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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K 405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
Commission File Number 0-6994
NEW BRUNSWICK SCIENTIFIC CO., INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1630072
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(State of incorporation) (I.R.S. Employer Identification Number)
44 Talmadge Road, Edison, N.J. 08817
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(Address of principal office)
Registrant's telephone number: (732) 287-1200
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
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Title of class
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Common stock - par value $0.0625
Common stock Purchase Rights
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
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 90 days.
(Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes _No X
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was $29,696,134 as of February 10, 2003. This figure was calculated
by reference to the high and low prices of such stock on February 10, 2003.
The number of shares outstanding of the Registrant's Common stock as of February
10, 2003: 7,790,796.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement and Annual Report to be filed within 120 days after
the end of the fiscal year 2002, are incorporated in Part III herein.
The EXHIBITS INDEX is on Page 55.
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PART I
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ITEM 1. BUSINESS
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New Brunswick Scientific Co., Inc. and its subsidiaries ("NBS" or "the
Company") design, manufacture and market a variety of equipment used in
biotechnology to create, maintain, measure and control the physical and
biochemical conditions required for the growth, detection and storage of
microorganisms. This equipment is used in medical, biological, chemical, and
environmental research and for the commercial development of antibiotics,
proteins, hormones, enzymes, monoclonal antibodies, agricultural products,
fuels, vitamins, vaccines and other substances. The equipment sold by NBS
includes fermentation equipment, bioreactors, biological shakers, ultra-low
temperature freezers, nutrient sterilizing and dispensing equipment, tissue
culture apparatus and air samplers.
On June 29, 2001, the Company announced that it had ceased accepting orders for
large fully custom-engineered bioprocess equipment which represented a small
niche business for the Company. Net sales of custom engineered products for the
year ended December 31, 2001 amounted to slightly more than $5 million,
primarily from orders received in 2000. Net sales of custom engineered products
were negligible during the year ended December 31, 2002. The Company continues
to market its broad-based fermentor and bioreactor products as well as to offer
special modifications to such equipment. The Company is developing a new family
of sterilizable-in-place fermentors the first of which were introduced in late
2002 when both 500L and 300L models became available. 75L and 150L models are
expected to be available during the first half of 2003.
NBS was incorporated in 1958 as the successor to a business founded in 1946 by
David and Sigmund Freedman, its principal stockholders and two of its directors
and executive officers. The Company owns its 243,000 square foot headquarters
and primary production facility located on 17 acres of land in Edison, New
Jersey.
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, the Company no longer exercises control and as required by accounting
principles generally accepted in the United States of America, ceased
consolidating the operations of DGI and began reporting 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
2
it has no further obligation or intent to fund the DGI operations. As of
December 31, 2002 and 2001, the Company's investment in DGI is zero.
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 hopes to consummate during the
first half of 2003, however, no assurance can be made as to the closing of this
financing. The inability to close this financing or the realization of funds
from another source could have a material adverse effect on DGI's ability to
survive. 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 or intent to provide any future financing or support to DGI.
As compensation for making the loans, the Company and BankInvest each received
Series B Convertible Preferred shares in DGI in proportion to their respective
share of the loan. Consequently, the Company's ownership interest in DGI at
December 31, 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 $134,000, related to DGI equipment leases
guaranteed by the Company (which has been fully reserved by the Company).
The Company is a party to a two-year lease with DGI under which DGI occupies
8,800 square feet of office and specifically designed laboratory space at the
Company's headquarters facility in Edison, New Jersey 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. The lease was established at
arm's length utilizing current market information. Should the anticipated round
of financing, described above, be consummated, the Company expects to receive
shares in DGI in lieu of future rent payments.
PRODUCTS
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Fermentation Equipment and Bioreactors. A fermentor is a device used to
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create, maintain and control the physical, chemical, and biochemical
environmental conditions required for growing bacteria, yeast, fungi and other
similar microorganisms. Bioreactors serve an identical purpose for the
propagation of animal and plant cells. The Company's fermentors and bioreactors
range in size from small research models to larger systems that are used in cGMP
production facilities.
NBS has supplied fermentors and bioreactors to universities, biotechnology and
pharmaceutical company laboratories since the 1950's. NBS' fermentors and
bioreactors are used for applications using microorganisms engineered by
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recombinant DNA techniques; immunology; and the production of monoclonal
antibodies. Animal and plant cells as well as bacteria and viruses are usually
grown on a small scale for research purposes. As the process is scaled up
(i.e., replicated, using larger volumes), physical and chemical parameters, such
as pH, vessel pressure and chemical composition may change, and the equipment
used may require increasingly sophisticated control systems. Scale-up, which is
one of the important uses of the Company's pilot scale systems is a complex
technical procedure critical to successful commercialization of biological
processes. Pilot scale systems may be used to set parameters or to determine
the feasibility of production at greater volumes, depending upon the goal of the
customer. Particularly in the area of bioreactors, the Company has developed
unique designs and has been issued patents to protect its technology. The
Company's fermentors and bioreactors incorporate sophisticated instrumentation
systems to measure, record and control a multiplicity of process variables.
The Company manufactures digital instrumentation for control of fermentors
and bioreactors. This instrumentation significantly enhances the utility of any
size fermentor or bioreactor. Consisting of an operator display and a series of
microprocessor-controlled instrument modules, this control unit uses software
developed by the Company to simplify the operation of fermentors and bioreactors
while enhancing their performance. It automatically monitors, displays,
analyzes, and makes immediately available, data concerning the culture process
and permits automatic modification of the various growth conditions without the
need of a host computer. This system is designed to replace manually operated
controls as well as more complex and more costly automatic systems.
Biological Shakers. Biological shakers perform a function similar to fermentors
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and bioreactors, as they are also used in the process of propagating biological
cultures. Under controlled conditions shakers agitate flasks containing
biological cultures in a liquid media in which nutrients are dissolved.
Nutrients are the source of energy needed for growth, while shaking furnishes
the dissolved oxygen needed to permit life processes to take place within the
microorganism. NBS Shakers are in worldwide use in biological laboratories for
research, development, and in some cases, for production of various medical,
biological and chemical products. In addition, shakers are widely used in
microbiological and recombinant DNA research.
The Company manufactures an extensive line of biological shakers ranging in size
from portable laboratory benchtop models to large multi-tier industrial
machines. Some models of the Company's shakers are designed to agitate flasks
under controlled environmental conditions of temperature, atmosphere and light.
Each shaker incorporates a variable speed regulator and may be equipped to
accommodate flasks of various sizes. To permit culture growth under constant
and reproducible conditions, shakers manufactured by NBS are precision
engineered and manufactured to agitate flasks uniformly and continuously over
prolonged periods.
The Company manufactures three distinct lines of shakers. Its INNOVA line,
which is its most sophisticated shaker, its C-Line which is intended primarily
for sale through distributors and its I-Series which is manufactured exclusively
for Fisher Scientific.
4
Ultra-Low Temperature Freezers. Ultra-low temperature ("ULT") freezers are
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utilized in research, clinical and industrial applications. They are primarily
- --
used to store or conserve biological products that include specimens (cells,
tissue) stock cultures (bacteria, viruses) and vaccines. ULT freezers have a
temperature range of -50 degrees C to -86 degrees C and come in both upright and
chest models of varying sizes.
The Company manufactures two distinct lines of ULT freeezers. Five models in
its space saving line, which utilizes ultra-thin vacuum insulation panels for up
to a 30% increase in storage capacity over traditionally insulated models in the
same footprint. The four models in our standard line offer an economical
alternative and make use of conventional urethane insulating techniques.
To maximize storage capacity, the Company's space saving Freezers utilize a
highly efficient thermal insulation panel called NanogelTM to form ultra-thin
vacuum insulation panels; the wall thickness has been reduced resulting in
increased storage capacity. The optional RS-485 interface allows remote control
and data-logging of all five models in the space saving range, which includes a
"personal-sized" freezer for use on or under the bench, as well as two large
upright and two chest-style units.
Nutrient Sterilizing and Dispensing Equipment. The Company manufactures devices
- ---------------------------------------------
that automatically sterilize biological nutrients and then maintains those
nutrients at the required temperature for subsequent use. As a complement to
its nutrient sterilizers, NBS sells an apparatus which automatically fills
culture dishes with sterile nutrient.
Tissue Culture Apparatus. The Company manufactures apparatus to rotate bottles
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and test tubes slowly and constantly for the purpose of growing animal and plant
cells as well as bacteria. Certain models of this apparatus may be placed into
an incubator and equipped to regulate the speed of rotation. The Company also
markets carbon dioxide incubators used in the propagation of tissue cultures.
This apparatus has applications in vaccine production, cancer and heart disease
research, and the commercial production of pharmaceuticals.
Air Samplers. The Company also manufactures air samplers which are used to
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detect the presence of spores and other microbial organisms in the environment.
These instruments can sample large volumes in environments having limited
contamination such as clean rooms, as well as sample smaller volumes in areas
with larger amounts of viable organisms.
Other Scientific Products. NBS distributes the NucleoCounter , which is an
- ---------------------------
automated cell counting device for mammalian cells and a line of centrifuges for
- ----
separating cells from fermentation broth.
5
PRODUCT DEVELOPMENT
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NBS designs and develops substantially all the products it sells. Its
personnel, who include biochemical, electrical, chemical, mechanical, electronic
and software engineers as well as scientists and technical support staff,
formulate plans and concepts for new products and improvements or modifications
to existing products. The Company develops specialized software for use with
its computer-coupled systems and the microprocessor-controlled instrumentation
systems for shakers, fermentors and bioreactors.
RESEARCH AND DEVELOPMENT
- --------------------------
Research and development expenditures, all of which are sponsored by the
Company, amounted to $2,453,000 in 2002, $2,744,000 in 2001 and $3,981,000 in
2000. Research expenditures related to DGI included in these amounts were zero
in 2002, $1,312,000 in 2001 and $3,480,000 in 2000. Twenty-Four (24) of the
Company's professional employees were engaged full time in research and
development activities.
MANUFACTURING
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Manufacturing is conducted according to planning and production control
procedures primarily on a lot production basis rather than on an assembly line.
NBS fabricates its parts from purchased raw materials and components and
produces most of its subassemblies. These parts, components and subassemblies
are carried in inventory in anticipation of projected sales and are then
assembled into finished products according to production schedules. In general,
manufacturing is commenced in anticipation of orders. The manufacturing
processes for the Company's products range from two weeks to months, depending
upon the product size, complexity and quantity. However, a substantial portion
of orders received are for items in the process of being manufactured or in
inventory.
The raw materials used by the Company include stainless steel, carbon steel,
copper, brass, aluminum and various plastics. Some components are purchased
from others, including pumps, compressors, plumbing fittings, electrical and
electronic components, gauges, meters, motors, glassware and general purpose
hardware. Many of these components are built to the Company's specifications.
NBS is not dependent upon any single supplier for any raw material or component,
but delay in receipt of key components can affect the manufacturing schedule.
The Company's products are designed to operate continuously over long periods
with precision and regularity so that research and production may be conducted
under controlled, constant and reproducible conditions. The Company
manufactures its products from materials which it selects as having
characteristics necessary to meet its requirements. In addition, to ensure that
its manufacturing processes result in products meeting exacting specifications
and tolerances, NBS follows rigorous inspection procedures. NBS maintains a
quality control department which is responsible for inspecting raw materials and
parts upon arrival at its plant as well as inspecting products during
manufacture. NBS' products are serviced at its plant and at its customers'
6
premises by Company technicians, distributors' technicians or, in the case of
minor repairs, by sales personnel.
MARKETING AND SALES
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The Company sells its equipment to pharmaceutical companies, agricultural
and chemical companies, other industrial customers engaged in biotechnology, and
to medical schools, universities, research institutes, hospitals, private
laboratories and laboratories of Federal, State and Municipal government
departments and agencies in the United States. While only a small percentage of
the Company's sales are made directly to United States government departments
and agencies, its domestic business is significantly affected by government
expenditures and grants for research to educational research institutions and to
industry. The Company regularly evaluates credit granted to customers.
NBS also sells its equipment, both directly and through scientific
equipment dealers, to foreign companies, institutions, and governments. The
major portion of its foreign sales are made in Canada, Western Europe, the
Middle East, China, Japan, India, Taiwan and Brazil. NBS also sells its
products in the former Soviet Union, Eastern Europe, Africa, other Asian
countries and Latin America. These sales may be substantially affected by
changes in the capital investment policies of foreign governments, or by the
availability of hard currency. These sales may also be affected by US export
control regulations applicable to scientific equipment.
Fisher Scientific is the exclusive U.S. distributor of the Company's C-Line
and I-Series biological shakers. While Fisher is the exclusive U.S. distributor
for these NBS Shakers, NBS markets and sells its INNOVA shakers and other
products on a direct basis as well. Fisher also distributes a few selected
INNOVA models. Fisher Scientific is also the exclusive distributor for the
Company's C-Line shakers in certain European countries and has a broader
distribution arrangement with the Company in Canada and in France.
For information concerning net sales in the United States and foreign countries,
income (loss) from operations derived therefrom, identifiable assets located in
the United States and foreign countries, and export sales for each of the three
years ended December 31, 2002, see Note 10 of Notes to Consolidated Financial
Statements. Export sales consist of all sales by the Company's domestic
operations to customers located outside the United States. Hence, foreign sales
include export sales.
Substantially all of the orders of the Company's domestic operations, including
export orders are recorded in United States dollars. The Company's wholly-owned
European subsidiaries book orders for equipment in local currencies and in some
instances in United States dollars. The assets and liabilities of the Company's
European subsidiaries are valued in local currencies. Fluctuations in exchange
rates between those currencies and the dollar have had an impact upon the
Company's consolidated financial statements, as measured in United States
dollars.
7
Export sales are influenced by changes in the exchange rate of the dollar as
those changes affect the cost of the Company's equipment to foreign purchasers.
Certain countries, may not be able to make substantial capital purchases in
dollars for economic or political reasons.
NBS maintains five European sales offices through wholly-owned subsidiaries, New
Brunswick Scientific (U.K.) Limited, in England, New Brunswick Scientific B.V.
in The Netherlands, New Brunswick Scientific GmbH in Germany, New Brunswick
Scientific NV/SA in Belgium and New Brunswick Scientific S.a.r.l. in France.
NBS with three offices, also sells on a direct basis in China.
At December 31, 2002, NBS had a backlog of unfilled orders of $6,668,000,
compared with $10,381,000 at the end of 2001. NBS expects to satisfy all of its
existing backlog during the coming year. Sluggishness in both the U.S. and
foreign economies may result in a slower pace of orders for NBS equipment in
2003.
One multi-national distributor based in the United States accounted for
approximately 18.9%, 14.2% and 14.9%, respectively, of consolidated net sales
during the years ended December 31, 2002, 2001 and 2000. Net sales to no other
customer exceeded 10% of consolidated net sales in any year.
COMPETITION
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The competitive factors affecting the Company's position as a manufacturer
of biotechnology equipment include availability, reliability, ease of operation,
the price of its products, its responsiveness to the technical needs and service
requirements of customers, and product innovation.
NBS encounters competition from approximately 11 domestic and 15 foreign
competitors in the sale of its products. The Company's principal competitors in
the sale of fermentation equipment and bioreactors both in the United States and
overseas are B. Braun Biotech, a German company and Applikon, B.V., located in
The Netherlands. Although financial information concerning these firms is not
readily available, the Company believes that B. Braun has substantially greater
financial resources than the Company.
The Company believes that it has the largest worldwide market share for
biological shakers. LabLine Instruments, Inc. and Forma Scientific in the
United States as well as several manufacturers in Europe are competitors of the
Company in this market.
The Company, having begun in 2001 to sell ultra-low temperature freezers in the
U.S., has a relatively small market share there but believes it has a
substantial market share for freezers in the European market where it has been
selling freezers for over 20 years. The Company's main competitors in the sale
of freezers are Revco, Forma and Sanyo.
8
NBS encounters substantial competition in the sale of most of its other
equipment where its sales do not represent major market shares. Although the
Company does not encounter substantial competition in the sale of its nutrient
sterilizing and dispensing equipment in the U.S. market, substantial competition
exists in foreign markets.
EMPLOYEES
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NBS employs approximately 405 people, including 232 people engaged in
manufacturing and supervision, 31 in research, development and engineering, 112
in sales and marketing, and 30 in administrative and clerical capacities.
Manufacturing employees currently work a single shift, however, in certain areas
a second shift has been employed. The Company's New Jersey manufacturing
employees are represented by District 15 of the International Association of
Machinists, AFL-CIO under a contract which expires in December 2003. The
Company considers its labor relations to be good.
PATENTS AND TRADEMARKS
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NBS holds and has filed applications for United States and foreign patents
relating to many of its products, their integral components and significant
accessories. NBS also has certain registered trademarks. However, NBS believes
that its business is not dependent upon patent, trademark, or other proprietary
protection in any material respect.
WEBSITE ACCESS TO REPORTS
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The Company makes its periodic and current reports available, free of charge on
its website (www.nbsc.com) as soon as reasonably practicable after such material
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is electronically filed with the Securities and Exchange Commission.
CAUTIONARY STATEMENT
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Statements included herein which are not historical facts are
forward-looking statements. Such forward looking statements are made pursuant
to the safe harbor provision of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve a number of risks and
uncertainties, including but not limited to, changes in economic conditions,
demand for the Company's products, pricing pressures, intense competition in the
industries in which the Company operates, the need for the Company to keep pace
with technological developments and timely respond to changes in customer needs,
the Company's dependence on third party suppliers, the effect on foreign sales
of currency fluctuations, acceptance of new products, the labor relations of the
Company and its customers and other factors identified in the Company's
Securities and Exchange Commission filings.
ITEM 2. PROPERTY
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The Company's executive, administrative, engineering and domestic sales
offices and its manufacturing operations, warehouse and other facilities are
9
located in a Company-owned 243,000 square foot one-story steel and concrete
block building situated on a 17-acre site in Edison, New Jersey. Approximately
50,000 square feet is office space, approximately 7,300 square feet is
laboratory space, approximately 8,800 square feet is leased to DGI, and the
balance is devoted to manufacturing and warehouse facilities. The Company's NBS
B.V. subsidiary owns its 22,825 square foot building in Nijmegen, The
Netherlands.
The Company's wholly-owned European subsidiaries lease facilities as follows:
New Brunswick Scientific (UK) Limited - 17,000 square feet, NBS Cryo-Research
Limited - 24,664 square feet, NBS GmbH - 1,400 square feet and New Brunswick
Scientific NV/SA - 3,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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No material legal proceedings are currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
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MATTERS
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(A) The Company's Common stock is traded in the National
over-the-counter market (Nasdaq symbol NBSC). The following table sets forth
the high and low prices for the Company's Common stock as reported by Nasdaq for
the periods indicated. The prices represent quotations between dealers
reflecting prevailing market factors which may include anticipated markups or
markdowns and do not necessarily represent actual transactions.
HIGH LOW
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2001
First Quarter $ 4.09 $3.13
Second Quarter 5.80 3.00
Third Quarter 4.95 3.80
Fourth Quarter 6.25 3.70
2002
First Quarter $10.00 $5.35
Second Quarter 10.62 5.81
Third Quarter 7.29 4.25
Fourth Quarter 8.25 4.85
2003
First Quarter $ 5.75 $4.85
(through February 10, 2003)
(B) The number of holders, including beneficial owners, of NBS' Common stock
as of February 10, 2003, is 1,767.
(C) NBS paid 10% Common stock dividends on May 15, 2002 and 2001.
10
ITEM 6. SELECTED FINANCIAL DATA
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The following table sets forth selected consolidated financial information
regarding the Company's financial position and operating results. This
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto which appear elsewhere herein.
Year Ended December 31,
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2002 2001 2000 1999 1998
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(In thousands, except per share amounts)
Net sales $57,226 $60,294 $ 49,864 $54,866 $46,968
Net income (loss) (a) 2,584 2,211 (3,927)(b) (1,148) (156)
Basic income (loss) per share (c) .34 .30 (.54) (.16) (.02)
Diluted income (loss) per share (c) .33 .30 (.54) (.16) (.02)
Total assets (d) 45,264 44,543 43,006 46,026 39,066
Long-term debt, net of current
installments (d) 5,213 6,751 694 7,347 239
(a) Includes pre-tax charges of $260,000 in 2001 and $663,000 in 1999 related to
non-recurring severance costs.
(b) Includes a pre-tax charge of $950,000 related to the write-off of investment in
Organica, Inc.
(c) Adjusted to reflect 10% stock dividend distributed on May 15, 2002.
(d) At year-end.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Statements included herein which are not historical facts are
forward-looking statements. Such forward-looking statements are made pursuant
to the safe harbor provision of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve a number of risks and
uncertainties, including but not limited to, changes in economic conditions,
demand for the Company's products, pricing pressures, intense competition in the
industries in which the Company operates, the need for the Company to keep pace
with technological developments and timely respond to changes in customer needs,
the Company's dependence on third party suppliers, the effect on foreign sales
of currency fluctuations, acceptance of new products, the labor relations of the
Company and its customers and other factors identified in the Company's
Securities and Exchange Commission filings.
Results of Operations
---------------------
2002 vs. 2001
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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
11
attacks, these regulations may be made more restrictive. The impact of these
anticipated regulations cannot be determined at this time.
For the year ended December 31, 2002, the Company generated net income
of $2,584,000 or $.33 per diluted share on net sales of $57,226,000 compared
with net income of $2,211,000 or $.30 per diluted share on net sales of
$60,294,000 for the year ended December 31, 2001.
The 5.1% decrease in net sales is due to the absence in 2002 of sales of
fully custom-engineered bioprocess equipment, which amounted to $5,088,000 in
2001, for which the Company ceased accepting orders after June 29, 2001 and
$400,000 of 2001 DGI revenues (which was not consolidated after June 14, 2001).
Net sales on a comparable basis increased 4.4% during 2002 as a result of
increased sales of cell culture equipment, shakers and ultra-low temperature
freezers. Net sales in Europe declined during 2002, however shipments in the
United States remained strong. Overall, net sales benefited from a large
backlog of unfilled orders, which was reduced to $6,668,000 at the end of 2002
from $10,381,000 at December 31, 2001. The decline in the backlog was the result
of improvements in manufacturing efficiencies allowing the Company to
substantially reduce average lead times. While only a small percentage of the
Company's sales are made directly to United States and foreign government
departments and agencies, its business is significantly affected by government
expenditures and grants for research to educational research institutions and to
industry.
Gross profit for the year ended December 31, 2002
decreased to $23,881,000 from $24,029,000 for 2001. The small dollar decrease
was despite the 5% sales decrease since gross margin increased to 41.7% from
39.9% in 2001 due primarily to the absence of lower margin sales of fully
custom-engineered bioprocess equipment as noted above, as well as a larger
percentage of the Company's sales coming from the U.S. domestic market, which
provides higher margins than foreign sales.
Selling, general and administrative expenses and research, development and
engineering expenses remained relatively flat during 2002 as normal yearly
increases in costs were balanced by selective reductions in costs. Effective
January 1, 2002, the Company adopted the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires
that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead they will be tested at least annually for impairment.
Consequently, the Company ceased amortizing goodwill upon adoption.
Amortization expense related to goodwill was $182,000 for the year ended
December 31, 2001.
DGI research expenses amounted to zero in 2002 compared with $1,312,000 in
2001 since DGI's operations are no longer 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 December 31, 2002).
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.
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Interest income increased to $64,000 in 2002 from $56,000 in 2001 due to higher
average invested cash, partially offset by lower interest rates.
Interest expense decreased to $460,000 in 2002 from $561,000 in 2001 as a result
of the full repayment of the working capital portion of the Company's debt under
its line of credit, lower balances on its acquisition and mortgage debt due to
payments as well as to lower rates.
Other, net decreased in 2002 to an expense of $35,000 from an expense of
$113,000 in 2001 due primarily to lower realized foreign exchange losses.
Income tax expense increased to $1,491,000 in 2002, an effective rate of
35.3% from $145,000 in 2001, an effective rate of 5%. During 2002 the Company
was subject to more normalized income tax rates whereas, as a result of
carry-forward losses related primarily to DGI, income tax expense for 2001
represents tax provisions of the Company's European subsidiaries, partially
offset by a U.S. tax benefit. The primary reason for the Company's effective
tax rate of 5% for 2001 vs. the statutory tax rate of 34% was a reduction in the
valuation allowance allocated to income tax expense.
Equity in operations of DGI was $150,000 in 2002 compared with $527,000 in
2001. The 2001 amount represents the Company's equity in DGI's losses from June
14 through December 31, 2001. The $150,000 charge in 2002 is related to a loan
made by the Company to DGI on September 27, 2002 as further described below
under "Financial Condition".
During 2002, the U.S. dollar weakened against the currencies of the
European countries where the Company has subsidiary operations. The effect of
balance sheet translation resulted in an unrealized currency translation gain of
$1,126,000, which is reflected as a component of accumulated other comprehensive
loss in the equity section of the Consolidated Balance Sheet.
2001 vs. 2000
- ---------------
For the year ended December 31, 2001, the Company generated net income of
$2,211,000 or $.30 per diluted share on net sales of $60,294,000 compared with a
net loss of $3,927,000 or $.54 per diluted share on net sales of $49,864,000 for
the year ended December 31, 2000.
The 20.9% increase in net sales resulted from increases in both the U.S. and
export markets as well as from the Company's European subsidiary operations.
Sales of shakers, fermentation equipment and ultra-low temperature freezers
increased 8%, 50% and 68%, respectively, as sales in Europe rebounded from a
significant downturn which occurred in 2000 and from the strong demand for
laboratory research equipment in the United States. While only a small
percentage of the Company's sales are made directly to United States and foreign
government departments and agencies, its business is significantly affected by
government expenditures and grants for research to educational research
institutions and to industry.
13
Gross profit for the year ended December 31, 2001 increased to $24,029,000 from
$20,154,000 for 2000. The 19.2% increase is due primarily to the 20.9% increase
in net sales as gross margin declined slightly to 39.9% in 2001 from 40.4% in
2000.
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 after the September 11, 2001 terrorist attacks, these
regulations may be made more restrictive.
Selling general and administrative expenses increased modestly to $16,205,000
in 2001 from $15,607,000 in 2000. The 3.8% increase was due to normal annual
salary and other increases.
Research, development and engineering expenses decreased $672,000 or 19.6% due
primarily to a reduction in engineering expenses related to the fully
custom-engineered bioprocess equipment business for which the Company ceased
accepting orders effective June 29, 2001. Custom-engineered products had
represented a small niche business for the Company.
The $260,000 of non-recurring severance costs incurred in 2001 are in connection
with the Company's withdrawal from this business.
DGI research expenses declined to $1,312,000 in 2001 from $3,480,000 in 2000 as
a result of DGI having received an infusion of funds on June 14, 2001 from an
institutional investor, as described below and the fact that DGI's operations
were no longer consolidated with those of the Company after June 14, 2001, as
the Company's ownership interest was reduced to 47% and the investment is now
accounted for using the equity method.
Interest expense decreased to $561,000 in 2001 from $638,000 in 2000 due
primarily to lower interest rates.
Write-off of investment decreased from $950,000 in 2000 to zero in 2001 since
all of the costs which relate to the Company's investment in Organica, Inc. were
written-off in 2000.
As a result of carry-forward losses related primarily to DGI, income tax expense
for 2001 represents tax provisions of the Company's European subsidiaries,
partially offset by a U.S. tax benefit. The primary reason for the Company's
effective tax rate of 5% for 2001 vs. the statutory tax rate of 34% was a
reduction in the valuation allowance allocated to income tax expense.
Equity in operations of DGI resulted in a charge of $527,000 in 2001 and relates
to the Company's 47% equity interest in DGI. The Company is not required to,
and will not record losses in the future from DGI's operations since it has no
further obligation or intent to fund the DGI operations and the carrying value
of its investment had been reduced to zero at December 31, 2001.
The following table reconciles income before income taxes on an as reported
basis to non-GAAP pro-forma income before income taxes before the effects of
DGI, non-recurring severance costs in 2001 and write-off of investment in 2000.
14
Such non-GAAP pro-forma amounts are not intended to be a measurement in
accordance with generally accepted accounting principles (in thousands):
Year Ended December 31,
------------------------------------
2001 2000
------------------------- ----------
Income (loss) before income tax expense
(benefit) and equity in operations of DGI
as reported $ 2,883 $ (3,975)
Add: DGI research and other expenses 1,312 3,480
Non-recurring severance costs 260 -
Write-off of investment - 950
Less: DGI revenues (400) (420)
------------------------- ----------
$ 4,055 $ 35
========================= ==========
During 2001, the U.S. dollar strengthened against the currencies of the European
countries where the Company has subsidiary operations. The effect of balance
sheet translation resulted in an unrealized currency translation loss of
$825,000, which is reflected as a component of accumulated other comprehensive
loss in the equity section of the Consolidated Balance Sheet.
Financial Condition
-------------------
Liquidity and Capital Resources
----------------------------------
Working capital increased to $26,671,000 at December 31, 2002 from
$24,389,000 at December 31, 2001 and cash and cash equivalents increased to
$9,718,000 from $3,794,000 at December 31, 2001. Accounts receivable decreased
to $9,991,000 at December 31, 2002 from $12,811,000 at December 31, 2001 due
primarily to a 14.3% decrease in net sales in the fourth quarter of 2002
compared with the fourth quarter of 2001, which was an exceptionally strong
quarter for the Company. Inventories decreased to $12,096,000 at December 31,
2002 from $15,168,000 at December 31, 2001 primarily as a result of reductions
in raw materials and work-in-process inventories due to improvements in sourcing
of materials and in manufacturing efficiencies and procedures. Excess of cost
over net assets acquired increased to $4,707,000 at December 31, 2001 from
$4,256,000 at December 31, 2001 as a result of the strengthening of the pound
sterling vs. the dollar during 2002 since the goodwill is denominated in pounds.
Accounts payable and accrued expenses decreased to $6,489,000 at December 31,
2002 from $9,136,000 at December 31, 2001 primarily as a result of a decrease in
trade payables, and advance payments from customers. Long-term debt, net of
current installments decreased to $5,213,000 at December 31, 2002 from
$6,751,000 at December 31, 2001 as a result of the payments of fixed debt and
the repayment of the working capital portion of the Company's bank debt down to
zero during the year. Other liabilities increased to $2,547,000 at December 31,
2002 from $2,094,000 at December 31, 2001 as a result of an increase in pension
liabilities.
15
At December 31, 2002 NBS had a backlog of unfilled orders of $6,668,000 all
of which it expects to satisfy in the coming year. Sluggishness in both the
U.S. and foreign economies may result in a slower pace of orders for NBS
equipment in 2003.
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 December 31, 2002, the
bank's prime rate was 4.25% and libor was 1.4175%. All of the Company's domestic
assets, which are not otherwise subject to lien, have been pledged as security
for any borrowings under the Bank Agreement. The Bank Agreement contains various
business and financial covenants including among other things, a debt service
ratio, a net worth covenant, and a ratio of total liabilities to tangible net
worth. The Company is in compliance with its covenants pursuant to the Bank
Agreement at December 31, 2002.
At December 31, 2002, $4,874,000 was outstanding under the Bank Agreement
related to acquisition loans bearing fixed interest at 8% per annum, $276,000
was being utilized for letters of credit and $54,000 for foreign exchange
transactions. The following amounts were available at December 31, 2002 under
the Bank Agreement: $4,724,000 for working capital and letters of credit,
$2,000,000 for equipment acquisitions, $7,626,000 for acquisitions and
$9,946,000 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 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 2003. At December 31, 2002 the balance due on the notes was $403,000.
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 December 31, 2002, an aggregate of $309,000 was
outstanding on both mortgages.
The Company's contractual obligations and commitments principally include
obligations associated with its outstanding indebtedness and future minimum
operating lease obligations as set forth in the following table:
16
Payments Due by Period
------------------------
(In thousands)
------------------------
Contractual obligations:
Within 1 1-2 3-4 After 4
Total Year Years Years Years
- ------------------------- ------------------------ ------ -------- ------
Long-term debt, notes and
credit facility $ 5,586 $ 373 $ 805 $4,334 $ 74
Operating leases 4,149 852 1,241 790 1,266
------------------------ ------ -------- ------ ------
Total contractual
cash obligations $ 9,735 $1,225 $ 2,046 $5,124 $1,340
======================== ====== ======== ====== ======
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 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, the Company no longer exercises control and as required by accounting
principles generally accepted in the United States of America, ceased
consolidating the operations of DGI and began reporting 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 or intent to fund the DGI operations. As of December
31, 2002 and 2001, the Company's investment in DGI is zero.
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 hopes to consummate during the
first half of 2003, however, no assurance can be made as to the closing of this
financing. The inability to close this financing or the realization of funds
from another source could have a material adverse effect on DGI's ability to
survive. 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 or intent to provide any future financing or support to DGI.
As compensation for making the loans, the Company and BankInvest each received
17
Series B Convertible Preferred shares in DGI in proportion to their respective
share of the loan. Consequently, the Company's ownership interest in DGI at
December 31, 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 $134,000, related to DGI equipment leases
guaranteed by the Company (which has been fully reserved by the Company).
The Company is a party to a two-year lease with DGI under which DGI occupies
8,800 square feet of office and specifically designed laboratory space at the
Company's headquarters facility in Edison, New Jersey 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. The lease was established at
arm's length utilizing current market information. Should the anticipated round
of financing, described above, be consummated, the Company expects to receive
shares in DGI in lieu of future rent payments.
Cash Flows from Operating Activities
----------------------------------------
Net cash provided by operating activities was $7,417,000 in 2002 compared
with $3,180,000 in 2001. Net cash provided by operating activities in 2002 was
composed of net income of $2,584,000 adjusted for depreciation and amortization
and equity in operations of DGI, which are non-cash items aggregating $1,215,000
and net cash provided by changes in operating assets and liabilities of
$3,618,000 which are primarily attributable to a decrease of $3,260,000 in
accounts receivable due to the lower level of fourth quarter 2002 shipments
compared with the fourth quarter of 2001, a decrease in inventories of
$3,373,000 due to improvements in sourcing of materials and in manufacturing
efficiencies and procedures and a decrease in other assets of $478,000,
partially offset by a decrease in accounts payable and accrued expenses of
$1,222,000 and a decrease of $1,558,000 in advance payments from customers
related to the Company's decision to cease accepting orders for fully
custom-engineered bioprocess equipment.
Net cash provided by operating activities in 2001 of $3,180,000 was
composed of net income of $2,211,000 adjusted for depreciation and amortization
and equity in operations of DGI which are non-cash items aggregating $1,842,000
and net cash used for changes in operating assets and liabilities of $873,000
which are primarily attributable to an increase in accounts receivable due to
the high level of shipments late in the year and a substantial reduction in
other assets directly related to the reduction in the valuation allowance
against the deferred tax asset due to the significant improvement in the
Company's operating income, offset by a decrease in inventories partly
attributable to the Company's decision to stop accepting orders for large fully
custom-engineered bioprocess equipment.
18
Cash Flows from Investing Activities
----------------------------------------
Net cash used in investing activities amounted to $1,365,000 in 2002
compared with $700,000 in 2001. Both years included expenditures for property,
plant and equipment and increases in insurance cash surrender value.
Cash Flows from Financing Activities
----------------------------------------
Net cash used in financing activities amounted to
$366,000 in 2002 compared with net cash used of $1,101,000 in 2001. Both years
reflect the scheduled repayment of long-term debt (2002-$248,000;
2001-$222,000), repayments under the working capital portion of the Company's
revolving credit facility (2002-$1,250,000; 2001-$1,000,000), proceeds under
stock option and purchase plans (2002-$1,270,000; 2001-$116,000) and proceeds
from notes receivable related to exercised stock options (2002-$12,000;
2001-$5,000).
Management believes that the resources available to the Company, including
current cash and cash equivalents, cash 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.
Related Party Transactions
----------------------------
David Freedman, Chairman of the Board of the Company, is the owner of
Bio-Instrument Ltd., a foreign firm that acts as an agent for sales of the
Company's products to customers in Israel, and earns commissions on those sales.
During 2002, 2001 and 2000, this firm earned commissions in the amounts of
$248,033, $212,128 and $204,357, respectively, on purchases by customers in
Israel of the Company's products. These commissions paid by the Company to
Bio-Instrument Ltd. were comparable to commissions paid to unrelated
distributors and sales representatives.
Carol Freedman, the daughter of David Freedman, the niece of Sigmund
Freedman and the sister of Kenneth Freedman, has been employed by the Company in
various capacities since 1979. Ms. Freedman is currently Customer Service
Manager and also is an Assistant Treasurer of the Company. Her compensation for
2002 was $63,162; she also received options to purchase 1,100 shares of the
Company's Common stock in 2002, under the Company's 2001 Stock Option Plan for
Officers and Key Employees.
Critical Accounting Policies
------------------------------
The Securities and Exchange Commission has issued disclosure guidance
for "critical accounting policies." The SEC defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
19
Management is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
The significant accounting policies are described in Note 1 of the
notes to consolidated financial statements included in the Company's 2002 Annual
Report on Form 10-K. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, management considers the following policies to be critical within the
SEC definition.
Inventories
-----------
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess and
obsolete inventories. The estimate is based on managements' review of
inventories on hand compared to estimated future usage and sales. Cost includes
material, labor and manufacturing overhead.
Long-Lived Assets
------------------
Long-lived assets, such as property, plant, and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is generally
based on discounted cash flows.
Goodwill, which is not subject to amortization is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that
the carrying amount of the Company exceeds its fair value.
Deferred Income Taxes
-----------------------
A portion of the deferred tax assets, which have been recorded by the
Company, represent net operating loss carry-forwards. A valuation allowance
has been recorded for certain capital losses and other deferred tax assets. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
20
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Accounts Receivable
--------------------
The Company estimates an allowance for doubtful accounts after
considering the collectibility of balances due, the credit worthiness of the
customer and its current level of business with the customer. Actual results
could differ from these estimates.
Recently Issued Accounting Standards Not Yet Adopted
----------------------------------------------------------
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.
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------------
In the normal course of business, the Company is exposed to fluctuations in
interest rates as it seeks debt financing to make capital expenditures,
potential acquisitions, and invest in cash equivalents and marketable debt
securities. Cash equivalents and other marketable investments are carried at
fair value on the consolidated balance sheets. At times, management might
employ specific strategies, such as the use of derivative instruments or hedging
to manage foreign currency or other exposures. Further, the Company does not
21
expect its market risk exposures to change in the near term. At December 31,
2002, the outstanding borrowings of the Company consisted primarily of fixed
rate long-term debt, which had a carrying value of $4,874,000 and a fair value
of approximately $5,574,000. Assuming other factors are held constant, interest
rate changes generally affect the fair value of fixed rate debt, but do not
impact the carrying value, earnings or cash flows. Accordingly, assuming a
hypothetical increase of 1% in interest rates and all other variables remaining
constant, interest expense would not change, however, the fair market value of
the fixed rate long-term debt would decrease by approximately $170,000.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
23
Independent Auditors' Report
The Board of Directors and Shareholders
New Brunswick Scientific Co., Inc.:
We have audited the consolidated financial statements of New Brunswick
Scientific Co., Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Brunswick
Scientific Co., Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As described in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" in 2002, which changes its accounting for
goodwill and intangible assets.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
February 18, 2003
24
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In thousands, except share and per share amounts)
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 9,718 $ 3,794
Accounts receivable, net of allowance for doubtful accounts, 9,991 12,811
2002 - $467 and 2001 - $466
Inventories 12,096 15,168
Deferred income taxes 962 1,162
Prepaid expenses and other current assets 766 856
--------- ---------
Total current assets 33,533 33,791
--------- ---------
Property, plant and equipment, net 5,195 4,868
Excess of cost over net assets acquired less accumulated
amortization of $386 in 2001 4,707 4,256
Other assets 1,829 1,628
--------- ---------
$ 45,264 $ 44,543
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 373 $ 266
Accounts payable and accrued expenses 6,489 9,136
--------- ---------
Total current liabilities 6,862 9,402
--------- ---------
Long-term debt, net of current installments 5,213 6,751
Other liabilities 2,547 2,094
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par; authorized 25,000,000 shares;
issued and outstanding: 2002 - 7,790,796 shares;
2001 - 6,761,892 shares 487 423
Capital in excess of par 47,959 40,124
Accumulated deficit (13,756) (10,014)
Accumulated other comprehensive loss (4,003) (4,180)
Notes receivable from exercise of stock options (45) (57)
--------- ---------
Total shareholders' equity 30,642 26,296
--------- ---------
$ 45,264 $ 44,543
========= =========
See notes to consolidated financial statements.
25
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands, except per share amounts)
2002 2001 2000
----------- ----------- ----------
Net sales $ 57,226 $ 60,294 $ 49,864
Operating costs and expenses:
Cost of sales 33,345 36,265 29,710
Selling, general and administrative
expenses 16,353 16,205 15,607
Research, development and engineering
expenses 2,872 2,751 3,423
DGI research expenses - 1,312 3,480
Non-recurring severance costs - 260 -
----------- ----------- ----------
Total operating costs and expenses 52,570 56,793 52,220
----------- ----------- ----------
Income (loss) from operations 4,656 3,501 (2,356)
----------- ----------- ----------
Other income (expense):
Interest income 64 56 56
Interest expense (460) (561) (638)
Other expense, net (35) (113) (87)
Write-off of investment - - (950)
----------- ----------- ----------
(431) (618) (1,619)
----------- ----------- ----------
Income (loss) before income tax expense
(benefit) and equity in operations of DGI 4,225 2,883 (3,975)
Income tax expense (benefit) 1,491 145 (48)
----------- ----------- ----------
Income (loss) before equity in operations
of DGI 2,734 2,738 (3,927)
Equity in operations of DGI (150) (527) -
----------- ----------- ----------
Net income (loss) $ 2,584 $ 2,211 $ (3,927)
=========== =========== ==========
Basic income (loss) per share $ .34 $ .30 $ (.54)
=========== =========== ==========
Diluted income (loss) per share $ .33 $ .30 $ (.54)
=========== =========== ==========
Basic weighted average number of shares
outstanding 7,651 7,412 7,304
=========== =========== ==========
Diluted weighted average number of shares
outstanding 7,837 7,449 7,304
=========== =========== ==========
See notes to consolidated financial statements.
26
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands, except share amounts)
Notes
Receivable
Accumulated From
Capital Other Exercise
Common Stock in Excess Accumulated Comprehensive Of Stock
Shares Amount Of Par Deficit Loss Options Total
------------- ------------- --------------- ---------- --------- -------
Balance, January 1, 2000 5,344,000 $ 334 $ 32,907 $ (2,107) $ (1,032) $ (332) $29,770
Issue of shares under employee
stock purchase plan 27,545 2 117 119
Issue of shares under stock option
plans 194,823 13 867 880
Payment on notes receivable from
exercise of stock options 270 270
10% stock dividend 549,189 34 3,072 (3,106) -
Net loss (3,927) (3,927)
Other comprehensive loss
adjustment (1,170) (1,170)
------------- ----------- ------------- -------------- ----------- --------- -------
Balance, December 31, 2000 6,115,557 $ 383 $ 36,963 $ (9,140) $ (2,202) $ (62) $25,942
------------- ----------- ------------- --------------- ---------- --------- -------
Issue of shares under employee
stock purchase plan 34,939 2 114 116
Payment on notes receivable from
exercise of stock options 5 5
10% stock dividend 611,396 38 3,047 (3,085) -
Net income 2,211 2,211
Other comprehensive loss
adjustment (1,978) (1,978)
------------- ----------- ------------ -------------- ---------- --------- -------
Balance, December 31, 2001 6,761,892 $ 423 $ 40,124 $ (10,014) $ (4,180) $ (57) $26,296
------------- ----------- ------------- --------------- ---------- --------- -------
Issue of shares under employee
stock purchase plan 36,895 2 170 172
Issue of shares under stock option
plans 371,027 22 1,582 1,604
Tax benefits related to exercise of
stock options 303 303
Mature shares received as payment
in lieu of cash for exercised stock
options (74,235) (4) (502) (506)
Payment on notes receivable from
exercise of stock options 12 12
10% stock dividend 695,217 44 6,282 (6,326) -
Net income 2,584 2,584
Other comprehensive loss
adjustment 177 177
------------- ----------- ------------ -------------- ---------- --------- -------
Balance, December 31, 2002 7,790,796 $ 487 $ 47,959 $ (13,756) $ (4,003) $ (45) $30,642
============= =========== ============= =============== ========== ========= =======
See notes to consolidated financial statements.
27
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,584 $ 2,211 $ (3,927)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,065 1,315 1,501
Equity in operations of DGI 150 527 -
Write-off of investment - - 950
Change in related balance sheet accounts,
excluding effect of acquisition:
Accounts and notes receivable 3,260 (2,632) 2,985
Inventories 3,373 1,326 (1,868)
Prepaid expenses and other current assets (163) (622) (324)
Other assets 478 (274) (85)
Accounts payable and accrued expenses (1,222) 1,370 (1,292)
Advance payments from customers (1,558) (336) 1,611
Other liabilities (550) 295 (304)
--------- --------- ---------
Net cash provided by (used in) operating activities 7,417 3,180 (753)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,203) (577) (351)
Sale of equipment - 18 3
Acquisition of DJM Cryo-Research Group,
net of cash acquired - - (352)
Increase in insurance cash surrender value (162) (141) (132)
--------- --------- ---------
Net cash used in investing activities (1,365) (700) (832)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term credit facility - - 1,000
Repayments of long-term debt (1,498) (1,222) (232)
Proceeds from issue of shares under stock
purchase and option plans 1,270 116 999
Loan to DGI (150) - -
Payments on notes receivable related to exercised
stock options 12 5 270
--------- --------- ---------
Net cash (used in) provided by financing activities (366) (1,101) 2,037
--------- --------- ---------
Net effect of exchange rate changes on cash 238 (58) (90)
--------- --------- ---------
Net increase in cash and cash equivalents 5,924 1,321 362
Cash and cash equivalents at beginning of year 3,794 2,473 2,111
--------- --------- ---------
Cash and cash equivalents at end of year $ 9,718 $ 3,794 $ 2,473
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 497 $ 551 $ 647
Income taxes 1,171 155 621
See notes to consolidated financial statements.
28
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
2002 2001 2000
-------- --------- --------
Net income (loss) $ 2,584 $ 2,211 $(3,927)
Other comprehensive income (loss):
Foreign currency translation adjustment 1,126 (825) (827)
Minimum pension liability adjustment (949) (1,153) (343)
-------- --------- --------
Net comprehensive income (loss) $ 2,761 $ 233 $(5,097)
======== ========= ========
See notes to consolidated financial statements.
29
1. Nature of operations and summary of significant accounting policies:
Nature of operations:
New Brunswick Scientific Co., Inc. and its subsidiaries ("NBS" or "the Company")
design, manufacture and market a variety of equipment used in biotechnology to
create, maintain, measure and control the physical and biochemical conditions
required for the growth, detection and storage of microorganisms. This
equipment is used in medical, biological, chemical, and environmental research
and for the commercial development of antibiotics, proteins, hormones, enzymes,
monoclonal antibodies, agricultural products, fuels, vitamins, vaccines and
other substances. The equipment sold by NBS includes fermentation equipment,
bioreactors, biological shakers, ultra-low temperature freezers, nutrient
sterilizing and dispensing equipment, tissue culture apparatus and air samplers.
Principles of consolidation:
The consolidated financial statements include the accounts of New Brunswick
Scientific Co., Inc., and its wholly-owned subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated.
Translation of foreign currencies:
Translation adjustments for the Company's foreign operations are included
as a component of accumulated other comprehensive loss in shareholders' equity.
Transaction gains and losses, which are not significant in amount, are included
in the consolidated statements of operations as part of "Other income
(expense), net".
Cash and cash equivalents:
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents in the consolidated
statements of cash flows.
Inventories:
Inventories are stated at the lower of cost (first in, first out or
average) or market and have been reduced by an allowance for excess and obsolete
inventories. Cost elements include material, labor and manufacturing overhead.
Property, plant and equipment:
Property, plant and equipment are stated at cost. The cost of repairs,
maintenance and replacements which do not significantly improve or extend the
life of the respective assets are charged to expense as incurred.
30
Depreciation is provided by the straight-line method over the estimated
useful lives of the related assets, generally 33-1/3 years for buildings and 10
years for machinery and equipment.
Goodwill:
In July 2001, the FASB issued Statement No. 141, Business Combinations ("SFAS
No. 141") and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations completed after June 30, 2001. SFAS No. 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 No. 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 No.
142. SFAS No. 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.
The Company has adopted the provisions of SFAS No. 141 for acquisitions
initiated after June 30, 2001, and SFAS No. 142 effective January 1, 2002. In
connection therewith, the Company determined that it has one reporting unit.
Goodwill acquired in business combinations completed before July 1, 2001 has
been amortized through December 31, 2001. Effective January 1, 2002, as part of
the adoption of SFAS No. 142 the Company is no longer amortizing goodwill. SFAS
No. 142 requires that the Company perform an assessment of whether there is an
indication that goodwill is impaired based on the provisions of SFAS No. 142.
To the extent an indication exists that the goodwill may be impaired, the
Company must measure the impairment loss, if any. Under SFAS No. 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. The Company performed an assessment to determine
whether goodwill was impaired as of December 31, 2002 and January 1, 2002, the
date of adoption and determined that there is no impairment to its goodwill
balance at these dates. The Company will test for impairment at December 31 each
year. Amortization expense related to goodwill was $182,000 and $195,000 for
the years ended December 31, 2001 and 2000, respectively.
All of the Company's goodwill relates to a 1999 acquisition by one of the
Company's United Kingdom subsidiaries. Unamortized goodwill at December 31,
2001 was $4,256,000. The only change in goodwill in 2002 was due to the
translation adjustment.
The following table reconciles previously reported net income (loss) to net
income (loss) adjusted as if the provisions of SFAS No. 142 were in effect in
2001 and 2000 (in thousands, except per share amounts):
31
Year Ended December 31
---------------------------------
2001 2000
----------------------- ---------
Reported net income (loss) $ 2,211 $ (3,927)
Addback: goodwill amortization 109 117
----------------------- ---------
Adjusted net income (loss) $ 2,320 $ (3,810)
======================= =========
Basic income (loss) per share:
Reported net income (loss) $ .30 $ (.54)
Goodwill amortization .01 .02
----------------------- ---------
Adjusted net income (loss) $ .31 $ (.52)
======================= =========
Diluted income (loss) per share:
Reported net income $ .30 $ (.54)
Goodwill amortization .01 .02
----------------------- ---------
Adjusted net income (loss) $ .31 $ (.52)
======================= =========
Prior to the adoption of SFAS No. 142 goodwill was amortized on a straight-line
basis over 25 years. The Company assessed the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows. The amount of goodwill impairment, if any, was measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
Research and development:
Research and development costs are expensed as incurred. Research and
development expenditures, all of which are sponsored by the Company, amounted to
$2,453,000 in 2002, $2,744,000 in 2001 and $3,981,000 in 2000. Research
expenditures related to DGI included in these amounts were zero in 2002,
$1,312,000 in 2001 and $3,480,000 in 2000.
Income taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
32
No provision has been made for federal income or withholding taxes which
may be payable on the remittance of the undistributed retained earnings of
foreign subsidiaries. These earnings have been reinvested to meet future
operating requirements and the Company has the ability to, and intends to
continue such policy for the foreseeable future.
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 using the treasury stock method. Antidilutive
options are excluded from the calculation of diluted income (loss) per share.
Information related to dilutive and antidilutive stock options is as follows (in
thousands):
Year Ended December 31,
------------------------
2002 2001 2000
----------------------- ---- ----
Dilutive effect 186 37 -
Antidilutive options 126 337 162
A 10% stock dividend was distributed on May 15, 2002. The weighted average
number of shares outstanding used in the computation of basic and diluted income
(loss) per share for prior periods have been restated to reflect this dividend.
Stock option plans:
At December 31, 2002, the Company has stock based employee compensation plans
which are described more fully in Note 9. The Company accounts for its stock
option plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. No stock based employee compensation cost is reflected in net income
(loss), as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
Company has adopted the disclosure standards of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
which requires the Company to provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method of accounting for stock options
as defined in SFAS No. 123 had been applied. The following table illustrates
the effect on net income (loss) and per share amounts if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock based employee
compensation:
33
Year Ended December 31
------------------------
2002 2001 2000
------------------------ --------- ----------
(In thousands, except per share amounts)
Net income (loss), as reported $ 2,584 $ 2,211 $ (3,927)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method,
net of related tax effects (424) (446) (385)
------------------------ --------- ----------
Pro forma net income (loss) $ 2,160 $ 1,765 $ (4,312)
======================== ========= ==========
Net income (loss) per share:
Basic-as reported $ .34 $ .30 $ (.54)
======================== ========= ==========
Basic-pro forma $ .28 $ .24 $ (.59)
======================== ========= ==========
Diluted-as reported $ .33 $ .30 $ (.54)
======================== ========= ==========
Diluted-pro forma $ .28 $ .24 $ (.59)
======================== ========= ==========
The fair value of each stock option granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
2002 2001 2000
------- ------- -------
Expected life (years) 5.2 5.7 7.4
Expected volatility 63.67% 71.21% 68.30%
Expected dividend yield - - -
Risk-free interest rate 4.34% 5.17% 5.39%
Weighed average fair value of options
granted during the year $ 3.09 $ 5.32 $ 3.42
Financial instruments:
The carrying values of the Company's financial instruments, principally
cash and cash equivalents, accounts receivable, accounts payable and certain
other assets and liabilities included in the Company's Consolidated Balance
Sheets approximated their fair values at December 31, 2002 and 2001. Fair
34
values were determined through a combination of management estimates and
information obtained from independent third parties using the latest available
market data. The approximate fair value of long-term debt was $5,574,000 at
December 31, 2002.
Impairment of long-lived assets and long-lived assets to be disposed of:
Long-lived assets, such as property, plant, and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is generally
based on discounted cash flows.
Comprehensive income (loss):
Comprehensive income (loss) consists of net income (loss), foreign currency
translation adjustment, and minimum pension liability adjustment and is
presented in the consolidated statements of comprehensive income (loss). At
December 31, 2002, accumulated comprehensive loss consists of $1,558,000 of
cumulative foreign currency translation adjustment and $2,445,000 of additional
minimum pension liability (net of tax of $517,000).
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. 2001 segment information for the Drug Lead
Discovery segment represents the operations of DGI from January 1 to June 14,
2001.
Revenue recognition:
Revenue is recognized when products are shipped. The Company's products are
tested by its quality control department prior to shipment. The Company has no
other obligation associated with its products once shipment has occurred except
for customary warranty provisions. Historically, returns have been immaterial
to the Company's consolidated financial statements and are projected to remain
at a consistent immaterial level in the future. The Company reports all amounts
billed to customers related to shipping and handling as revenue and includes all
costs incurred for shipping and handling as cost of sales.
35
Derivative instruments and hedging activities:
The Company accounts for its derivative and hedging transactions in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities". SFAS No. 133 and SFAS No. 138 require that all
derivative instruments be recorded on the balance sheet at their respective fair
values. The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001.
The adoption did not have an effect on the Company's consolidated financial
statements.
From time to time, the Company has entered into forward foreign exchange
contracts to hedge certain firm and anticipated sales commitments, net of
offsetting purchases, denominated in certain foreign currencies. The purpose of
such foreign currency derivatives is to mitigate the risk that the eventual cash
flows resulting from the sale of products to certain foreign customers (net of
purchases from applicable foreign suppliers) will be adversely affected by
fluctuations in exchange rates. At December 31, 2002 and 2001, the Company did
not have any derivative instruments outstanding.
Supplemental non-cash investing and financing activities:
During 2002, the Company had an exchange of mature shares of common stock upon
the exercise of stock options in the amount of $506,000. During 2001, the
Company made a non-cash contribution of equipment to DGI in the amount of
$429,000.
Use of estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and revenue and expenses,
such as the valuation of accounts receivable and inventories, and the disclosure
of contingent assets and liabilities to prepare the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
36
2. Inventories at December 31 consist of:
2002 2001
------- -------
(In thousands)
Raw materials and sub-assemblies $ 4,514 $ 6,704
Work-in-process 1,705 2,647
Finished goods 5,877 5,817
------- -------
$12,096 $15,168
======= =======
3. Property, plant and equipment at December 31 consists of:
2002 2001
--------- --------
(In thousands)
Land $ 800 $ 800
Buildings and improvements 4,440 4,294
Machinery and equipment 14,154 12,753
--------- --------
19,394 17,847
Less accumulated depreciation 14,199 12,979
--------- --------
$ 5,195 $ 4,868
========= ========
4. Investments:
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, the Company no longer exercises control and as required by accounting
principles generally accepted in the United States of America, ceased
consolidating the operations of DGI and began reporting 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
37
it has no further obligation or intent to fund the DGI operations. As of
December 31, 2002 and 2001, the Company's investment in DGI is zero.
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 hopes to consummate
during the first half of 2003, however, no assurance can be made as to the
closing of this financing. The inability to close this financing or the
realization of funds from another source could have a material adverse effect on
DGI's ability to survive. 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 or intent to provide any future
financing or support to DGI. As compensation for making the loans, the Company
and BankInvest each received Series B Convertible Preferred shares in DGI in
proportion to their respective share of the loan. Consequently, the Company's
ownership interest in DGI at December 31, 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 $134,000,
related to DGI equipment leases guaranteed by the Company (which has been fully
reserved by the Company).
Through the third quarter of 2000, the Company had invested $950,000 (less
than a twenty-percent voting interest) in Organica, Inc. (Organica) which was
formed in 1993 to develop and commercialize various "environmentally friendly"
products produced via fermentation processes. As previously reported , there
had been continuing uncertainties as to the future direction of Organica, Inc.
as it continued to generate losses. The Company concluded that a portion of its
investment in Organica, Inc. had become permanently impaired and recorded an
$800,000 writedown in the second quarter of 2000 to reduce its investment
balance to $150,000 the then estimated recoverable amount. Subsequently, the
two members of the Organica Board of Directors appointed by the Company
resigned. On October 30, 2000 Organica filed in the United States Bankruptcy
Court for the District of Delaware, a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code. Based on the information available at
that time, the Company determined that its investment was not recoverable and,
accordingly, wrote off the remaining $150,000 investment in the third quarter of
2000. There has been no substantial change as of December 31, 2002 and the
Company has not recovered any portion of the Organica investment.
38
5. Long-term debt and credit agreement:
The Company is a party to first and second mortgages on the facility of the
Company's Netherlands subsidiary, which bear interest of 5.50% and 5.65%,
respectively, per annum. During the terms of the mortgages, the Company is
obligated to make monthly payments of interest and quarterly payments of
principal. At December 31, 2002, $144,000 and $165,000 was outstanding under
the first and second mortgages, respectively, and at December 31, 2001, $141,000
and $162,000 was outstanding under the first and second mortgages, respectively.
Each mortgage requires 80 equal quarterly payments of principal.
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 December 31, 2002, the
bank's prime rate was 4.25% and libor was 1.4175%. All of the Company's domestic
assets, which are not otherwise subject to lien, have been pledged as security
for any borrowings under the Bank Agreement. The Bank Agreement contains various
business and financial covenants including among other things, a debt service
ratio, a net worth covenant, and a ratio of total liabilities to tangible net
worth. The Company is in compliance with its covenants pursuant to the Bank
Agreement at December 31, 2002.
At December 31, 2002, $4,874,000 was outstanding under the Bank Agreement
related to acquisition loans bearing fixed interest at 8% per annum, $276,000
was being utilized for letters of credit and $54,000 for foreign exchange
transactions. The following amounts were available at December 31, 2002 under
the Bank Agreement: $4,724,000 for working capital and letters of credit,
$2,000,000 for equipment acquisitions, $7,626,000 for acquisitions and
$9,946,000 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
2003. At December 31, 2002 the balance of the notes was $403,000.
39
Aggregate annual maturities of long-term debt are as follows:
Year ending December 31 Amount
- --------------------------------------- ---------------
(In thousands)
2003 $ 373
2004 390
2005 415
2006 4,206
2007 128
After 2007 74
---------------
5,586
===============
6. Accounts payable and accrued expenses at December 31, consists of:
2002 2001
------ ------
(In thousands)
Accounts payable-trade $1,948 $2,875
Accrued salaries, wages and payroll taxes 2,217 2,501
Advance payments from customers 168 1,715
Other accrued liabilities 2,156 2,045
------ ------
$6,489 $9,136
====== ======
On June 29, 2001, the Company announced that it had ceased accepting orders for
large fully custom-engineered bioprocess equipment which represented a small
niche business for the Company. In connection therewith, the Company recorded
a $260,000 charge for severance costs in 2001, which was fully paid as of
December 31, 2002.
40
7. Income taxes
:
Year Ended December 31
---------------------------
2002 2001 2000
------- ------- ----------
(In thousands)
Income (loss) before income tax
expense (benefit) and equity in
operations of DGI:
Domestic $3,969 $1,975 $ (2,690)
Foreign 256 908 (1,285)
------- ------- ----------
$4,225 $2,883 $ (3,975)
======= ======= ==========
Income tax expense (benefit) consists of:
Federal Current $ 820 $ 611 $ -
Federal-deferred 294 (850) -
State-current 338 71 -
State -deferred (94) (112) -
Foreign-current 133 425 (48)
------- ------- ----------
$1,491 $ 145 $ (48)
======= ======= ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2002 and 2001 are as
follows:
2002 2001
------ ------
(In thousands)
Deferred tax assets:
Inventories $ 810 $ 755
Allowance for doubtful accounts 150 100
Accrued expenses 450 585
Alternative minimum tax credit carry-forward - 67
Foreign net operating loss carry-forward 522 -
Domestic capital loss and contribution carry- 386 360
forwards
Other assets 517 -
------ ------
Gross deferred tax assets 2,835 1,867
Less: valuation allowance 823 360
------ ------
2,012 1,507
------ ------
Deferred tax liabilities:
Accumulated depreciation 308 218
Other liabilities 187 89
------ ------
495 307
------ ------
Net deferred tax asset $1,517 $1,200
====== ======
41
At December 31, 2002 and 2001, respectively, approximately $555,000 and $38,000
of the deferred tax asset is included in other assets in the accompanying
consolidated balance sheets.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company has a U.S.
capital loss carry-forward at December 31, 2002 of $967,000 which expires in
2006. The Company also has foreign net operating loss carry-forwards of
approximately $1,313,000. Based upon the projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences, net of the existing valuation allowances at
December 31, 2002. The net change in the total valuation allowance for the
year ended December 31, 2002 and 2001 was an increase of $463,000 and a decrease
of $2,117,000 respectively.
The Company's effective income tax rates for 2002, 2001 and 2000 differed from
the U.S. statutory Federal income tax rate of 34% as follows:
Percentage of income (loss) before taxes
-----------------------------------------
2002 2001 2000
----------------------------------------- ------ -------
Computed "expected" tax expense
(benefit) 34.0% 34.0% (34.0)%
Increase (decrease) in taxes resulting
from:
State taxes, net of federal benefit 3.8 (1.0) -
Rate differential between U.S. and
foreign income taxes 1.1 6.7 -
Change in valuation allowance
allocated to income tax expense (2.0) (37.8) 31.8
Benefit due to foreign loss
carry-back - - (1.2)
Other (1.6) 3.1 2.2
----------------------------------------- ------ -------
Actual tax expense (benefit) 35.3% 5.0% (1.2)%
========================================= ====== =======
42
8. Pension plans and other liabilities:
The Company has a noncontributory defined benefit pension plan covering
qualified U.S. salaried employees, including officers. Additionally, the
Company made contributions to a union sponsored multi-employer defined benefit
plan, in the amount of $138,000, $131,000 and $133,000 in 2002, 2001, and
2000, respectively.
The following table sets forth the U.S. defined benefit plan's benefit
obligation, fair value of plan assets and funded status at December 31, 2002 and
2001:
2002 2001
--------------- ---------
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ ,7095 $ 6,216
Actuarial loss 188 563
Service cost 287 227
Interest cost 449 443
Benefits paid (389) (354)
--------------- ---------
Benefit obligation at end of year $ 7,630 $ 7,095
=============== =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 5,110 $ 5,452
Actual return on plan assets (676) (453)
Employer contribution 801 465
Benefits paid (389) (354)
--------------- ---------
Fair value of plan assets at end of year $ 4,846 $ 5,110
=============== =========
MISCELLANEOUS ITEMS AT END OF YEAR
Funded status $ (2,784) $ (1,985)
Unrecognized net transition obligation 73 92
Unrecognized prior service cost (14) ( 19)
Unrecognized net loss 3,498 2,375
--------------- ---------
Prepaid pension $ 773 $ 463
=============== =========
AMOUNTS RECOGNIZED IN FINANCIAL STATEMENTS
Accrued benefit cost $ (2,247) $ (1,569)
Intangible asset 58 73
--------------- ---------
Accumulated other comprehensive loss (2,189) (1,496)
Unfunded pension liability 2,962 1,959
--------------- ---------
Prepaid pension $ 773 $ 463
=============== =========
2002 2001 2000
--------------- --------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST (In thousands)
Service cost $ 287 $ 227 $ 269
Interest cost 449 443 420
Expected return on plan assets (424) (475) (503)
Transition obligation 19 19 19
Amortization of prior service cost (4) (4) (4)
Recognized net actuarial loss 165 29 -
--------------- --------- -------
Net periodic benefit cost $ 492 $ 239 $ 201
=============== ========= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.50% 6.50% 7.25%
Expected return on plan assets 8.00% 8.50% 8.50%
Rate of compensation increase 3.00% 3.00% 3.00%
43
The minimum additional pension liability in 2002 and 2001 are non-cash
items which are offset by a direct reduction to shareholders' equity of
$2,189,000 and $1,496,000 respectively.
The Company has a defined contribution plan for its U.S. employees, with a
specified matching Company contribution. The expense to the Company in 2002,
2001 and 2000 was $164,000, $173,000 and $180,000 respectively.
International pension expense in 2002, 2001 and 2000 was not material.
Foreign plans generally are insured or otherwise fully funded.
In October 1999, the Company and its President agreed that the President
would leave the Company to pursue other business interests. In accordance with
a pre-existing employment contract the Company is making severance payments over
three years in the amount of $200,000 per year. At December 31, 1999, the
Company accrued the present value of the future payments ($20,000 outstanding at
December 31, 2002) and is recognizing interest expense over the three-year term.
9. Shareholders' equity:
Data for the stock options and rights plans for 2001 and all previous years
described below have been restated to reflect the 10% stock dividend which was
distributed on May 15, 2002.
2001 NON-QUALIFIED STOCK OPTION PLAN
The 2001 Non-Qualified Stock Option Plan (the 2001 Plan) for officers and
key employees provides for the granting of options to purchase up to 220,000
shares of the Company's Common stock. Options generally may be exercised over
five years in cumulative installments of 20% per year and expire up to ten years
from the date of grant. The exercise price per share of each option may not be
less than the fair market value of the Company's common stock on the date of
grant.
1991 NON-QUALIFIED STOCK OPTION PLAN
The 1991 Non-Qualified Stock Option Plan (the 1991 Plan) for officers and
key employees of the Company expired on December 11, 2001. The 1991 Plan
provided for the granting of options to purchase up to 1,066,157 shares of the
Company's Common stock. Options granted are generally exercisable in five equal
installments commencing one year after date of grant. Options expire up to 10
years from the date of grant. The exercise price per share of each option could
not be less than the fair market value of the Company's Common stock on the date
of grant.
No further options will be granted under the 1991 Plan due to its
expiration during 2001.
44
1999 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
The 1999 Stock Option Plan for Nonemployee Directors (the 1999 Plan)
provides for the granting of options to purchase up to 133,100 shares of the
Company's Common stock. No options may be granted under the 1999 Plan after
March 17, 2009. Options generally may be exercised over five years in
cumulative installments of 20% per year and expire up to ten years from the date
of grant. The exercise price per share of each option may not be less than
eighty-five percent (85%) of the fair market value of the Company's Common stock
on the date of grant.
1998 STOCK OPTION PLAN FOR 10% SHAREHOLDER - DIRECTORS
The 1998 Stock Option Plan for 10% Shareholder-Directors (the 1998 Plan)
provides for the granting of options to purchase up to 146,410 shares of the
Company's Common stock. No options may be granted under the 1998 Plan after
March 17, 2008. Options generally may be exercised over five years in
cumulative installments of 20% per year and expire up to ten years after grant.
The exercise price per share of each option may not be less than the fair market
value of the Company's Common stock on the date of grant.
STOCK OPTION AGREEMENTS
Stock option agreements were entered into in 1997 with the two
Shareholder-Directors of the Company for a grant of options to purchase 177,154
shares of the Company's Common stock. The options were issued at fair market
value on the date of grant, were exercisable in five equal annual installments
commencing one year after date of grant and were due to expire five years after
date of grant. All options granted under these agreements were exercised in
2002.
The following table summarizes the Company's activity in the aggregate, for
the aforementioned stock option plans and agreements:
Weighted
Stock Range of Average
Options Exercise Prices Exercise Price
---------- ---------------- ---------------
Outstanding, December 31, 1999 1,320,930 $ 2.89 -$11.29 $ 4.09
Granted 378,125 5.06 - 5.78 5.32
Exercised (245,150) 2.89 - 4.35 3.44
Cancelled (172,012) 2.89 - 11.29 6.43
---------- ---------------- ---------------
Outstanding, December 31, 2000 1,281,893 3.39 - 10.25 4.29
Granted 6,050 2.48 2.48
Exercised - - -
Cancelled (177,987) 3.42 - 10.25 4.77
---------- ---------------- ---------------
Outstanding, December 31, 2001 1,109,956 2.48 - 5.79 4.20
Granted 204,400 4.94 - 6.24 4.98
Exercised (395,854) 3.39 - 5.79 3.89
Cancelled (38,340) 3.54 - 5.06 4.39
---------- ---------------- ---------------
Outstanding, December 31, 2002 880,162 $ 2.48- $6.24 $ 4.52
========== ================ ===============
45
Information regarding stock options outstanding as of December 31, 2002 is as
follows:
Outstanding
Weighted Average
Number of
Exercise Number of Remaining Shares
Price Shares Contractual Life Exercisable
--------- ---------------- ---------------- -----------
$3.54 175,817 2.80 137,738
5.06 188,518 3.58 75,262
4.94 151,800 5.01 -
6.24 2,000 5.94 -
5.79 124,025 2.59 124,025
2.48 6,050 4.28 1,210
5.10 44,000 5.78 -
3.39 34,224 2.66 34,224
3.42 80,524 2.21 60,026
3.93 73,204 1.92 58,560
---------------- ---------------- -----------
880,162 3.35 491,045
========= ================ ===========
In the aggregate, related to the aforementioned stock option plans, there
were 304,500 additional shares available for grant at December 31, 2002.
In 1987, the Company adopted an Employee Stock Purchase Plan. Under the Stock
Purchase Plan, employees may purchase shares of the Company's Common stock at
85% of fair market value on specified dates. The Company has reserved 372,028
shares of its authorized shares of Common stock for this purpose. During 2002,
2001 and 2000, 36,895, 38,433 and 33,329 Common shares, respectively, were
issued under the plan.
On October 15, 1999, the Company declared a dividend of one Common share
purchase right (the Rights) on each share of Common stock outstanding. The
Rights entitle the holder to purchase one share of Common stock at $18.78 (the
Purchase Price) per share. Upon the occurrence of certain events related to
non-negotiated attempts to acquire control of the Company, the Rights: (i) will
entitle holders to purchase at the Purchase Price that number of shares of
Common stock having an aggregate fair market value of two times the Purchase
Price; (ii) will become exchangeable at the Company's election at an exchange
ratio of one share of Common stock per right; and (iii) will become tradable
separately from the Common stock. Further, if the Company is a party to a
merger or business combination transaction, the Rights will entitle the holders
to purchase at the Purchase Price, shares of Common stock of the surviving
company having a fair market value of two times the Purchase Price.
46
In 1989, the Company adopted an Employee Stock Ownership Plan and
Declaration of Trust (ESOP). The ESOP provides for the annual contribution by
the Company of cash, Company stock or other property to a trust for the benefit
of eligible employees. The amount of the Company's annual contribution to the
ESOP is within the discretion of the Board of Directors but must be of
sufficient amount to repay indebtedness incurred by the ESOP trust, if any, for
the purpose of acquiring the Company's stock. The Company made contributions to
the ESOP of $11,000 $4,000 and $3,000 during 2002, 2001 and 2000, respectively.
Shareholders' Equity includes non-interest bearing notes receivable,
resulting from the exercise of stock options, from the Vice President, Finance
in the amount of $35,000 and from another key employee in the amount of $10,000.
Imputed interest on these loans amounted to $1,000, $3,000 and $5,000 during
2002, 2001 and 2000, respectively.
10. Segment information:
Business segments are defined by SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131)" as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker assessing performance
and making operating and capital decisions.
Since June 14, 2001, the Company operates in one business segment. This segment
consists of the manufacture and marketing of equipment used in the
pharmaceutical, medical, biotechnology, chemical and environmental research
fields throughout the world.
Prior to June 14, 2001, the Company had a second segment, DGI BioTechnologies,
Inc. (DGI). This segment was involved in the development of a novel technology
that facilitates the discovery of new drugs. 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 for the year ended December 31, 2002. 2001 segment information for the
Drug Lead Discovery segment represents the operations of DGI from January 1 to
June 14, 2001.
47
Summarized segment information for the years ended December 31, 2002, 2001 and
2000 are as follows (in thousands, except percentages):
Laboratory
Research DGI Total
Equipment BioTechnologies Segments
------------ ----------------- ----------
2002
- ----
Net sales from external customers $ 57,226 $ - $ 57,226
Income from operations 4,656 - 4,656
Percentage of sales 100% - 100%
Total assets 45,264 - 45,264
Capital expenditures 1,203 - 1,203
Depreciation 1,065 - 1,065
2001
- ----
Net sales from external customers $ 59,894 $ 400 $ 60,294
Income (loss) from operations 4,413 (912) 3,501
Percentage of sales 99.3% 0.7% 100%
Total assets (1) 44,543 - 44,543
Capital expenditures 577 - 577
Depreciation and amortization (1) 1,315 - 1,315
2000
- ----
Net sales from external customers $ 49,444 $ 420 $ 49,864
Income (loss) from operations 704 (3,060) (2,356)
Percentage of sales 99.2% 0.8% 100%
Total assets (1) 42,636 370 43,006
Capital expenditures 351 - 351
Depreciation and amortization (1) 1,501 - 1,501
(1) As described in Note 4, the Company's interest in DGI was reduced to 47%
(41.3% as of December 31, 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 4), which
is comprised of DGI BioTechnologies, Inc.
The Company sells its equipment to pharmaceutical companies, agricultural
and chemical companies, other industrial customers engaged in biotechnology, and
to medical schools, universities, research institutes, hospitals, private
laboratories and laboratories of Federal, State and Municipal government
departments and agencies in the United States and abroad.
48
While only a small percentage of the Company's sales are made directly to
United States government departments and agencies, its domestic business is
significantly affected by government expenditures and grants for research to
educational research institutions and to industry. The Company regularly
evaluates credit granted to customers.
The following table sets forth the Company's operations by geographic area
for 2002, 2001 and 2000. The information shown under the caption "Europe"
represents the operations of the Company's wholly-owned foreign subsidiaries
primarily in the UK, The Netherlands, Belgium and Germany (in thousands):
Transfers and
eliminations
United between geo- Conso-
States Europe graphic areas lidated
--------------- -------------- --------------- --------
Net sales:
2002 $ 47,752 $ 14,151 $ 4,677 $ 57,226
2001 48,855 17,605 6,166 60,294
2000 41,657 13,921 5,714 49,864
Income (loss) from operations:
2002 $ 4,011 $ 645 $ 4,656
2001 2,161 1,340 3,501
2000 (1,719) (637) (2,356)
Identifiable assets:
2002 $ 23,792 $ 21,472 $ 45,264
2001 23,304 21,239 44,543
2000 22,261 20,745 43,006
Total sales by geographic area include both sales to unaffiliated customers
and transfers between geographic areas. Such transfers are accounted for at
prices comparable to normal unaffiliated customer sales. One multi-national
distributor based in the United States accounted for approximately 18.9%, 14.2%
and 14.9%, respectively, of consolidated net sales during the years ended
December 31, 2002, 2001 and 2000.
Income from operations from the United States has been significantly
affected by the research and development costs of DGI BioTechnologies, Inc.
prior to 2002.
During 2002, 2001 and 2000, net sales from domestic operations to foreign
customers were $11,564,000, $11,916,000 and $9,284,000, respectively. Export
sales from the United States are made to many countries and areas of the world
including the Far East, India, the Middle East and South America with the most
significant sales going to Canada, China, Israel, Japan, Switzerland and Taiwan.
49
11. Related party transactions:
David Freedman, Chairman of the Board of the Company, is the owner of
Bio-Instrument Ltd., a foreign firm that acts as an agent for sales of the
Company's products to customers in Israel, and earns commissions on those sales.
During 2002, 2001 and 2000, this firm earned commissions in the amounts of
$248,000, $212,000, and $204,000, respectively, on purchases by customers in
Israel of the Company's products. These commissions paid by the Company to
Bio-Instrument Ltd. were comparable to commissions paid to unrelated
distributors and sales representatives.
Carol Freedman, the daughter of David Freedman, the niece of Sigmund Freedman
and the sister of Kenneth Freedman, has been employed by the Company in various
capacities since 1979. Ms. Freedman is currently Customer Service Manager and
also is an Assistant Treasurer of the Company. Her compensation for 2002 was
$63,162; she also received options to purchase 1,100 shares of the Company's
Common stock in 2002, under the Company's 2001 Stock Option Plan for Officers
and Key Employees.
12. Commitments and contingencies:
The Company is obligated under the terms of various operating leases.
Rental expense under such leases for 2002, 2001 and 2000 was $772,000, $762,000,
and $849,000, respectively. As of December 31, 2001, estimated future minimum
annual rental commitments under noncancelable leases expiring through 2014 are
as follows (in thousands):
Sublease
Obligation Rentals Net
----------------- ------- ---
2003 $ 852 $ 56 $ 796
2004 708 47 661
2005 533 - 533
2006 428 - 428
2007 362 - 362
After 2007 1,266 - 1,266
----------------- ---- ------
Total minimum payments
required $ 4,149 $103 $4,046
================= ==== ======
From time to time, the Company is involved in litigation in the normal
course of business, which management believes, after consultation with counsel,
the ultimate disposition of which will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
50
13. Quarterly financial information (unaudited) (in thousands, except per
share amounts):
First Second Third Fourth Total
------- ------- ------- ------- -------
Year ended December 31, 2002
Net sales $13,263 $16,113 $13,057 $14,793 $57,226
Gross profit 5,680 6,437 5,559 6,205 23,881
Net income 566 846 258 914 2,584
Income per share:
Basic $ .08 $ .11 $ .03 $ .12 $ .34
Diluted .07 .11 .03 .12 .33
Year ended December 31, 2001
Net sales $14,700 $14,799 $13,542 $17,253 $60,294
Gross profit 5,818 6,096 5,042 7,073 24,029
Net income 114 138 123 1,836 2,211
Income per share: (a)
Basic $ .02 $ .02 $ .02 $ .25 $ .30
Diluted .02 .02 .02 .24 .30
(a) Due to rounding, the sum of the quarters does not necessarily equal the
amount for the full year.
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------
None.
51
------
PART III
--------
The information required by Part III is contained in the Registrant's proxy
statement which will be filed pursuant to Regulation 14A or an information
statement pursuant to Regulation 14C of the General Rules and Regulations under
the Securities Exchange Act of 1934 not later than 120 days after the close of
the fiscal year ended December 31, 2002. The information is incorporated herein
by reference.
ITEM 14. 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.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial statements and supplementary data included in
Part II of this report:
New Brunswick Scientific Co., Inc. and Subsidiaries,
consolidated financial statements:
Consolidated Balance Sheets as of December 31, 2002
and 2001
Consolidated Statements of Operations for the years
Ended December 31, 2002, 2001 and 2000
52
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial statement schedules included in part IV of this
report:
Schedule II
Schedules other than those listed above have been omitted because
They are not applicable or the required information is
shown in the financial statements or notes thereto.
3. Controls and Procedures
4. Exhibits:
The Exhibits index is on Page 55.
53
Schedule II
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
Additions
----------------------
Balance Charged to Balance
At Costs and Charged to At
Beginning (Credited) to Other End of
of Period Expenses Accounts Deductions Period
----------- -------------- ---------- ----------- -------
Year ended
December 31, 2002
Allowance for
doubtful accounts $ 466 $ 1 - $ - $ 467
Inventory valuation
allowance 1,759 400 - 227 1,932
Year ended
December 31, 2001
Allowance for
doubtful accounts 354 145 - 33 466
Inventory valuation
allowance 1,112 931 - 284 1,759
Year ended
December 31, 2000
Allowance for
doubtful accounts 339 22 - 7 354
Inventory valuation
allowance 934 222 - 44 1,112
54
EXHIBIT INDEX
-------------
(3a) Restated Certificate of Incorporation, as amended is incorporated
herein by reference from Exhibit (4) to the Registrant's Registration Statement
on Form S-8 on file with the commission (No. 33-15606), and with respect to two
amendments to said Restated Certificate of Incorporation, to Exhibit (4b) of
Registrant's Registration Statement on Form S-8 (No. 33-16024).
(3b)* Restated By-Laws of the Company, as amended and restated
(3c) Rights Agreement dated as of October 31, 1999 between New Brunswick
Scientific Co., Inc. and American Stock Transfer & Trust Company, as Rights
Agent, which includes the Form of Right Certificate as Exhibit A and the Summary
of Terms of the Rights Agreement as Exhibit B is incorporated herein by
reference to Registrant's Current Report on Form 8-K filed on October 29, 1999.
(3d) Amendment to the Restated Certificate of Incorporation of the Company
is incorporated herein by reference to Item 2 of Registrant's Proxy Statement
filed with the Commission on or about April 13, 1999.
(4) See the provisions relating to capital structure in the Restated
Certificate of Incorporation, amendment thereto, incorporated herein by
reference from the Exhibits to the Registration Statements identified in Exhibit
(3) above.
(10-2) Pension Plan is incorporated herein by reference from Registrant's
Form 10-K for the year ended December 31, 1985.
(10-3) The New Brunswick Scientific Co., Inc., 1989 Stock Option Plan for
Nonemployee Directors is incorporated herein by reference to Exhibit "A"
appended to the Company's Proxy Statement filed with the Commission on or about
April 22, 1989.
(10-8) Termination Agreement with David Freedman is incorporated herein by
reference to Exhibit of the Registrant's Annual Report on Form 10-K for the year
ended
December 31, 1990.
(10-9) Termination Agreement with Samuel Eichenbaum is incorporated herein
by
reference to Exhibit (10-9) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991
(10-10)* Involuntary Termination Agreement with Samuel Eichenbaum.
55
(10-11) Termination Agreement with Sigmund Freedman is incorporated herein
by reference to Exhibit (10-11) of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990.
(10-12) 1991 Nonqualified Stock Option Plan is incorporated herein by
reference to Exhibit (10-12) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.
(10-13) Indemnification Agreements in substantially the same form as with
all the Directors and Officers of the Company is incorporated herein by
reference to Schedule A to Exhibit (10-13) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991.
(10-19) Credit Agreement between New Brunswick Scientific Co., Inc. and
First Union National Bank dated April 1, 1999 is incorporated herein by
reference to Exhibit (10-19) of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
(10-20) Financial Statements and Proforma financial information related to
the Company's acquisition of the outstanding Common stock of DJM Cryo-Research
Limited and the net assets of DJM Fabrications, collectively (DJM) are
incorporated herein by reference to Registrant's Current Report on Form 8-K/A
filed on February 4, 2000.
(10-21) Purchase Agreement and Cross Option Agreement related to the
acquisition of DJM are incorporated herein by reference to the exhibits
contained in Registrant's Current Report on Form 8-K filed on December 8, 1999.
(10-22) Settlement Agreement and General Release between New Brunswick
Scientific Co., Inc. and Ezra Weisman is incorporated herein by reference to
Registrant's Current Report on Form 8-K filed on February 2, 2000.
(10-23) Indemnification Agreements with Kenneth Freedman and Peter Schkeeper
are incorporated herein by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
(10-24) Indemnification Agreements with Jerome Birnbaum and Lee Eppstein are
incorporated herein by reference to Exhibit (10-24) of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(10-25) Indemnification Agreements with James T. Orcutt and Daniel S. Van
Riper are incorporated herein by reference to Exhibit (10-25) of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
(10-26) The New Brunswick Scientific Co., Inc., 1998 Nonqualified Stock
Option Plan for Ten Percent Shareholder - Directors is incorporated herein by
reference to Appendix "A" appended to the Company's Proxy Statement filed with
the Commission on or about April 10, 1998.
56
(10-27) The New Brunswick Scientific Co., Inc., 1999 Stock Option Plan for
Nonemployee Directors is incorporated herein by reference to Appendix "C"
appended to the Company's Proxy Statement filed with the Commission on or about
April 13, 1999.
(10-28) The New Brunswick Scientific Co., Inc. 2001 Nonqualified Stock
Option Plan for Officers and Key Employees is incorporated herein by reference
to Appendix "A" appended to the Company's Proxy Statement filed with the
Commission on or about April 17, 2001.
(10-29) Involuntary Termination Agreement with James T. Orcutt is
incorporated herein by reference to Exhibit (10-29) of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
(10-30) Employment Agreement with David Freedman is incorporated herein
by reference to Exhibit (10-30) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
(10-31) Fifth Amendment to Credit Agreement between New Brunswick Scientific
Co., Inc. and First Union National Bank dated April 1, 1999 is incorporated
herein by reference to Exhibit (10-31) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
(10-32)* Involuntary Termination Agreement with Lee Eppstein.
(13) Annual Report to Shareholders, to be filed within 120 days of the end
of the fiscal year ended December 31, 2002, is incorporated herein by reference.
(22) Subsidiaries of the Company appear on Page 58.
(24a)* Consent of KPMG LLP.
* Filed herewith.
57
EXHIBIT 22
----------
SUBSIDIARIES OF THE COMPANY
---------------------------
Percentage of
Name and Place of Incorporation Ownership
- ------------------------------------------------- ------------------
New Brunswick Scientific (U.K.) Limited
Incorporated in the United Kingdom 100%
New Brunswick Scientific B.V.
Incorporated in The Netherlands 100%
New Brunswick Scientific N.V.
Incorporated in Belgium 100%
New Brunswick Scientific GmbH
Incorporated in Germany 100%
New Brunswick Scientific of Delaware, Inc.
Incorporated in the State of Delaware 100%
New Brunswick Scientific International, Inc.
Incorporated in the State of Delaware 100%
New Brunswick Scientific West Inc.
Incorporated in the State of California 100%
New Brunswick Scientific S.a.r.l.
Incorporated in France 100%
NBS ULT Limited
Incorporated in the United Kingdom 100%
NBS Cryo-Research Limited
Incorporated in the United Kingdom 100%
58
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 17, 2003 By: /s/ David Freedman
--------------------
David Freedman
Chairman of the Board
(Principal Executive Officer)
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 17, 2003 By: /s/ Adele Lavender
--------------------
Adele Lavender
Corporate Secretary
Dated: March 17, 2003 By: /s/ Sigmund Freedman
----------------------
Sigmund Freedman
Treasurer and Director
Dated: March 17, 2003 By: /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance
Dated: March 17, 2003 By: /s/ James T. Orcutt
----------------------
James T. Orcutt
President and Director
59
Dated: March 14, 2003 By: /s/ Dr. Jerome Birnbaum
--------------------------
Dr. Jerome Birnbaum
Director
Dated: March 17, 2003 By: /s/ Kenneth Freedman
----------------------
Kenneth Freedman
Director
Dated: March 17, 2003 By: /s/ Ernest Gross
------------------
Ernest Gross
Director
Dated: March 17, 2003 By: /s/ Kiyoshi Masuda
--------------------
Kiyoshi Masuda
Director
Dated: March 17, 2003 By: /s/ Dr. David Pramer
-----------------------
Dr. David Pramer
Director
Dated: March 15, 2003 By: /s/ Peter Schkeeper
---------------------
Peter Schkeeper
Director
Dated: March 17, 2003 By: /s/ Daniel S. Van Riper
---------------------------
Daniel S. Van Riper
Director
60
CERTIFICATIONS
--------------
I, David Freedman, hereby certify that the annual report being filed
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
annual report.
March 17, 2003 /s/ David Freedman
--------------------
Name: David Freedman
Chairman and
Chief Executive Officer
I, Samuel Eichenbaum, hereby certify that the annual report being filed
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
annual report.
March 17, 2003 /s/ Samuel Eichenbaum
-----------------------
Name: Samuel Eichenbaum
Vice President, Finance and
Chief Financial Officer
61
CERTIFICATION
I, Samuel Eichenbaum, certify that:
1. I have reviewed this annual report on Form 10-K 405 of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003 /s/ Samuel Eichenbaum
-----------------------
Vice President, Finance and
Chief Financial Officer
62
I, David Freedman, certify that:
1. I have reviewed this annual report on Form 10-K 405 of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
63