, as a
result of having received an infusion of funds from an institutional investor on
June 14, 2001, are no longer consolidated with those of the Company after that
date. If the sales related to custom engineered equipment and DGI are excluded
from the 2001 results, net sales of core products increased 12.4%. Net sales for
12
the 2002 period benefitted from increased shipments of shakers, ultra low
temperature freezers, cell culture products and fermentors.
Sales of the Company's equipment to foreign companies, institutions and
governments may be affected by United States export control regulations. The
Company believes that as a result of the September 11, 2001 terrorist attacks,
these regulations are going to be made more restrictive. The impact of these
anticipated regulations cannot be determined at this time.
Gross profit for the 2002 period of $17,676,000 increased 4.2% from $16,956,000
reported for the first nine months of 2001. Consolidated gross margins increased
to 41.7% for the 2002 period from 39.4% for the first nine months of 2001 due
primarily to a more profitable product mix in 2002 from the absence of low
margin custom equipment, a larger percentage of the Company's sales being
generated in the U.S. which has traditionally yielded higher margins and from
imrovement in manufacturing efficiencies.
Selling, general and administrative expenses increased to $12,446,000 in the
2002 period compared with $11,896,000 in the 2001 period primarily as a result
of normal salary, wage, benefits and other increases.
Research, development and engineering expenses increased in 2002 to $2,117,000
from $2,049,000 in 2001 due to normal increases and expenditures related to the
Company's product development program partially offset by the reduction in staff
related to the fully custom-engineered bioprocess equipment business.
DGI research expenses amounted to zero in 2002 compared with $1,312,000 in 2001
since DGI's operations are no longer being consolidated with those of the
Company effective June 14, 2001 as the Company's ownership interest was reduced
to 47% at that time (41.3% at September 30, 2002) and the balance sheet carrying
value of its investment in DGI is zero.
No non-recurring severance costs were incurred in 2002 compared with $260,000 of
such costs in 2001 which were related to the Company's decision to stop
accepting orders for fully custom-engineered bioprocess equipment effective June
29, 2001.
Interest income decreased 28.9% to $32,000 in 2002 from $45,000 in 2001 due to
lower average interest rates partially offset by higher average invested cash.
Interest expense decreased 19.7% to $351,000 in 2002 from $437,000 in 2001 due
to lower average interest rates in 2002 as well as lower average outstanding
bank debt.
Income tax expense for the nine months ended September 30, 2002 was $980,000, an
effective rate of 35% and compares with income tax expense of $103,000 in 2001,
an effective rate of 10.6%. The increase in the effective tax rate in 2002 is
due to the Company no longer having the benefit of DGI's losses and
additionally, the Company has utilized most of its tax carry-forward losses.
Consequently, the Company is now subject to more traditional tax rates. In 2001
the Company provided no tax on its U.S. operations since losses associated with
DGI offset otherwise taxable income.
13
Equity in operations of DGI was $150,000 in 2002 compared with $493,000 for the
first nine months of 2001, which, in 2001, represented the Company's equity in
DGI's losses from June 14 through September 30, 2001. The $150,000 charge in
2002 is related to a loan made by the Company on September 27, 2002, as further
described below under "Other Matters"
Financial Condition
-------------------
Liquidity and Capital Resources
- ----------------------------------
Working capital increased to $26,436,000 at September 30, 2002 from $24,389,000
at December 31, 2001.
Accounts receivable decreased to $9,021,000 at September 30, 2002 from
$12,811,000 at December 31, 2001 due to the lower level of net sales in the
quarter ended September 30, 2002 compared with the quarter ended December 31,
2001 as well as improved collections.
Inventories decreased to $14,035,000 at September 30, 2002 from $15,168,000 at
December 31, 2001. Raw materials and sub-assemblies decreased 15.6% and
work-in-process decreased 31.4% while finished goods increased 12.8%. The
decrease in raw materials and sub-assemblies is due to continuous improvements
to the Company's planning, purchasing and manufacturing operations. The decrease
in work-in-process was due primarily to the shipment of multiple,
sterilizable-in-place, fermentation systems during the period. The increase in
finished goods resulted primarily from increased inventories of freezers due to
a buildup of freezers in Europe as a result of increased production relative to
shipments during the 2002 period.
Prepaid expenses and other current assets increased to $1,057,000 at September
30, 2002 from $856,000 at December 31, 2001. The increase is primarily
attributable to prepaid insurance and prepaid pension payments.
Other assets increased to $2,072,000 at September 30, 2002 from $1,628,000 at
December 31, 2001. The increase is primarily attributable to deposits on
capital equipment orders.
Net cash provided by operating activities was $4,568,000 in 2002 as compared
with cash provided of $517,000 in 2001. The $4,568,000 cash provided by
operating activities for the first nine months of 2002 was due to changes in
operating assets and liabilities in the ordinary course of business, primarily
(i) net income of $1,670,000, (ii) tax benefit from the exercise of stock
options of $303,000, (iii) a decrease in accounts receivable of $4,119,000 and
(iv) a decrease in inventories of $1,358,000 partially offset by (i) increase in
prepaid expenses and other current assets of $217,000, (ii) an increase in other
assets of $444,000, (iii) a decrease in accounts payable and accrued expenses of
$1,864,000 and (iv) a decrease in advance payments from customers of $1,393,000.
Net cash used in investing activities amounted to $462,000 in 2002 as compared
with $500,000 in 2001 and primarily represented expenditures for property, plant
and equipment.
14
Net cash used in financing activities amounted to $424,000 in 2002 as compared
with net cash used of $89,000 in 2001. Both periods reflect the repayment of
long-term debt, including a repayment of $1,250,000 in the 2002 period to
completely pay off the remaining balance under the Company's working capital
line. The 2002 and the 2001 periods include $1,154,000 and $64,000,
respectively, of proceeds resulting from the exercise of stock options under the
Company's stock option plans and from the issuance of shares under the Company's
stock purchase plan and the 2002 period includes a loan of $150,000 to DGI.
On March 15, 2002, the Company and First Union National Bank (the Bank) entered
into an amendment to extend their agreement (the Bank Agreement) by three years
to May 31, 2005. The amendment to the Bank Agreement did not change the
maturity date of the acquisition credit line component which remains at December
1, 2006. No other provisions of the Bank Agreement were materially amended. The
$29.5 million secured line of credit provides the Company with a $5 million
revolving credit facility for both working capital and letters of credit, a $2
million Revolving Line of Credit for equipment acquisition purposes, a $12.5
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 other than the fixed term acquisition debt, bear
interest at the bank's prime rate less 125 basis points or libor plus 125 basis
points, at the discretion of the Company. At September 30, 2002, the bank's
prime rate was 4.75% and libor was 1.79%. The Company is in compliance with its
covenants pursuant to the Bank Agreement at September 30, 2002.
At September 30, 2002, $4,933,000 was outstanding under the Bank Agreement
related to acquisition loans bearing fixed interest at 8% per annum, $278,000
was being utilized for letters of credit and $52,000 for foreign exchange
transactions. The following amounts were available at September 30, 2002 under
the Bank Agreement: $4,722,000 for working capital and letters of credit,
$2,000,000 for equipment acquisitions, $7,567,000 for acquisitions and
$9,948,000 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 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, 2002 the balance of the notes was $392,000.
The Company is a party to first and second mortgages on the facility of the
Company's Netherlands subsidiary, which bear interest at 5.50% and 5.45%
respectively, per annum. At September 30, 2002, an aggregate of $302,000 was
outstanding on both mortgages.
Contractual obligations and commitments principally include obligations
associated with outstanding indebtedness and future minimum operating lease
obligations as set forth in the following table:
15
Payments Due by Period
------------------------
(In thousands)
Contractual Obligations:
Within 1-2 3-4 After 4
Total 1 Year Years Years Years
- ------------------------- ------------------------ ------ -------- ------
Long-term debt, notes and
credit facility $ 5,627 $ 284 $ 301 $ 401 $4,641
Operating leases 4,147 610 964 765 1,808
------------------------ ------ -------- ------ ------
Total contractual
cash obligations $ 9,774 $ 894 $ 1,265 $1,166 $6,449
======================== ====== ======== ====== ======
DGI BioTechnologies, Inc. expects to require additional financing or other
alternative source of funds this year to support its continuing operations (see
Note 2).
Management believes that the resources available to the Company, including
current cash and cash equivalents, working capital, cash to be generated from
operations and its line of credit which matures May 31, 2005, will satisfy its
expected working capital needs and capital expenditures for the near and
intermediate term.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 on January 1, 2003. The adoption is not expected to have
a material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 is different from EITF Issue No. 94-3 in
that Statement No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity only when the liability is
incurred, that is when it meets the definition of a liability in the FASB's
conceptual framework. Statement No. 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit or disposal
activities. In contrast, under EITF Issue 94-3, a company recognized a
liability for an exit cost when it committed to an exit plan. Statement No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of Statement No. 146 can be expected to impact the
timing of liability recognition associated with any future exit activities.
16
Other Matters
--------------
On September 27, 2002, the Company and BankInvest, DGI's two major shareholders,
provided DGI with a bridge loan in order to sustain its operations until DGI's
anticipated closing of a financing transaction with an investment group, which
DGI management has informed the Company that it expects to be consummated before
December 31, 2002. The Company made the loan solely as a means of allowing DGI
more time to complete its financing. The Company had no obligation to make this
loan and has no obligation to provide any future financing or support to DGI.
However, should the anticipated round of financing be consummated, the Company
expects to receive shares in DGI in lieu of future rent payments. As
compensation for making the loans, the Company and BankInvest will each
receiveSeries B Convertible Preferred shares in DGI in proportion to their
respective share of the loan. Consequently, the Company's ownership interest in
DGI at September 30, 2002 was reduced from 47.0% to 41.3%. The $150,000 portion
advanced to DGI by the Company has been expensed as a charge to equity in
operations of DGI due to the uncertainty surrounding DGI's ability to consummate
the equity financing and the resulting uncertainty as to the ability of DGI to
repay the loan, absent the procurement of financing. Under the terms of the
loan agreement, should the financing be consummated, the Company will be repaid
in full from the proceeds. Such repayment would then be recorded as income from
equity in operations of DGI in the Company's consolidated statement of
operations. In the event DGI is unable to obtain additional financing, the
Company may be required to fund up to $152,000 related to DGI equipment leases
guaranteed by the Company when DGI was majority-owned.
Critical Accounting Policies
----------------------------
No changes have been made in the Company's critical accounting policies during
the nine months ended September 30, 2002.
17
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, 2001. There has been
no material change in the disclosures regarding market risk.
Item 4. Controls and Procedures
- -----------------------------------
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Chief Financial Officer. Based upon
that evaluation, the Company's Chief Executive Officer along with the Company's
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
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,
2002.
18
------
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 11, 2002 /s/ David Freedman
--------------------
David Freedman
Chairman and
Chief Executive Officer
Date: November 11, 2002 /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)
19
CERTIFICATIONS
--------------
I, David Freedman, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
November 11, 2002 /s/ David Freedman
--------------------
Name: David Freedman
Chairman and
Chief Executive Officer
I, Samuel Eichenbaum, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
November 11, 2002 /s/ Samuel Eichenbaum
-----------------------
Name: Samuel Eichenbaum
Vice President, Finance and
Chief Financial Officer
20
- ------
CERTIFICATION
I, Samuel Eichenbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002 /s/ Samuel Eichenbaum
-----------------------
Vice President, Finance and
Chief Financial Officer
21
I, David Freedman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
22