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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 December 31, 1998
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 Commission File Number
December 31, 1998 0-12716
Novitron International, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 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 February 5, 1999,
is 1,449,925.
Novitron International, Inc. AND SUBSIDIARIES
FORM 10-Q
Index
Page
Part I: FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Unaudited consolidated balance sheets
at December 31, 1998 and March 31, 1998 3
Unaudited consolidated statements of
operations for the three and nine months
ended December 31, 1998 and 1997 5
Unaudited consolidated statements of
stockholders' investment for the years
ended March 31, 1997 and 1998 and the
nine months ended December 31, 1998 6
Unaudited consolidated statements of
cash flows for the nine months ended
December 31, 1998 and 1997 7
Notes to unaudited consolidated
financial statements 9
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II: OTHER INFORMATION 16
SIGNATURE 16
Novitron International, Inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1998 March 31, 1998
CURRENT ASSETS:
Cash and cash equivalents $ 1,682,896 $ 1,229,918
Accounts receivable, less
reserves of $50,000 and $49,000
at December 31, and March 31,
1998, respectively 2,954,068 2,412,725
Inventories 3,077,745 3,719,698
Prepaid expenses 432,968 347,118
Other current assets 158,085 28,971
Total current assets 8,305,762 7,738,430
EQUIPMENT, at cost:
Manufacturing and computer 2,499,563 2,010,683
equipment
Furniture and fixtures 421,878 386,090
Leasehold improvements 312,330 247,868
Vehicles 61,127 65,787
3,294,898 2,710,428
Less: Accumulated depreciation
and amortization 2,353,363 1,944,063
941,535 766,365
OTHER ASSETS, net 966,621 899,929
$ 10,213,918 $ 9,404,724
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Novitron International, Inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
December 31, 1998 March 31, 1998
CURRENT LIABILITIES:
Short-term notes payable and
current portion of long-term debt $ 44,802 $ 52,113
Accounts payable 2,736,777 2,598,755
Accrued expenses 2,317,294 1,884,036
Deferred revenue 130,238 -
Accrued income taxes 20,333 105,010
Total current liabilities 5,249,444 4,639,914
LONG-TERM DEBT, net of current portion 23,163 30,028
DEFERRED TAXES 194,173 93,844
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 and 1,454,211
at December 31, and March 31,
1998, respectively (Note 2) 14,544 14,542
Capital in excess of par value 4,881,066 4,881,068
Retained earnings (deficit) (361,270) 32,712
Cumulative translation adjustment 219,247 (287,384)
Treasury stock, 3,200 shares at
cost (6,449) -
Total stockholders'investment 4,747,138 4,640,938
$ 10,213,918 $ 9,404,724
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Novitron International, Inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months For the Nine Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
REVENUES $ 4,103,704 $ 3,519,515 $ 11,254,246 $ 8,999,519
COST OF REVENUES 2,996,052 2,614,735 8,318,891 6,660,004
Gross profit 1,107,652 904,780 2,935,355 2,339,515
OPERATING EXPENSES:
Sales and marketing 309,056 77,704 808,111 508,225
Research and
development 371,767 330,793 1,281,384 923,962
General and
administrative 489,942 495,981 1,245,148 1,353,315
1,170,765 904,478 3,334,643 2,785,502
Income(loss)from
operations (63,113) 302 (399,288) (445,987)
Interest expense (19,104) (16,429) (48,159) (55,602)
Interest income 7,045 25,186 16,192 56,394
Other income (expense) (38,680) 609,814 (67,764) 642,107
(113,852) 618,873 (499,019) 196,912
Provision for(benefit
from) income taxes 19,193 136,353 (105,037) 48,614
(133,045) 482,520 (393,982) 148,298
Minority interest - (2,477) - 6,560
Net income (loss) $ (133,045) $ 480,043 $ (393,982) $ 154,858
Basic and diluted net
income (loss) per share $ (0.09) $ 0.36 $ (0.27) $ 0.12
Weighted average common
shares outstanding 1,453,716 1,322,005 1,454,187 1,322,005
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
</FN>
Novitron International, Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED MARCH 31, 1997, AND 1998
AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
Common Stock Capital in Cumulative
Number Excess of Treasury Retained Translation
of Shares Par Value Par Value Stock Earnings Adjustment
BALANCE at March
31, 1996 1,322,005 $13,220 $4,882,390 - $ 511,312 $ 785,223
Net loss (582,550)
Translation adjustment (636,527)
BALANCE at March
31, 1997 1,322,005 13,220 4,882,390 - (71,238) 148,696
Net income 103,950
Translation adjustment (436,080)
Issuance of common
stock in connection
with a 10% stock
dividend of March
27, 1998 132,206 1,322 (1,322)
BALANCE at March
31, 1998 1,454,211 14,542 4,881,068 - 32,712 (287,384)
Net loss (393,982)
Translation adjustment 506,631
Further issuance
of common stock in
connection with a
10% stock dividend
of March 27, 1998 214 2 (2) -
Purchase of
treasury stock (6,449)
BALANCE at December
31, 1998 1,454,425 $14,544 $4,881,066 $(6,449) $(361,270) $219,247
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Novitron International, Inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
1998 1997
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ (393,982) $ 154,858
Adjustments to reconcile
net loss to net cash provided
by operating activities-
Depreciation and
amortization 367,714 235,857
Minority interest - (6,560)
Capitalization of research
costs (33,119) (254,860)
Deferred income taxes 86,969 (252,109)
Release of certain
indebtedness - (119,625)
Changes in Current Assets and
Liabilities-
Accounts receivable (277,417) (3,796)
Inventories 991,217 (896,251)
Prepaid expenses (47,944) (95,032)
Other current assets (121,214) 49,258
Accounts payable (127,593) 1,267,251
Accrued expenses 234,076 499,045
Deferred revenues 125,154 (11,694)
Accrued income taxes (163,470) 138,172
Net cash provided by
operating activities $ 640,391 $ 704,514
CASH FLOWS FROM
INVESTING ACTIVITIES:
Marketable securities $ - $ 99,472
Other assets (3,642) 27,822
Purchases of equipment (349,688) (289,378)
Sales of equipment - 26,657
Purchase of minority interest - (201,899)
Other, including foreign
exchange effects on cash 194,255 (38,692)
Net cash used in
investing activities $ (159,075) $ (376,018)
Continues on next page
Novitron International, Inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
(Continued)
1998 1997
CASH FLOWS FROM
FINANCING ACTIVITIES:
(Payments on) proceeds from
short-term debt $ (12,270) $ 142,880
Payments on long-term debt (9,619) (7,767)
Purchase of treasury stock (6,449) -
Net cash (used in) provided
by financing activities $ (28,338) $ 135,113
NET INCREASE IN
CASH AND CASH EQUIVALENTS $ 452,978 $ 463,609
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 1,229,918 1,634,270
CASH AND CASH EQUIVALENTS
AT December 31, 1998 and 1997 $ 1,682,896 $ 2,097,879
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Novitron International, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Basis of Presentation
Novitron International, Inc. ("the Company") prepared the consolidated
financial statements included herein pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information normally
included in footnote disclosures in financial statements prepared in
accordance with generally accepted accounting principles was condensed or
omitted pursuant to such rules and regulations. In management's opinion,
the consolidated financial statements and footnotes reflect all adjustments
necessary to disclose adequately the Company's financial position at
December 31, 1998 and December 31, 1997. Management suggests these
condensed consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.
(1) Operations and Accounting Policies
(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., 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 December 31, and March 31, 1998:
December 31, 1998 March 31, 1998
Raw materials $ 1,780,191 $ 788,420
Work-in-process 368,530 1,768,431
Finished goods 929,024 1,162,847
$ 3,077,745 $ 3,719,698
(d) Revenue Recognition
The Company generally recognizes revenue from the sale of products and
supplies at the time of shipment. Deferred revenue represents amounts
paid by a customer for services to be performed.
Novitron International, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(1) Operations and Accounting Policies (continued)
(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
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 December 31, and
March 31, 1998, the Company's remaining goodwill relates to its investment
in Vital Scientific NV. Based on an analysis of other assets at December
31, 1998, the Company does not believe impairment exists.
(f) Net Income (Loss )Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This statement establishes standards
for computing and presenting earnings per share and applies to entities
with publicly traded common stock or potential common stock. Basic net
income (loss) per share is determined by dividing net income (loss) by the
weighted average shares of common stock outstanding during the period.
Diluted net income (loss) per share has been calculated on the same basis
as basic earnings per share because the Company's potentially dilutive
securities, stock options, were antidilutive.
On October 21, 1998, 83,783 options to purchase common stock at prices
ranging from $2.73 to $13.30 were cancelled and 97,000 new options to
purchase common stock at prices ranging from $0.62 to $0.69 were issued.
There were 118,035 and 89,034 weighted average common equivalent shares
not included in the diluted weighted average shares outstanding at December
31, 1998 and 1997, respectively, because they were antidilutive.
Novitron International, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(1) Operations and Accounting Policies (continued)
(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; Clinical Data
Australia uses the Australian dollar and NovaChem BV's functional currency
is the United States dollar. Gains and losses from translating assets and
liabilities that are denominated in currencies other than the respective
functional currency are included in other expense 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 part of stockholders' investment in
the accompanying consolidated balance sheets. Foreign currency transaction
gains and losses are included in other income (expense) in the
consolidated statements of operations.
(h) Post-retirement 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.
(k) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, 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.
Novitron International, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(1) Operations and Accounting Policies (continued)
(m) Software Development Costs
In connection with the development of software included as a significant
component of new analysis products, 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 nine months ended December 31, 1998 and during the year ended
March 31, 1998 the Company capitalized $33,000 and $242,000, respectively,
under SFAS No. 86, which have been included as a component of other assets
in the accompanying consolidated balance sheet.
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.
Amortization recorded with respect to this product for the nine months
ended December 31, 1998 was approximately $114,800; there was no
amortization with respect to this product for the nine months ended
December 31, 1997. The Company has begun to amortize the software costs
capitalized during the three months ended June 30, 1998 over three years
using the straight-line method. Amortization recorded with respect to this
product for the nine months ended December 31, 1998 approximated $6,400.
(n) New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
an interim basis for each reportable segment of an enterprise. SFAS No.
131 is effective for fiscal years beginning after December 31, 1997.
Unless impracticable, companies would be required to restate prior period
information upon adoption. The Company does not expect this accounting
pronouncement to materially effect its financial statements and will
formally adopt the pronouncement with the March 31, 1999 financial
statements.
(o) Line of Credit
In April 1998, the Company entered a new relationship with a major Dutch
bank, which provides for a 4,000,000 Dutch Guilder (approximately
$2,120,000) line of credit. Interest on this facility is set at 1.25%
above the base rate as reported by the Netherlands Central Bank (3.75% at
March 31, 1998). 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. There were no borrowings outstanding
under this credit line at December 31, 1998.
(p) Reclassifications
Certain reclassifications have been made to the prior year's presentation
in order to conform to that of the current year.
Novitron International, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(2) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective April 1, 1998. SFAS No. 130 requires that items defined as other
comprehensive income, such as foreign currency translation adjustments, be
separately classified in the financial statements. The components of
comprehensive income for the three and nine month periods ended December
31, 1998 and 1997 are as follows:
<CATION>
For Three Months For the Nine Months
Ended December 31, Ended December 31
1998 1997 1998 1997
Net income (loss) $(133,045) $ 480,043 $(393,982) $ 154,858
Foreign currency
translation adjustments 52,242 82,722 506,631 (158,530)
Comprehensive income(loss) $ 562,765 $ 112,649 (3,672) (80,803)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of the Securities Exchange
Act of 1934 (Section 21E), may be made throughout this Discussion and
Analysis. 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, such words as, "anticipates,"
"plans," "expects, "believes", "estimates," and similar expressions are
intended to identify such forward-looking statements. Such statements
involve risk and uncertainties, including but not limited to competitive,
governmental, economic, and technological factors that may affect the
Company's operations, products, markets, and services. Actual results could
differ materially from those expressed in such statements and readers are
referred to the Company's other SEC reports and filings.
Results of Operations
Third Quarter ended December 31, 1998 compared to the Third Quarter ended
December 31, 1997
Consolidated revenues for the third quarter of fiscal year 1999 increased
16.6% when compared with the same period in the prior year and 12.1% as
compared to the second quarter ended September 30, 1998. The year-to-date
consolidated revenues increased 25.1% from the same period last year. When
compared to the prior year, Vital Scientific's sales increased 19.7%
primarily from the delivery of two new instruments for allergy testing and
the measurement of drugs-of-abuse, as well as further improvement in the
sales of clinical chemistry analyzers. At Clinical Data (Australia), sales
increased 63.0% from the prior year reflecting the addition of new product
lines.
The gross profit margins were the same (26.0%) for the nine months ended
December 31, 1998 as compared to December 31, 1997. For the three months
ended December 31, 1998, the margin increased from 25.7% to 27.0% as
compared to the third quarter last fiscal year. For the quarter ended
December 31, 1998, the margin increased 1.8% from the quarter ended
September 30, 1998 (from 25.2% to 27.0%).
When analyzing the comparative revenue figures stated above and the
comparative expenses presented below for the three and nine month reporting
periods, consideration should be given to the three-month 5.2%, and nine-
month 0.9%, strengthening in the value of the Company's primary functional
currency, the Dutch Guilder, against the U.S. dollar.
Comparing fiscal year 1999 with fiscal year 1998, sales and marketing
expenses increased 297.7% and 59.0% for the three and nine-month periods,
respectively. The sales and marketing expenses for the three and nine month
periods ended December 31, 1998 were significantly higher primarily as a
result of the reporting of reduced expenses in fiscal year 1998 resulting
from a one-time release of certain reserves related to the settlement of a
dispute with a customer. This is described in Note 11 of the Company's
Notes to the March 31, 1998 Consolidated Financial Statements. This release
of certain reserves contributed 84.5% of the difference for the quarterly
comparatives and 12.9% of the year to date increase. The remainder of the
increase is attributable to increased commissions and costs resulting from
increased sales at each of the Company's operating subsidiaries.
Research and development charges, as shown on the December 31, 1998
consolidated statement of operations, increased 12.4% and 38.7% as compared
to the three and nine month periods ended December 31, 1997, respectively.
The increase is principally related to new product development at Vital
Scientific. During the first three months of fiscal year 1999, the Company
spent an additional $33,000 which was capitalized on the consolidated
balance sheet pursuant to the precepts of Statement of Financial Standards
No. 86 (see Note 1(n) in the Notes to the Consolidated Financial
Statements). No research and development expenses were capitalized during
the second or third quarters of fiscal year 1999. During the last fiscal
year's third quarter and for the first nine months of the prior year, the
Company spent an additional $100,000 and $255,000, respectively, which were
capitalized onto the December 31, 1997 consolidated balance sheet. The
overall effect was that there was an increase in research and development
costs of 11.5% for the year to date, but a decrease of 13.7% for the third
quarter's comparative figures. This decrease resulted from a planned effort
to bring research and development expenses into line with revenues.
General and administrative expenses decreased by 1.2% for the three-month
and 8.0% for the nine-month periods ended December 31, 1998, when compared
to the same periods ended December 31, 1997, due to a program for cost
containment.
Interest expense increased for the period and decreased for year-to-date
when compared to last year. There has been a reduced dependence on
borrowing at NovaChem offset at Vital Scientific by increased interest
expense from loans provided by a special government program for the support
of research and development (see Note 12 in the Company's Notes to the
March 31, 1998 Consolidated Financial Statements). Interest income
decreased because of fewer funds available for investment. Other income and
expense for fiscal year 1999 consists primarily of the effect of foreign
currency transaction gains and losses on the results of operations. Other
income and expense for fiscal year 1998 include the proceeds from the
settlement of a dispute by a major customer. The settlement ($625,741) was
described in Note 11 in the Company's Notes to the March 31, 1998
Consolidated Financial Statements.
The minority interest in fiscal year 1998 is attributable to the 6% of
Vital Scientific not held by the Company. Vital Scientific became a wholly
owned subsidiary on October 21, 1997.
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.
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 upon that work
completed in the period ended December 31, 1998, the Company has determined
that the basic functionality of all tested products, which include all of
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 either
already "Year 2000 compliant" or are scheduled for replacement during
fiscal year 1999, in the normal course of business. The replacement
systems are "Year 2000 compliant" and the programs for implementing such
replacements are presently on schedule.
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 are
assessing and implementing programs to deal with the "Year 2000" problem.
There can be no assurance, however, that the Company's customers and
suppliers will not be adversely affected by the "Year 2000" problem, which
will in turn adversely effect the Company.
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.
Financial Condition and Liquidity
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 $304,000 of the December 31, 1998 balance of
$1,683,000 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, a separate
component of stockholders' investment in the balance sheet.
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 $8.21 million of $8.31 million of
current assets reside in the Company's foreign subsidiaries.
The Company generated approximately $640,000 of cash in operations during
the first nine months of fiscal year 1999. The increase comes principally
from the decrease in inventory and the increase in accrued expenses offset
by the increase in accounts receivable. For the first three-quarters of
fiscal year 1999, approximately $350,000 was used to purchase equipment.
Financing activities were immaterial.
In April 1998, the Company entered a new relationship with a major Dutch
bank that provides for a 4,000,000 Dutch Guilder (approximately $2,120,000)
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 December 31, 1998, there were no borrowings outstanding under
this line of credit.
The Company's sources of cash include cash balances and the aforementioned
4,000,000 Dutch Guilder line of credit from a Dutch bank. The Company
believes that its existing cash balances and available funds will provide
it with sufficient working capital through fiscal year 1999.
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.
(Registrant)
Israel M. Stein MD
Date: February 9, 1999 Israel M. Stein MD
President