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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, 2003
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 $35,989,663 as of February 10, 2004. This figure was calculated
by reference to the high and low prices of such stock on February 10, 2004.
The number of shares outstanding of the Registrant's Common stock as of February
10, 2004: 8,638,475.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement and Annual Report to be filed within 120 days after
the end of the fiscal year 2003, are incorporated in Part III herein.
The EXHIBITS INDEX is on Page 61.
1
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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
biological cultures. 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, CO2 incubators, nutrient sterilizing and dispensing
equipment, tissue culture apparatus and air samplers.
NBS was incorporated in 1958 as the successor to a business founded in 1946 by
David and Sigmund Freedman, its principal stockholders and, until August 31,
2003, two of its directors and executive officers. Sigmund Freedman retired as
a Director and as Treasurer of the Company effective August 31, 2003. The
Company owns its 243,000 square foot headquarters and primary production
facility located on 17 acres of land in Edison, New Jersey.
On November 14, 2003, the Company acquired all of the outstanding common stock
of RS Biotech Laboratory Equipment Limited (RS Biotech), a United Kingdom
corporation located in Irvine, Scotland. The purchase price consisted of
975,000 ($1,645,000 at the date of acquisition) in cash and 975,000 ($1,645,000
at the date of acquisition) in notes, payable 487,500 on the first and second
anniversary, respectively, of the acquisition with interest at the lower of 6%
or the base rate of the Bank of Scotland payable semi-annually. In addition, the
Company is obligated to pay up to an additional 300,000 if certain minimum unit
sales of CO2 incubators are achieved. RS Biotech is in the business of
designing, developing and manufacturing CO2 Incubators for laboratories. The
acquisition has been accounted for by the purchase method and, accordingly, the
results of operations of RS Biotech have been included in the Company's
consolidated financial statements from November 14, 2003.
As previously reported, the Company has an equity investment in Antyra Inc.
(formerly DGI BioTechnologies, Inc.) ("Antyra") that was written down to zero in
2001. Antyra had anticipated closing a significant financing transaction with
an investment group during the first half of 2003, however, the financing with
this group did not take place. On May 12, 2003, Antyra closed on certain new
short-term financing. Under the terms of the agreement, Antyra issued preferred
shares in exchange for a $200,000 cash infusion from an investment group
consisting of certain members of Antyra management and other investors and
warrants to BankInvest (an existing equity investor) to purchase up to $100,000
of Antyra preferred stock exercisable through October 2003. At October 31, 2003,
BankInvest chose not to exercise the warrant and it has expired. The agreement
includes a provision that if such warrant is not exercised, the investment group
has the right, but not the obligation, to invest an additional $100,000 in
preferred stock under the same terms as the BankInvest warrant, $80,000 of which
2
they exercised. Additionally, under the terms of the agreement, the Company
agreed to accept additional shares of Antyra preferred stock on a monthly basis
in lieu of the next 12 months of rent payments due the Company from Antyra (rent
is due at $12,367 per month). For financial reporting purposes, the Company is
attributing no value to the shares received under this arrangement. We believe
that any amount recorded would not be probable of recovery based on our estimate
that the new short-term financing, together with its expected limited revenues
during 2004, should only enable Antyra to continue operating as a going concern
into the first quarter of 2004 without additional fundingAs a result of the
short-term financing obtained by Antyra, the Company's fully diluted interest in
Antyra was reduced and will increase to 23.4% upon the receipt of the Antyra
stock in lieu of rent over the 12-month period.
Due to the fact that Antyra has virtually exhausted its remaining operating
capital and consequently, its continued viability and existence is dependent
upon its raising additional capital by the end of March 2004.
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, insect 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 in applications using microorganisms engineered by
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
3
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
- ------------------
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 provides 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 controller 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.
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 freezers. Five models in its
space-saving line, which utilizes thin vacuum insulation panels provide 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 to form thin vacuum insulation panels
reducing the wall thickness 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.
4
CO2 Incubators. The Company, through the acquisition of RS Biotech Laboratory
- ---------------
Equipment Limited in November 2003, manufactures a line of direct heat CO2
Incubators. CO2 Incubators are used in the life science industry to control the
culture conditions of cells and tissues.
Nutrient Sterilizing and Dispensing Equipment. The Company manufactures devices
- ---------------------------------------------
that automatically sterilize biological nutrients and then maintain 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
- -------------------------
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.
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 a line of centrifuges for separating
- -------------------------
cells from fermentation broth and is the exclusive North American distributor of
the NucleoCounter , an automated cell counting device for mammalian cells.
PRODUCT DEVELOPMENT
- --------------------
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 all its microprocessor-controlled
instrumentation systems.
RESEARCH AND DEVELOPMENT
- --------------------------
Research and development expenditures, all of which are sponsored by the
Company, amounted to $3,035,000 in 2003, $2,453,000 in 2002 and $2,744,000 in
2001. Research expenditures related to Antyra, Inc. included in these amounts
were zero in 2003 and 2002 and $1,312,000 in 2001. Twenty-six (26) of the
Company's professional employees were engaged full time in research and
development activities.
5
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 assurance 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'
premises by Company technicians or by distributors' technicians.
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.
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. Fisher also distributes a few selected INNOVA
models. Fisher Scientific is also the exclusive distributor for the Company's
6
C-Line shakers in certain European countries and has a broader distribution
arrangement with the Company in Canada and France. Fisher Scientific accounted
for approximately 15.9%, 18.9% and 14.2%, respectively, of consolidated net
sales during the years ended December 31, 2003, 2002 and 2001. Net sales to no
other customer exceeded 10% of consolidated net sales in any year.
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 Eastern Europe, Africa, Asia 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 U.S. export control regulations applicable to scientific equipment.
During 2003, net sales to foreign customers, which have been in the 50% range
for many years, amounted to 50.5% of consolidated net sales.
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, 2003, see Note 11 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 had a substantial impact on the
Company's consolidated financial statements, as measured in United States
dollars. During 2003 the weakening of the U.S. dollar against the Pound and the
Euro resulted in increases in accounts receivable and inventories of $596,000
and $637,000, respectively, and also had the effect of increasing net sales by
$1,621,000.
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 customers.
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 and
with three offices, also sells on a direct basis in China.
7
At December 31, 2003, NBS had a backlog of unfilled orders of $9,018,000,
compared with $6,668,000 at the end of 2002. NBS expects to satisfy all of its
existing backlog during the coming 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 Sartorius BBI, a German company and Applikon, B.V., located in The
Netherlands. The Company believes that Sartorius BBI has substantially greater
financial resources than the Company.
The Company believes that it has the largest worldwide market share for
biological shakers. Barnstead International and Thermo/Forma 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.
The Company, through the acquisition of RS Biotech Laboratory Equipment Limited
in November 2003 began selling its own CO2 incubators. Since RS Biotech sold
its CO2 incubators primarily in the United Kingdom, the Company believes it has
a substantial market share in the UK and a relatively small market share in the
rest of the world. The Company's main competitors in the sale of CO2 incubators
are Thermo/Forma, Kendro, Sanyo, Nuaire, Thermo/Napco, Sheldon and Binder.
NBS encounters substantial competition in the sale of most of its other
equipment where its sales do not represent major market shares.
EMPLOYEES
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NBS employs approximately 394 people, including 218 people engaged in
manufacturing and supervision, 34 in research, development and engineering, 107
in sales and marketing, and 35 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 2007. The
Company considers its labor relations to be good.
8
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
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 9,900 square feet is
laboratory space, approximately 6,200 square feet is leased to Antyra, Inc., 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 - 3,002 square feet, NBS Cryo-Research
Limited - 24,664 square feet, RS Biotech Laboratory Equipment Limited - 6,000
square feet, NBS GmbH - 1,173 square feet and New Brunswick Scientific NV/SA -
1,990 square feet.
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ITEM 3. LEGAL PROCEEDINGS
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No material legal proceedings are currently pending.
In June 2003, the U.S. Department of Commerce notified the Company that it
believes the Company may have failed to comply with certain export control
requirements in connection with certain equipment sales to certain foreign
customers. The applicable statutory framework gives the Commerce Department
authority to impose civil monetary penalties (up to a maximum of $176,000 based
on the agency's preliminary assessment) and other sanctions. The Company
responded to the agency's invitation to settle the matter informally and has
provided an explanation of the transactions in question and information about
the Company's compliance measures. The Company has made a settlement offer,
which it has accrued, in an amount significantly lower than $176,000 reflecting
the Company's belief that the matter should be settled at a substantially
reduced level. While the ultimate outcome of this matter cannot be determined
at this time, management believes that it will not have a material effect on the
Company's financial condition or liquidity but could have a material effect on
the Company's results of operations in any one period.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
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MATTERS
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(A) (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.
10
HIGH LOW
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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 $4.55
Second Quarter . . . . . . . 5.14 3.96
Third Quarter. . . . . . . . 5.83 3.90
Fourth Quarter . . . . . . . 6.43 4.01
2004
First Quarter
(through February 10, 2004) $ 5.95 $5.06
(B) The number of holders, including beneficial owners, of NBS' Common stock
as of February 10, 2004, is 1,685.
(C) NBS paid 10% Common stock dividends on May 15, 2003 and 2002.
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,
--------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ----------- --------
(In thousands, except per share amounts)
Net sales. . . . . . . . . . . . . . . . . $ 49,404 $57,226 $60,294 $ 49,864 $54,866
Net (loss) income (a). . . . . . . . (1,455) 2,584 2,211 (3,927)(b) (1,148)
Basic (loss) income per share (c). . (.17) .31 .27 (.49) (.15)
Diluted (loss) income per share (c). (.17) .30 .27 (.49) (.15)
Total assets (d) . . . . . . . . . . 51,321 45,264 44,543 43,006 46,026
Long-term debt, net of current
installments (d). . . . . . . . . . 7,675 5,213 6,751 694 7,347
(a) Includes pre-tax charges of $320,000 in 2003 related to the assignment of the lease and relocation of certain UK operations
(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, 2003.
(d) At year-end.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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The following section should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K. 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
---------------------
OVERVIEW
The Company is a leading provider of a wide variety of research equipment
and scientific instruments for the life sciences used to create, maintain and
control the physical and biochemical conditions required for the growth,
detection and storage of microorganisms. The Company's product offerings
include:
- - Fermentation equipment
- - Bioreactors
- - Biological shakers
- - Ultra-low temperature freezers
- - CO2 incubators
- - Nutrient sterilizing and dispensing equipment
- - Tissue culture apparatus
- - Air samplers
The Company's products are used for 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 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
12
expenditures and grants for research to educational research institutions and to
industry. The Company also sells its equipment both directly (primarily in
Western Europe) and through scientific equipment dealers to foreign companies,
institutions and governments. Foreign sales may be affected by U.S. 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. 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.
Sales of the Company's equipment to foreign companies, institutions and
governments may be affected by United States export control regulations, which
in some instances require export licenses and also restrict or prohibit
shipments to certain countries or specific end-users. The Company does not
believe that these regulations have had a significant negative impact on its
business.
The following table summarizes consolidated backlog, orders and net sales
for the three years ended December 31, (in thousands):
% change % change
from prior from prior
2003 2002 year 2001 year
----------------------------------------------------
Backlog-beginning $ 6,668 $10,381 (35.8)% $12,543 (17.2)%
Orders. . . . . . 51,754 53,513 (3.7) 58,132 (7.9)
Less net sales. . 49,404 57,226 (13.7) 60,294 (5.1)
----------------------------------------------------
Backlog-ending. $ 9,018 $ 6,668 35.2 $10,381 (35.8)
======= ======= ======== =======
Net sales declined 13.7% during 2003 as compared with 2002 net sales,
however, the decline in orders in 2003 was 3.5% since net sales in 2002 were
bolstered by a significant reduction in backlog of $3,713,000 while net sales in
2003 were negatively affected by a $2,350,000 increase in backlog. The increase
in backlog in 2003 resulted from increased orders late in the year for the
Company's new sterilizable-in-place fermentors, which require up to four months
to manufacture as well as other fermentation products and new Innova 44
incubator shakers. The reduction in backlog in 2002 was the result of
improvements in manufacturing efficiencies allowing the Company to substantially
decrease average lead times.
The major areas of decline in 2003 in net sales were in biological shakers with
a decrease of 27.5% in sales to Fisher Scientific accounting for a significant
portion of the decline (Fisher's sales of the Company's products to its
customers declined 11.6% but they substantially reduced their inventory of the
Company's products during 2003), and a decrease of 35% in sales of cell culture
equipment. All of the Company's operating units experienced lower sales during
2003 due to the lingering weakness in demand for life science equipment both in
the United States and in our export markets as a result of tight government
funding, reduced capital spending by pharmaceutical companies and by
significantly reduced spending by biotechnology companies due to their
difficulty in raising capital. However, towards the latter part of 2003 biotech
13
funding once again became available and capital spending by both industry and
government picked up resulting in a relatively strong fourth quarter for the
Company both in shipments and in orders.
The 5.1% decrease in net sales in 2002 as compared with 2001 is due to the
absence 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 Antyra, Inc. revenues (which was not consolidated
after June 14, 2001).
COLLECTIVE BARGAINING AGREEMENT
Effective December 7, 2003, the Company renewed its collective bargaining
agreement with the International Association of Machinists. The renewed
agreement is for a term of four years, ending December 8, 2007. The agreement
provides for 1% wage increases in each of years two, three and four of the
agreement plus a 1% bonus in each of those years unless certain income targets
are achieved in which case a 1% wage increase will be paid in lieu of the bonus.
The agreement also calls for a 2.8% increase in contribution to the Union's
pension plan effective in the fourth year of the agreement.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
NET SALES
The following table presents the Company's net sales to U.S. and non-U.S.
customers for the year ended December 31, (in thousands of dollars):
Change
--------
2003 2002 $ %
-------------------------------------------------------
Net sales:
U.S. sales . . . . $24,469 $31,515 $(7,046) (22.4)%
Non-U.S. sales . . $24,935 25,711 (776) (3.0)
------- -------- -------- ------
Total net sales $49,404 $57,226 $(7,822) (13.7)%
======= ======== ======== =======
Net sales decreased $7,822,000 or 13.7% in 2003 from $57,226,000 in 2002.
Net sales decreased 22.4% in the U.S. and 3.0% internationally. The reduction in
sales was due principally to lower unit volume but was also affected by price
erosion due to competitive pressures. Partially offsetting these reductions was
an increase of $1,621,000 resulting from the dollar's weakness when the net
sales of the Company's UK and European subsidiaries were translated into
dollars. The declines primarily involved biological shakers and cell culture
equipment. The weak economy coupled with the downturn in the life science
industry and the difficulty experienced by biotechnology companies in raising
capital resulted in significant reductions in capital spending by the Company's
customers.
14
GROSS MARGIN
Gross margin decreased to 37.4% from 41.7% in 2002 due to the effect of
unabsorbed manufacturing overhead as a result of lower manufacturing activity, a
less favorable product mix and downward pressure on prices as a consequence of a
number of competitors chasing after a smaller amount of business.
SELLING, GENERAL AND ADMINISTRATIVE
In 2003, selling, general and administrative expenses decreased $311,000 to
$16,042,000 from $16,353,000 in 2002. During 2003, the Company effected a
reduction-in-force, which resulted in the payment of $100,000 in severance costs
and also relocated certain operations and assigned the lease for one of its
United Kingdom facilities to another company incurring approximately $270,000 of
lease assignment costs in the process. The lease assignment relieved the
Company of the on-going expenses of the facility, which is expected to result in
annual savings of approximately $160,000, net of the costs of a new, smaller
leased facility. It should also be noted that as a result of the weak dollar,
expenses of the Company's European subsidiaries, when translated into U.S.
dollars at 2003 exchange rates were $694,000 higher than if exchange rates had
remained at 2002 levels. The primary reasons for the decrease were the fact
that in 2003 virtually no incentive bonuses were accrued due to the Company
having not achieved its performance targets and from the savings realized from
the reduction-in-force and other belt tightening measures undertaken during the
year.
RESEARCH, DEVELOPMENT AND ENGINEERING
During 2003, the Company placed a great deal of emphasis on strengthening
its product engineering efforts and in this regard added to staff and incurred
higher costs for prototypes and consultants resulting in an increase of 18.9% in
2003 expenses
15
OTHER EXPENSE, NET
The following table details other expense, net for the years ended December
31, (in thousands):
2003 2002
------ ------
Gain on assets sold, primarily property . . $ 207 $ 14
Loss on foreign currency transactions(a). . (157) (29)
Write-off of U.K. leasehold improvements(b) (50) -
Other, net. . . . . . . . . . . . . . . . . (38) (20)
----- ------
Total other expense, net. . . . . . . $ (38) $(35)
====== ======
________________________
(a) Realized foreign exchange losses which relate primarily to the
settlement of purchases in the normal course of business between the Company's
United States and European operating companies.
(b) Write-off of leasehold improvements incurred in connection with the
relocation of certain U.K. facilities and assignment of the lease to another
company as described above in selling, general and administrative expenses.
EQUITY IN OPERATIONS OF ANTYRA
Equity in operations of Antyra was zero in 2003 compared with an expense of
$150,000 in 2002. The 2002 charge is related to a loan made by the Company to
Antyra in 2002.
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 2003 was $29,000 on a
loss of $1,426,000, compared with income tax expense of $1,491,000 in 2002, an
effective rate of 36.6%. The 2003 expense in a situation where a tax benefit
would be usual is due to the inability to carry-back losses incurred by the
Company's European subsidiaries resulting in no financial statement tax benefit
in 2003.
CURRENCY TRANSLATION
During 2003, the 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
$2,345,000, which is reflected as a component of accumulated other comprehensive
loss in the equity section of the consolidated balance sheet.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
NET SALES
The 5.1% decrease in net sales to $57,226,000 is due to the absence in 2002
of (i) sales of fully custom-engineered bioprocess equipment, which amounted to
16
$5,088,000 in 2001, for which the Company ceased accepting orders after June 29,
2001 and (ii) $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 MARGIN
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/ RESEARCH, DEVELOPMENT AND ENGINEERING
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.
ANTYRA RESEARCH EXPENSES
Antyra research expenses amounted to zero in 2002 compared with $1,312,000
in 2001 since Antyra'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).
INTEREST EXPENSE
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.
17
OTHER EXPENSE, NET
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.
EQUITY IN OPERATIONS OF ANTYRA
Equity in operations of Antyra was $150,000 in 2002 compared with $527,000
in 2001. The 2001 amount represents the Company's equity in Antyra'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 Antyra in 2002.
INCOME TAX EXPENSE
Income tax expense increased to $1,491,000 in 2002, an effective rate of
36.6% from $145,000 in 2001, an effective rate of 6.2%. 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 6.2% for 2001 vs. the statutory tax rate of 34% was a reduction in
the valuation allowance allocated to income tax expense.
CURRENCY TRANSLATION
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.
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CONTRACTUAL OBLIGATIONS
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:
18
Payments Due by Period
------------------------
(In thousands)
------------------------
Contractual obligations:
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
- ------------------------------ ------------------------ ------ ---------- --------
Long-term debt,
obligations(a) . . . . . . . $ 9,336 $1,661 $ 6,813 $ 862 $ -
Operating lease obligations(b) 4,233 822 1,814 839 758
Purchase obligations(c). . . . 4,309 4,025 284 - -
Other long-term liabilities(d) 535 - 535 - -
------------------------ ------ ---------- -------- ----
Total contractual cash
Obligations. . . . . . . . . $ 18,413 $6,508 $ 9,446 $ 1,701 $758
======================== ====== ========== ======== ====
_____________________
(a) Consists primarily of debt incurred for acquisitions financed under the Company's
Bank Agreement and of notes due to the sellers of businesses acquired by the Company.
(b) Primarily reflects (on a gross basis before sublet income) lease obligations for
five premises in the United Kingdom, two of which have been sublet. One of the subleased
premises with a lease expiration date of 2014 and an annual rental of 99,750 ($178,000 at
December 31, 2003) has been sublet for the entire term of the lease. The second sublet
premises with a lease expiration date of September 28, 2009 and an annual rental of 45,000
($80,000 at December 31, 2003) has been sublet for a number of years, however, the subtenant
has advised the Company that it does not intend to renew its sublease when it expires on
October 13, 2004. The Company is confident that a new subtenant will be located prior to the
expiration of the current sublease.
(c) Primarily includes commitments for raw materials and services related to the
Company's production of equipment at its various manufacturing facilities.
(d) Represents a contingent liability for an earnout related to the acquisition of RS
Biotech provided a minimum number of units of CO2 Incubators are sold. The Company believes
that the payment of such additional consideration is determinable beyond a reasonable doubt
and as such has recorded the amount as a liability and as additional purchase price.
CASH
Cash and cash equivalents increased to $10,536,000 at December 31, 2003
from $9,718,000 at December 31, 2002. The $818,000 increase resulted primarily
from an increase in net cash provided by operating activities of $1,998,000 and
an increase in net cash provided by financing activities of $2,103,000 and a
$277,000 favorable foreign currency impact on cash offset partially by net cash
used in investing activities of $3,560,000.
OPERATING ACTIVITIES
The overall factors primarily driving positive cash flow during 2003 were
reductions in accounts receivable and inventories as well as an increase in
accounts payable. The net loss for the year was, for the most part, offset by
depreciation expense. Assuming the business trends experienced in the fourth
19
quarter of 2003 continue to build, the Company currently anticipates that in
2004 it will generate positive cash flow from net income and depreciation
expense, most likely partially offset by an increase in accounts receivable due
to the improving business climate.
INVESTING ACTIVITIES
In 2003, in addition to its normal additions to property, plant and
equipment, the Company purchased a state-of-the-art laser punch machine for its
sheet metal operation at a cost of $911,000. The Company currently has no plans
to purchase any equipment in 2004 other than normal and customary acquisitions
of equipment as in past years. During 2003, the Company sold a piece of
property for $258,000 on which it realized a gain of $201,000. Also, in 2003,
the Company acquired RS Biotech Laboratory Equipment Limited, a U.K. developer
and manufacturer of CO2 Incubators for cash and notes, see below and Note 4 to
the consolidated financial statements for more information.
FINANCING ACTIVITIES
In 2003, the Company borrowed $2,325,000 under its Bank Agreement to
finance the cash portion of the purchase price for RS Biotech and to purchase a
laser punch machine for its manufacturing plant.
ACQUISITION
On November 14, 2003, the Company acquired all of the outstanding common
stock of RS Biotech Laboratory Equipment Limited, a United Kingdom corporation
for 1,950,000 ($3,290,000 at the date of acquisition) in cash and notes. The
Company will also pay an additional 300,000 ($506,000 at the date of
acquisition) if certain minimum unit sales of CO2 Incubators are achieved. The
Company has recorded the 300,000 as additional purchase price because it
believes the earn-out criteria will be met. The acquisition resulted in an
increase of $2,742,000 in goodwill, and an allocation of $400,000 to the trade
name. RS Biotech designs, develops and manufactures CO2 Incubators for
laboratories. RS Biotech has a significant presence in the U.K. marketplace, is
currently ramping up in many other countries and sells virtually no units in the
United States, thereby presenting the Company with a significant opportunity for
growth. The Company expects the acquisition of RS Biotech to be accretive to its
ongoing operations.
BANK AGREEMENT
The Company's agreement (the Bank Agreement) with Wachovia Bank, National
Association (the Bank) was amended on September 26, 2003 to temporarily ease the
financial ratio requirements under the negative covenant provisions of the Bank
Agreement as a consequence of the losses sustained by the Company during the
first nine months of 2003, which if not relaxed, would have resulted in the
Company being in violation of the debt coverage ratio covenant of 1.3 to 1.
Concurrently, the Company and the Bank agreed to reduce the acquisition
component of the line from $12.5 million to $10 million. Among the changes was
to omit the requirement to meet the debt service ratio during the period ended
September 27, 2003 and to modify it slightly for the fourth quarter of 2003 and
20
for the first three quarters of 2004, a change in the minimum equity that must
be maintained as well as the maintenance of a minimum $3 million cash balance.
In addition, the interest rate on new borrowings under the Bank Agreement will
increase by 50 basis points. At such time as the Company meets the financial
ratios that were in force prior to this amendment (expected to be September 30,
2004) all of the terms, financial ratios as well as interest rates will revert
to what they were prior to the September 26, 2003 amendment. No other provisions
of the Bank Agreement were materially amended. During the fourth quarter of
2003, the Company, under the Bank Agreement, borrowed $1,500,000 to fund the
cash portion of the RS Biotech acquisition and $825,000 towards the purchase of
capital equipment. If the Company continues to meet the financial ratios under
the agreement, its continued ability to borrow under the Bank Agreement should
not be impeded. The Company at present foresees no need to borrow additional
funds under the Bank Agreement during 2004 as any cash requirements including
$1,661,000 of debt repayments are expected to be funded from cash flow or from
existing cash balances. The Company is in compliance with its covenants
pursuant to the Bank Agreement, as amended at December 31, 2003 and expects to
be in compliance with such covenants through December 31, 2004.
Pension Contribution
---------------------
The Company's best estimate of its contributions to its defined
benefit pension plan is $1,040,000 for the year ending December 31, 2004.
Related Party Transactions
----------------------------
Until December 15, 2003, David Freedman, Chairman of the Board of the
Company, was 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 2003, 2002 and 2001, this firm earned
commissions in the amounts of $16,316, $248,033 and $212,128, 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. On December 15, 2003, Mr.
Freedman sold his ownership interest in Bio-Instrument Ltd. to an unrelated
third party.
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 the Customer Service
Manager and is also an Assistant Treasurer of the Company. Her compensation for
2003 and 2002 was $61,900 and $63,162, respectively; she also received options
to purchase 1,100 and 1,210 shares of the Company's Common stock in 2003 and
2002, respectively, 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,
21
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.
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 2003 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.
Revenue recognition
- --------------------
Revenue is recognized in accordance with the F.O.B. terms of orders,
generally when products are shipped. The Company's products are tested by its
quality assurance 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.
Certain of the Company's products carry limited warranties that in
general do not exceed one year from sale. The Company accrues estimated product
warranty costs based on historical trends at the time of sale and any additional
amounts are recorded when such costs are probable and can be reasonably
estimated.
The Company periodically sells maintenance contracts to certain customers.
The value of such contracts is deferred and recognized into revenue on a
straight line basis over the term of the contract.
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.
22
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
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
---------------------------------------
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2004. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
23
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The adoption of FIN 46R is not expected
to have any effect on the Company's consolidated results of operations,
financial position or cash flows.
Recently Adopted Accounting Standards
----------------------------------------
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 acquistion, 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 adopted
SFAS No. 143 on January 1, 2003. The adoption did not have any 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
Restructuing)". 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 was adopted January 1, 2003 with
no effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others". This Interpretation elaborates on the
24
disclosures to be made by a guarantor in its interim an annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
adoption of this interpretation did not have a material effect on the Company's
consolidated financial statements.
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
expect its market risk exposures to change in the near term. At December 31,
2003, the outstanding borrowings of the Company consisted primarily of fixed and
variable rate long-term debt, which had a carrying value of $9,336,000 and a
fair value of approximately $12,295,000. 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 $1,388,000.
25
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, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2003, 2002
and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
26
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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 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.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
February 23, 2004
27
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except share amounts)
- 28 -
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 10,536 $ 9,718
Accounts receivable, net of allowance for doubtful accounts,. 10,012 9,991
2003 - $603 and 2002 - $467
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 12,304 11,676
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 299 962
Prepaid expenses and other current assets . . . . . . . . . . 1,049 766
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . 34,200 33,113
--------- ---------
Property, plant and equipment, net. . . . . . . . . . . . . . . 6,478 5,615
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,147 4,707
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 2,496 1,829
--------- ---------
$ 51,321 $45,264
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt. . . . . . . . . . . . $ 1,661 $ 373
Accounts payable and accrued expenses . . . . . . . . . . . . 7,260 6,489
--------- ---------
Total current liabilities . . . . . . . . . . . . . . 8,921 6,862
--------- ---------
Long-term debt, net of current installments . . . . . . . . . . 7,675 5,213
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,866 2,547
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par; authorized 25,000,000 shares;
issued and outstanding: 2003 - 8,636,865 shares;
2002 - 7,790,796 shares. . . . . . . . . . . . . . . . . . 540 487
Capital in excess of par. . . . . . . . . . . . . . . . . . . 51,817 47,959
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (18,879) (13,756)
Accumulated other comprehensive loss. . . . . . . . . . . . . (1,585) (4,003)
Notes receivable from exercise of stock options . . . . . . . (34) (45)
--------- ---------
Total shareholders' equity. . . . . . . . . . . . . . 31,859 30,642
--------- ---------
$ 51,321 $45,264
========= =========
See notes to consolidated financial statements
28
..
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
-------- ----------- -----------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $49,404 $ 57,226 $ 60,294
Operating costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . 30,935 33,345 36,265
Selling, general and administrative expenses . . . . 16,042 16,353 16,465
Research, development and engineering expenses . . . 3,414 2,872 2,751
Antyra research expenses . . . . . . . . . . . . . . - - 1,312
-------- ----------- -----------
Total operating costs and expenses . . . . . . . . . . 50,391 52,570 56,793
-------- ----------- -----------
(Loss) income from operations . . . . . . . . . . . . (987) 4,656 3,501
-------- ----------- -----------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 84 64 56
Interest expense . . . . . . . . . . . . . . . . . . (485) (460) (561)
Other expense, net . . . . . . . . . . . . . . . . . (38) (35) (113)
Equity in operations of Antyra . . . . . . . . . . . - (150) (527)
-------- ----------- -----------
(439) (581) (1,145)
-------- ----------- -----------
(Loss) income before income tax expense
(benefit). . . . . . . . . . . . . . . . . . . . . . (1,426) 4,075 2,356
Income tax expense (benefit) . . . . . . . . . . . . . 29 1,491 145
-------- ----------- -----------
Net (loss) income. . . . . . . . . . . . . . . . . . . $(1,455) $ 2,584 $ 2,211
======== =========== ===========
Basic (loss) income per share . . . . . . . . . . . . $ (.17) $ .31 $ .27
======== =========== ===========
Diluted (loss) income per share . . . . . . . . . . . $ (.17) $ .30 $ .27
======== =========== ===========
Basic weighted average number of shares outstanding . 8,592 8,416 8,153
======== =========== ===========
Diluted weighted average number of shares outstanding. 8,592 8,621 8,194
======== =========== ===========
See notes to consolidated financial statements.
29
- 32 -
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(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, 2001 . . . . . . . . 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
Issue of shares under employee
stock purchase plan. . . . . . . . . . 54,469 3 192 195
Issue of shares under stock option
Plans. . . . . . . . . . . . . . . . . 12,884 1 41 42
Tax benefits related to exercise of
stock options. . . . . . . . . . . . . 6 6
Payment on notes receivable from
exercise of stock options. . . . . . . 11 11
10% stock dividend . . . . . . . . . . . 778,716 49 3,619 (3,668) -
Net loss . . . . . . . . . . . . . . . . (1,455) (1,455)
Other comprehensive loss
Adjustment . . . . . . . . . . . . . . 2,418 2,418
---------- ------------ -------------- --------- --------- ------ -------
Balance, December 31, 2003 . . . . . . . 8,636,865 $ 540 $ 51,817 $ (18,879) $ (1,585) $ (34) $31,859
========== ============= =============== ========== ========= ======= =======
See notes to consolidated financial statements.
30
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
2003 2002 2001
-------- --------- ---------
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . $(1,455) $ 2,584 $ 2,211
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . 1,275 1,065 1,315
Gain on sale of property . . . . . . . . . . . . . (201) - -
Equity in operations of Antyra . . . . . . . . . . - 150 527
Change in related balance sheet accounts,
excluding effect of acquisition:
Accounts and notes receivable. . . . . . . . . . . 1,163 3,260 (2,632)
Inventories. . . . . . . . . . . . . . . . . . . . 435 3,373 1,326
Prepaid expenses and other current assets. . . . . 498 (163) (622)
Other assets . . . . . . . . . . . . . . . . . . . (88) 478 (274)
Accounts payable and accrued expenses. . . . . . . 431 (1,222) 1,370
Advance payments from customers. . . . . . . . . . 27 (1,558) (336)
Other liabilities. . . . . . . . . . . . . . . . . (87) (550) 295
-------- --------- ---------
Net cash provided by operating activities. . . . . . . 1,998 7,417 3,180
-------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment . . . . . . (1,869) (1,203) (577)
Proceeds from sale of property and equipment . . . . . 277 - 18
Acquisition of RS Biotech Laboratory Equipment
Limited, net of cash acquired . . . . . . . . . . . (1,789) - -
Increase in insurance cash surrender value. . . . . . . (179) (162) (141)
-------- --------- ---------
Net cash used in investing activities. . . . . . . . . (3,560) (1,365) (700)
-------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term credit facility . . . . . . 2,325 - -
Repayments of long-term debt . . . . . . . . . . . . . (470) (1,498) (1,222)
Proceeds from issue of shares under stock
purchase and option plans. . . . . . . . . . . . . . 237 1,270 116
Loan to Antyra . . . . . . . . . . . . . . . . . . . . - (150) -
Payments on notes receivable related to exercised
stock options. . . . . . . . . . . . . . . . . . . . 11 12 5
-------- --------- ---------
Net cash provided by (used in) financing activities. 2,103 (366) (1,101)
-------- --------- ---------
Net effect of exchange rate changes on cash. . . . . . . 277 238 (58)
-------- --------- ---------
Net increase in cash and cash equivalents . . . . . . . 818 5,924 1,321
Cash and cash equivalents at beginning of year . . . . . 9,718 3,794 2,473
-------- --------- ---------
Cash and cash equivalents at end of year . . . . . . . . $10,536 $ 9,718 $ 3,794
======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 487 $ 497 $ 551
Income taxes . . . . . . . . . . . . . . . . . . . . . 579 1,171 155
Exchange of mature shares upon exercise of options . . - 506 -
See notes to consolidated financial statements.
31
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
2003 2002 2001
--------- -------- ---------
Net (loss) income . . . . . . . . . . . . . $ (1,455) $ 2,584 $ 2,211
Other comprehensive income (loss):
Foreign currency translation adjustment 2,345 1,126 (825)
Minimum pension liability adjustment. . 73 (949) (1,153)
--------- -------- ---------
Net comprehensive income. . . . . . . . . . $ 963 $ 2,761 $ 233
========= ======== =========
See notes to consolidated financial statements.
32
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, CO2 incubators,
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 subsidiaries are included
as a component of accumulated other comprehensive loss in shareholders' equity.
Transaction gains and losses 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.
33
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 and acquired intangible assets:
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 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, 2003 and determined that there
is no impairment to its goodwill balance. The Company will test for impairment
at December 31 each year. Amortization expense related to goodwill was $182,000
($.01 per diluted share) for the year ended December 31, 2001.
The Company's goodwill relates to acquisitions by the Company in the United
Kingdom in 2003 and in 1999. The changes in goodwill in 2003 and 2002 were
due to the acquisition of RS Biotech Laboratory Equipment Ltd (RS Biotech) (see
Note 4) and to the translation adjustment, as shown in the following table (in
thousands):
34
2003 2002
------ ------
Balance at January 1 . . . . . . . . $4,707 $4,256
Add: Goodwill related to the
acquisition of RS Biotech 2,742 -
Effect of foreign exchange
translation rates.. . . . . . 698 463
------ ------
Balance at December 31 . . . . . . . $8,147 $4,707
====== ======
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
$3,035,000 in 2003, $2,453,000 in 2002 and $2,744,000 in 2001. Research
expenditures related to Antyra (see note 5) included in these amounts were zero
in 2003 and 2002 and $1,312,000 in 2001.
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.
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 per share is
calculated by dividing net income by the sum of the weighted average number of
shares outstanding plus the dilutive effect of stock options which have been
issued by the Company using the treasury stock method. Antidilutive options are
excluded from the calculation of diluted income (loss) per share. As the
Company had a net loss in 2003, the dilutive effect of stock options was not
considered. Information related to dilutive and antidilutive stock options is
as follows (in thousands):
35
Year Ended December 31,
-----------------------
2003 2002 2001
----------------------- ---- ----
Dilutive effect. . . - 204 40
Antidilutive options 317 138 370
A 10% stock dividend was distributed on May 15, 2003. 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, 2003, the Company has stock-based employee compensation plans
which are described more fully in Note 10. 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:
36
Year Ended December 31
----------------------
2003 2002 2001
(In thousands, except per share amounts)
-------- ---------------------- ----
Net (loss) income, as reported $ (1,455) $ 2,584 $ 2,211
Deduct: Total stock-based employee
compensation expense determined under
fair value based method,
net of related tax effects (628) (424) (446)
--------- -------------------------- -------
Pro forma net (loss) income $ (2,083) $ 2,160 $ 1,765
========= ========================== ========
Net (loss) income per share:
Basic-as reported $ (.17) $ .31 $ .27
========= ========================== ========
Basic-pro forma $ (.24) $ .26 $ .22
========= ========================== ========
Diluted-as reported $ (.17) $ .30 $ .27
========= ========================== ========
Diluted-pro forma $ (.24) $ .25 $ .22
========= ========================== ========
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:
2003 2002 2001
------ ------ ------
Expected life (years). . . . . . . . . 6.0 5.2 5.7
Expected volatility 75.80% 63.67% 71.21%
Expected dividend yield. . . . . . . . - - -
Risk-free interest rate. . . . . . . . 3.10% 4.34% 5.17%
Weighed average fair value of options
granted during the year . . . . . . $4.90 $3.09 $5.32
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
37
Sheets approximated their fair values at December 31, 2003 and 2002. Fair
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 $12,295,000 at
December 31, 2003.
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, 2003, accumulated other comprehensive loss consists of $787,000 of
a cumulative foreign currency translation gain more than offset by a $2,372,000
additional minimum pension liability adjustment (net of tax of $473,000).
Segment information:
Effective June 14, 2001, as a result of the Company's reduction in ownership in
Antyra to below 50%, the Company ceased consolidating the operations of Antyra
and, accordingly, has only one segment. 2001 segment information for the Drug
Lead Discovery segment represents the operations of Antyra from January 1 to
June 14, 2001.
Revenue recognition:
Revenue is recognized in accordance with the F.O.B. terms of orders, generally
when products are shipped. The Company's products are tested by its quality
assurance 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.
38
Certain of the Company's products carry limited warranties that in general do
not exceed one year from sale. The Company accrues estimated product warranty
costs based on historical trends at the time of sale and any additional amounts
are recorded when such costs are probable and can be reasonably estimated.
The Company periodically sells maintenance contracts to certain customers. The
value of such contracts is deferred and recognized into revenue on a straight
line basis over the term of the contract.
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.
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, 2003 and 2002, the Company did
not have any derivative instruments outstanding.
Recently adopted accounting standards:
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 adopted
SFAS No. 143 on January 1, 2003. The adoption did not have any 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
Restructuing)." Statement No. 146 is different from EITF Issue No. 94-3 in that
39
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 was adopted January 1, 2003 with
no effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others." This Interpretation elaborates on the disclosures to
be made by a guarantor in its interim an annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002. The adoption of this interpretation did
not have a material effect on the Company's consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation NO. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2004. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effective of an
accounting change. If determining the carrying amounts is not practicable, fair
value at the date FIN 46R first applies may be used to measure the assets,
40
liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R is
not expected to have any effect on the Company's consolidated results of
operations, financial position or cash flows.
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.
Reclassifications:
Certain amounts in the 2002 and 2001 consolidated financial statements have
been reclassified to conform to the 2003 financial statement presentation.
2. Inventories at December 31 consist of:
2003 2002
------- -------
(In thousands)
Raw materials and sub-assemblies. $ 5,194 $ 4,514
Work-in-process . . . . . . . . . 2,088 1,705
Finished goods. . . . . . . . . . 5,022 5,457
------- -------
$12,304 $11,676
------- =======
3. Property, plant and equipment at December 31 consists of:
2003 2002
-------- --------
(In thousands).
Land . . . . . . . . . . . . . $ 760 $ 800
Buildings and improvements . . 4,336 4,440
Machinery and equipment. . . . 16,552 14,574
-------- --------
21,648 19,814
Less accumulated depreciation. 15,170 14,199
-------- --------
$ 6,478 $ 5,615
======== ========
41
4. Acquisition:
On November 14, 2003, the Company acquired all of the outstanding common stock
of RS Biotech Laboratory Equipment Limited (RS Biotech), a United Kingdom
corporation located in Irvine, Scotland. The purchase price consisted of
975,000 ($1,645,000 at the date of acquisition) in cash and 975,000 ($1,645,000
at the date of acquisition) in notes, payable 487,500 on the first and second
anniversary, respectively, of the acquisition with interest at the lower of 6%
or the base rate of the Bank of Scotland payable semi-annually. In addition, the
Company is obligated to pay up to an additional 300,000 if certain minimum unit
sales of CO2 incubators are achieved. The Company believes that the payment of
such additional consideration is determinable beyond a reasonable doubt and as
such, has recorded the amount as a liability and as additional purchase price.
The source of the cash consideration paid was the Company's line of credit for
acquisition purposes provided by Wachovia Bank National Association, payable in
monthly installments of $17,858 with interest at 175 basis points over LIBOR.
RS Biotech is in the business of designing, developing and manufacturing CO2
Incubators for laboratories. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of RS Biotech have
been included in the Company's consolidated financial statements from November
14, 2003. The excess of purchase price over the fair value of net identifiable
tangible assets acquired of $3,142,000 has been recorded as $2,742,000 of
goodwill and $400,000 for the trade name, which is included in other assets in
the accompanying 2003 consolidated balance sheet and have a weighted average
life of 15 years.
The acquisition of RS Biotech consisted of the following ( in thousands):
Net cash paid $1,789
Debt incurred 2,151
Liabilities assumed 284
Fair value of tangible assets acquired (1,082)
Amount allocated to intangible assets acquired (400)
-------
Goodwill $2,742
=====
5. Investment in Antyra Inc.:
The Company has an equity investment in Antyra Inc. (formerly DGI
BioTechnologies, Inc) ("Antyra") that was written down to zero in 2001. Antyra
had anticipated closing a significant financing transaction with an investment
group during the first half of 2003, however, the financing with this group did
not take place. On May 12, 2003, Antyra closed on certain new short-term
financing. Under the terms of the agreement, Antyra issued preferred shares in
exchange for a $200,000 cash infusion from an investment group consisting of
certain members of Antyra management and other investors and warrants to
BankInvest (an existing equity investor) to purchase up to $100,000 of Antyra
42
preferred stock exercisable through October 2003. At October 31, 2003,
BankInvest chose not to exercise the warrant and it has expired. The agreement
includes a provision that if such warrant is not exercised, the investment group
has the right, but not the obligation, to invest an additional $100,000 in
preferred stock under the same terms as the BankInvest warrant, $80,000 of which
they exercised. Additionally, under the terms of the agreement, the Company
agreed to accept additional shares of Antyra preferred stock on a monthly basis
in lieu of the next 12 months of rent payments due the Company from Antyra (rent
is due at $12,367 per month). For financial reporting purposes, the Company is
attributing no value to the shares received under this arrangement. We believe
that any amount recorded would not be probable of recovery based on our estimate
that the new short-term financing, together with its expected limited revenues
during 2004, should only enable Antyra to continue operating as a going concern
into the first quarter of 2004 without additional funding. As a result of the
short-term financing obtained by Antyra, the Company's fully diluted interest in
Antyra was reduced and will increase to 23.4% upon the receipt of the Antyra
stock in lieu of rent over the 12-month period.
Antyra has virtually exhausted its remaining operating capital and consequently,
its continued viability and existence is dependent upon its raising additional
capital by the end of March 2004.
6. Long-term debt and credit agreement:
On March 15, 2002, the Company and Wachovia Bank, National Association (formerly
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 then
existing acquisition credit line component related to a 1999 acquisition, which
remains at December 1, 2006. The maturity date of the acquisition credit line
component related to the 2003 acquisition of RS Biotech and the equipment credit
line component are November 2008. On September 26, 2003 the Bank Agreement was
further amended to temporarily ease the financial ratio requirements under the
negative covenant provisions of the Bank Agreement and to reduce the acquisition
line from $12.5 million to $10 million. Among the changes was to omit the
requirement to meet the debt service ratio during the period ended September 27,
2003, a change in the minimum equity that must be maintained, as well as the
maintenance of a minimum $3 million cash balance. In addition, the interest
rate on new borrowings under the Bank Agreement will increase by 50 basis
points. At such time as the Company meets the financial ratios that were in
force prior to this amendment (expected to be October 2, 2004), all of the
terms, financial ratios and requirements as well as interest rates will revert
to what they were prior to the September 26, 2003 amendment. No other
provisions of the Bank Agreement were materially amended. 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 75 basis points or LIBOR plus 175 basis points, at the discretion of
the Company. At December 31, 2003, the bank's prime rate was 4.0% and LIBOR was
43
1.15%. 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, as amended, at December 31, 2003 and
currently anticipates to be in compliance with such covenants through December
31, 2004.
At December 31, 2003, the following amounts were outstanding and available under
the Bank Agreement (in thousands):
Total
Line Outstanding Available
---- ----------- ---------
Acquisitions $10,000 $6,111(a) $ 3,889
Equipment loans 2,000 811(b) 1,189
Working capital and
letters of credit 5,000 150(c) 4,850
Foreign exchange
transactions 10,000 10,000
------ ------- --------
$27,000 $7,072 $19,928
======= ======= ======
_____________________
(a) $4,629,000 at fixed interest of 8% per annum and $1,482,000 at 175 basis
points over LIBOR
(b) Interest at 175 basis points over LIBOR
(c) Letters of credit
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 which commenced in
November 2003. At December 31, 2003, the balance of the notes was 200,000
($357,000).
In November 2003, the Company issued notes in the amount of 975,000 ($1,645,000
at the date of acquisition) in connection with the acquistion of RS Biotech.
The notes bear interest, payable semi-annually at the lower of 6% or the base
rate of the Bank of Scotland and are payable 487,500 on the first and second
anniversary, respectively, of the acquisition. At December 31, 2003, the
balance due on the notes was 975,000 ($1,741,000).
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 5.45%,
respectively, per annum. During the terms of the mortgages, the Company is
44
obligated to make monthly payments of interest and quarterly payments of
principal. At December 31, 2003, $144,000 and $170,000 was outstanding under
the first and second mortgages, respectively, and at December 31, 2002, $144,000
and $165,000 was outstanding under the first and second mortgages, respectively.
Each mortgage requires 80 equal quarterly payments of principal.
Aggregate annual maturities of long-term debt are as follows:
Year ending December 31 . . . . . . . . Amount
- --------------------------------------- ---------------
(In thousands)
2004. $1,661
2005. . . . . . . . . . . . . . . . . . 1,682
2006. . . . . . . . . . . . . . . . . . 4,605
2007. . . . . . . . . . . . . . . . . . 526
2008. . . . . . . . . . . . . . . . . . 833
After 2008 . . . . . . . . . . . . . . 29
---------------
$9,336
===============
7. Accounts payable and accrued expenses at December 31, consists of:
2003 2002
------ ------
(In thousands)
Accounts payable-trade . . . . . . . . . . $2,940 $1,948
Accrued salaries, wages and payroll taxes. 1,564 2,217
Commissions payable. . . . . . . . . . . . 709 527
Other accrued liabilities. . . . . . . . . 2,164 1,800
------ ------
$7,377 $6,489
====== ======
45
8. Income taxes:
Year Ended December 31
------------------------
2003 2002 2001
--------- ------- ------
(In thousands)
(Loss) income before
income tax (benefit)
expense:
Domestic . . . . . . . . . . . . . . . . . . . $ (293) $3,969 $1,658
Foreign. . . . . . . . . . . . . . . . . . . . (1,133) 256 1,225
------------------------ ------- -------
$ (1,426) $4,225 $2,883
======================== ======= =======
Income tax (benefit) expense consists of:
Federal-current . . . . . . . . . . . . . . . . $ (237) $ 820 $ 611
Federal-deferred. . . . . . . . . . . . . . . . 293 294 (850)
State-current . . . . . . . . . . . . . . . . . (28) 338 71
State-deferred. . . . . . . . . . . . . . . . . (11) (94) (112)
Foreign-current . . . . . . . . . . . . . . . . 12 133 425
------------------------ ------- -------
$ 29 $1,491 $ 145
======================== ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2003 and 2002 are as
follows:
2003 2002
------ ------
(In thousands)
Deferred tax assets:
Inventories . . . . . . . . . . . . . . . $ 868 $ 810
Allowance for doubtful accounts . . . . . 185 150
Accrued expenses. . . . . . . . . . . . . 210 450
Foreign net operating loss carry-forward. 933 522
Domestic unrealized capital loss and
contribution carry-forwards. . . . . . 390 386
Other assets. . . . . . . . . . . . . . . 514 517
------ ------
Gross deferred tax assets . . . . 3,100 2,835
Less: valuation allowance. . . . . . . 1,234 823
------ ------
1,866 2,012
------ ------
Deferred tax liabilities:
Accumulated depreciation. . . . . . . . . 226 308
Pension . . . . . . . . . . . . . . . . . 354 -
Other liabilities . . . . . . . . . . . . 327 187
------ ------
907 495
------ ------
Net deferred tax asset. . . . . . $ 959 $1,517
====== ======
46
At December 31, 2003 and 2002, respectively, approximately $660,000 and $555,000
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 also has
foreign net operating loss carry-forwards of approximately $2,525,000. 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, 2003. The net change in
the total valuation allowance for the year ended December 31, 2003 and 2002 was
an increase of $411,000 and $463,000, respectively.
The Company's effective income tax rates for 2003, 2002 and 2001 differed from
the U.S. statutory Federal income tax rate of 34% as follows:
Percentage of (loss) income before taxes
------------------------------------------
2003 2002 2001
------------------------------------------ ------- -------
Computed "expected" tax (benefit)
expense
$ (485) $1,437 $ 980
Increase (decrease) in taxes resulting
from:
State taxes, net of federal benefit . (26) 161 (29)
Rate differential between U.S. and
foreign income taxes. . . . . . . . 21 46 193
Change in valuation allowance
allocated to income tax expense . . 411 (85) 1,089
Other . . . . . . . . . . . . . . . . 108 (68) 90
------------------------------------------ ------- -------
Actual tax (benefit) expense. . . . . . . $ 29 $1,491 $ 145
========================================== ======= =======
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
9. 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 $130,000, $138,000 and $131,000 in 2003, 2002, and 2001,
respectively.
47
The following table sets forth the U.S. defined benefit plan's projected benefit
obligation, fair value of plan assets and funded status at December 31, 2003 and
2002:
2003 2002
--------- ---------
(In thousands)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of year . . . . $ 7,630 $ ,7095
Actuarial loss. . . . . . . . . . . . . . . . . 397 188
Service cost. . . . . . . . . . . . . . . . . . 314 287
Interest cost . . . . . . . . . . . . . . . . . 483 449
Benefits paid . . . . . . . . . . . . . . . . . (391) (389)
--------- ---------
Benefit obligation at end of year . . . . . . . $ 8,433 $ 7,630
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year. $ 4,846 $ 5,110
Actual gain (loss) on plan assets . . . . . . . 681 (676)
Employer contributions. . . . . . . . . . . . . 769 801
Benefits paid . . . . . . . . . . . . . . . . . (391) (389)
--------- ---------
Fair value of plan assets at end of year. . . . $ 5,905 $ 4,846
========= =========
MISCELLANEOUS ITEMS AT END OF YEAR
Projected benefit obligation. . . . . . . . . . $ (8,433) $ (7,630)
Fair value of plan assets . . . . . . . . . . . 5,905 4,846
--------- ---------
Funded status . . . . . . . . . . . . . . . . . $ (2,528) $ (2,784)
Unrecognized net transition obligation. . . . . 53 73
Unrecognized prior service cost . . . . . . . . (10) (14)
Unrecognized net loss . . . . . . . . . . . . . 3,341 3,498
--------- ---------
Net amounts recognized. . . . . . . . . . . . . $ 856 $ 773
========= =========
AMOUNTS RECOGNIZED IN FINANCIAL STATEMENTS
Accrued benefit cost. . . . . . . . . . . . . . $ (2,031) $ (2,247)
Intangible asset. . . . . . . . . . . . . . . . 43 58
--------- ---------
Accumulated other comprehensive loss. . . . . . (1,988) (2,189)
Unfunded pension liability. . . . . . . . . . . 2,844 2,962
--------- ---------
Prepaid pension . . . . . . . . . . . . . . . . $ 856 $ 773
========= =========
The accumulated benefit obligation for the U.S. defined benefit pension
plan was $7,936,000 and $7,093,000 at December 31, 2003 and 2002, respectively.
2003 2002 2001
------- ------- ---------
(In thousands)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost . . . . . . . . . . . . . . . . . . . . $ 314 $ 287 $ 227
Interest cost. . . . . . . . . . . . . . . . . . . . 483 449 443
Expected return on plan assets . . . . . . . . . . . (386) (424) (475)
Transition obligation. . . . . . . . . . . . . . . . 19 19 19
Amortization of prior service cost . . . . . . . . . (4) (4) (4)
Recognized net actuarial loss. . . . . . . . . . . . 259 165 29
------- ------- ---------
Net periodic benefit cost. . . . . . . . . . . . . . $ 685 $ 492 $ 239
======= ======= =========
48
WEIGHTED-AVERAGE ASSUMPTIONS AND MEASUREMENT DATES . 2003 2002 2001
------- ------- ---------
Benefit obligations:
Discount rate. . . . . . . . . . . . . . . . . . . 5.85% 6.50% 6.50%
Rate of compensation increase. . . . . . . . . . . 3.00% 3.00% 3.00%
Measurement date - December 31 . . . . . . . . . . 2003 2002 2001
Census date snapshop date - December 31 . . . . . 2003 2002 2001
Net periodic pension cost:
Discount rate. . . . . . . . . . . . . . . . . . . 6.50% 6.50% 6.50%
Rate of compensation increase. . . . . . . . . . . 3.00% 3.00% 3.00%
Expected long-term return on plan assets . . . . . 7.50% 8.00% 8.50%
Measurement date - January 1 . . . . . . . . . . . 2003 2002 2001
Census date snapshot date - January 1. . . . . . . 2003 2002 2001
The Company's best estimate of its contributions to the plan is $1,040,000
for the year ending December 31, 2004.
The asset allocation of plan assets at December 31, 2003 and 2002 were as
follows:
ASSET CATEGORY. . . . . . 2003 2002
------ ------
Cash and cash equivalents 7.7% 70.2%
Debt securities . . . . . 39.5 19.8
Equity securities . . . . 52.8 10.0
------ ------
Total . . . . . . . . . . 100.0% 100.0%
====== ======
The Company's overall investment objective is to maintain a balanced
portfolio focused on maintaining the inflation-adjusted value of the current
asset base while allowing for potential real growth in principal. The objective
is to have a 40% to 70% exposure to equities with the remainder in debt
securities. Coherent in this investment objective is the understanding that the
portfolio is subject to the risk of short-term principal volatility associated
with investing in stocks and bonds, including the potential loss of capital.
The plan's assets are managed by outside professionals. The investment
time horizon is at least 3-5 years. There are no regular cash flow requirements
from the portfolio and all income is reinvested into principal since the cash
needs of the plan are met by the Company's annual contributions. The Company is
not aware of any pending substantial liquidity needs from the plan. The
Company's minimum performance objective is to meet its assumed expected annual
return on plan assets of 7.5%. The plan is not permitted to invest in illegal
and not readily marketable securities or real estate.
Pension expense was determined using a 6.5% discount rate (consistent with
the determination of liabilities at the end of 2002) and the plan liability and
49
other disclosure items using a 5.85% discount rate. The discount rates were
determined as [3x(a)+(b)]/4 where (a) is the average Aaa (Moody's) long term
corporate bond yield in December and (b) is the average Baa (Moody's) long term
corporate bond yield in December. The expected long-term rate of return on plan
assets is 7.5%. The Company employs a building block approach in determining
the long-term rate of return for plan assets with proper consideration of
diversification and rebalancing. Historical markets are studied and long-term
historical relationships between equities and fixed income are preserved
congruent with the widely-accepted capital market principle that assets with
higher volatility generate a greater return over the long run. Current market
factors such as inflation and interest rates are evaluated before long-term
capital market assumptions are determined. Peer data and historical returns are
reviewed to check for reasonability and appropriateness. The annual salary
increase assumption of 3% was selected based on the Company's estimate.
The minimum additional pension liability in 2003 and 2002 are non-cash
items which are offset by a direct reduction to shareholders' equity of
$2,372,000 and $2,445,000, 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 2003,
2002 and 2001 was $127,000, $164,000 and $173,000, respectively.
International pension expense in 2003, 2002 and 2001 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 made severance payments over
three years in the amount of $200,000 per year through January 2003,
recognizing interest expense over the three-year term.
10. Shareholders' equity:
Data for the stock options and rights plans for 2002 and all previous years
described below have been restated to reflect the 10% stock dividend which was
distributed on May 15, 2003.
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 462,000
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.
50
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 and no further options
will be granted under the 1991 Plan. The 1991 Plan provided for the granting of
options to purchase up to 1,172,772 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.
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 146,410 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 294,151 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 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.
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 194,869
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.
51
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, 2000 1,397,170 $ 3.08 - $9.32 $ 3.87
Granted. . . . . . . . . . . 6,655 2.25 2.25
Exercised. . . . . . . . . . - - -
Cancelled. . . . . . . . . . (195,782) 3.10 - 9.32 4.34
---------- ---------------- ---------------
Outstanding, December 31, 2001 1,208,043 2.25 - 5.26 3.78
Granted. . . . . . . . . . . 224,840 4.49 - 5.67 4.53
Exercised. . . . . . . . . . (422,552) 3.08 - 5.26 3.42
Cancelled. . . . . . . . . . (42,173) 3.22 - 4.60 3.99
---------- ---------------- ---------------
Outstanding, December 31, 2002 968,158 2.25 - 5.67 4.10
Granted. . . . . . . . . . . 132,000 4.59 4.46
Exercised. . . . . . . . . . (12,884) 3.22 3.22
Cancelled. . . . . . . . . . (50,865) 3.22 - 4.60 4.46
---------- ---------------- ---------------
Outstanding, December 31, 2003 1,036,409 $ 2.25 - $5.67 $ 4.14
========== ================ ===============
Information regarding stock options outstanding as of December 31, 2003 is as
follows:
Outstanding
Weighted Average Number of
Exercise . Number of Remaining Shares
Price. . . Shares Contractual Life Exercisable
- ---------- ---------------- ---------------- -----------
2.25. . . 6,655 3.28 2,662
3.08 . . . 37,646 1.66 37,646
3.10 . . . 88,576 1.21 77,298
3.22 . . . 176,963 1.80 176,963
3.57 . . . 80,524 .92 80,524
4.45 . . . 120,450 6.14 -
4.49 . . . 150,040 4.01 -
4.59 . . . 10,450 4.01 -
4.60 . . . 178,081 2.58 106,717
4.64 . . . 48,400 5.69 9,680
5.26 . . . 136,424 1.59 136,424
5.67 . . . 2,200 4.94 -
---------------- -----------
1,036,409. 627,914
========== ===========
In the aggregate, related to the aforementioned stock option plans, there
were 273,009 additional shares available for grant at December 31, 2003.
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
52
85% of fair market value on specified dates. The Company has reserved 559,231
shares of its authorized shares of Common stock for this purpose. During 2003,
2002 and 2001, 54,469, 40,584 and 42,276 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 $17.07 (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.
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 $3,000, $11,000 and $4,000 during 2003, 2002 and 2001, 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 $23,750 and from the Controller in the amount of $10,000.
Imputed interest on these loans amounted to $271, $1,000, and $3,000 during
2003, 2002 and 2001, respectively.
11. 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 has operated 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.
53
Prior to June 14, 2001, the Company had a second segment, Antyra, Inc. (Antyra).
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 Antyra to below 50%, the Company ceased
consolidating the operations of Antyra and, accordingly, has only one segment
for the year ended December 31, 2003 and 2002. 2001 segment information for the
Drug Lead Discovery segment represents the operations ofAntyra from January 1 to
June 14, 2001 and were immaterial.
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.
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 2003, 2002 and 2001. 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):
United United Conso-
States Kingdom Europe lidated
----------- -------- ------- --------
Net sales:
2003 . . . . . . . . . $ 36,293 $ 6,177 $ 6,934 $ 49,404
2002 . . . . . . . . . 43,075 6,821 7,330 57,226
2001 . . . . . . . . . 42,689 8,784 8,821 60,294
Long-lived assets:
2003 . . . . . . . . . $ 6,445 $ 9,094 $ 922 $ 16,461
2002 . . . . . . . . . 5,357 5,379 860 11,596
2001 5,315 5,052 767 11,134
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, Fisher Scientific, based in the United States accounted for
approximately 15.9%, 18.9% and 14.2%, respectively, of consolidated net sales
during the years ended December 31, 2003, 2002 and 2001.
Income from United States operations was significantly affected by the
research and development costs of Antyra prior to 2002.
54
During 2003, 2002 and 2001, net sales from domestic operations to foreign
customers were $11,824,000, $11,564,000 and $11,916,000, 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.
12. Related party transactions:
Until December 15, 2003, David Freedman, Chairman of the Board of the Company,
was 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 2003, 2002 and 2001, this firm earned commissions in the
amounts of $16,316, $248,033 and $212,128, 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. On December 15, 2003, Mr. Freedman sold
his ownership interest in Bio-Instrument Ltd. to an unrelated third party.
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 2003 and
2002 was $61,900 and $63,162, respectively; she also received options to
purchase 1,100 and 1,210 shares of the Company's Common stock in 2003 and 2002,
respectively, under the Company's 2001 Stock Option Plan for Officers and Key
Employees.
13. Commitments and contingencies:
The Company is obligated under the terms of various operating leases.
Rental expense under such leases for 2003, 2002 and 2001 was $655,000, $644,000
and $645,000, respectively. As of December 31, 2003, estimated future minimum
annual rental commitments under noncancelable leases expiring through 2014 are
as follows (in thousands):
Obligation Sublease Rentals Net
----------- ----------------- ------
2004 . . . . . . . . . $ 822 $ 245 $ 577
2005 . . . . . . . . . 712 178 534
2006 . . . . . . . . . 593 178 415
2007 . . . . . . . . . 509 178 331
2008 . . . . . . . . . 419 178 241
After 2008 . . . . . . 1,178 909 269
----------- ----------------- ------
Total minimum payments
Required . . . . . . $ 4,233 $ 1,866 $2,367
=========== ================= ======
55
The Company is contingently liable under two leases in the United Kingdom
for premises that have been sub-let to third parties. One lease pursuant to
which the annual rent is 99,750 ($178,000 at December 31, 2003) expires in 2014
and has been sublet for the entire remaining term of the lease. The second
lease on which the annual rent is 45,000 ($80,000 at December 31, 2003) runs
until September 2009. The current sub-leasee for the second lease has informed
the Company that it does not intend to renew its sub-lease, which expires in
October 2004 and the Company is currently in the process of finding another
sub-tenant to occupy the premises for the remainder of the lease term.
In June 2003, the U.S. Department of Commerce notified the Company that it
believes the Company may have failed to comply with certain export control
requirements in connection with certain equipment sales to certain foreign
customers. The applicable statutory framework gives the Commerce Department
authority to impose civil monetary penalties (up to a maximum of $176,000 based
on the agency's preliminary assessment) and other sanctions. The Company
responded to the agency's invitation to settle the matter informally and has
provided an explanation of the transactions in question and information about
the Company's compliance measures. The Company has made a settlement offer,
which it has accrued, in an amount significantly lower than $176,000 reflecting
the Company's belief that the matter should be settled at a substantially
reduced level. While the ultimate outcome of this matter cannot be determined
at this time, management believes that it will not have a material effect on the
Company's financial condition or liquidity but could have a material effect on
the Company's results of operations in any one period.
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.
56
14. Quarterly financial information (unaudited) (in thousands, except per
share amounts):
First Second Third Fourth Total
----- ------ ----- ------ -----
Year ended December 31, 2003
Net sales $11,585 $10,747 $11,478 $15,594 $49,404
Gross profit 4,193 3,455 4,469 6,352 18,469
Net (loss) income (432) (1,195) (722) 894 (1,455)
(Loss) income per share: (a)
Basic $ (.05) $ (.14) $ (.08) $ .10 $ (.17)
Diluted (.05) (.14) (.08) .10 (.17)
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: (a)
Basic $ .07 $ .10 $ .03 $ .11 $ .31
Diluted .07 .10 .03 .11 .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.
ITEM 9A. CONCLUSIONS ABOUT EFFECTIVENESS OF DISCLOSURE CONTROLS
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective as
of December 31, 2003. There have been no significant changes in the Company's
internal controls or in other factors, which could significantly affect internal
controls during the period ended December 31, 2003.
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.
57
------
PART III
--------
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registarnt will file a definitive proxy statement
within one hundred twenty (120) days after the end of the fiscal year pursuant
to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders
currently scheduled for June 1, 2004, and the information included in the Proxy
Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers is incorporated by reference to the Proxy Statement.
Information regarding compliance with Section 16 of the Securities Exchange Act
of 1934, as amended, is incorporated by reference to the information under the
hearding "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement
Registrant has a code of ethics for its Chief Executive Officer, President,
Chief Financial Officer and Corporate Controller, which has been posted on its
website at http://nbsc.com. Registrant will disclose on its website when there
---------------
have been any waivers of, or amendments to, the code of ethics.
At least one member of Registrant's audit committee is considered as an
audit committee financial expert. Registrant's audit committee consists of
Daniel S. Van Riper, Peter Schkeeper and Ernest Gross.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to the compensation of
the Registrant's executive officers is incorporated by reference to the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated herein by reference to
the Registant's Definitive Proxy Statement with respect to the 2004 Annual
Meeting of Stockholders to be filed with the SEC in April 2004, pursuant to
Regulation 14A.
58
PART IV
-------
ITEM 15. 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, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 2003, 2002 and 2001
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 60.
(a) The following reports on Form 8-K have been filed during the last
quarter
of the period covered by this report:
On November 17, 2003 Registrant filed a report referencing a press release
reporting its acquisition of RS Biotech Laboratory Equipment Ltd.
59
Schedule II
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
Additions
----------------------
Balance Charged to Balance
At Costs and Charged to At End
Beginning (Credited) to Other of
of Period Expenses Accounts Deductions Period
------------------ -------------- ----------- ----------- -------
Year ended
December 31, 2003
Allowance for
doubtful accounts $ 467 $ 114 $ 22 $ - $ 603
Inventory valuation
allowance . . . . 1,932 918 65 257 2,658
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
60
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 is
incorporated herein by reference from Exhibit (3b) to the Registrant's Form 10-Q
for the quarter ended Septebmer 27, 2003.
(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 is
incorporated herein by reference to Exhibit (10-10) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.
61
(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.
(10-23) 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.
(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.
62
(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 is incorporated
herein by reference to Exhibit (10-32) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002.
..
(10-33) Sixth Amendment to Credit Agreement between New Brunswick Scientific
Co., Inc. and Wachovia Bank, National Association (previously First Union
National Bank) dated April 1, 1999 is incorporated herein by reference to
Exhibit (10-33)) of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 27, 2003.
(13) Annual Report to Shareholders, to be filed within 120 days of the end
of the fiscal year ended December 31, 2003, is incorporated herein by reference.
(22) Subsidiaries of the Company appear on Page 64.
(24a)* Consent of KPMG LLP.
(31) Certification of Samuel Eichenbaum appears on Page 65.
(31) Certification of David Freeman appears on Page 66.
(32) Certifications of David Freedman and Samuel Eichenbaum
appear on Page 67.
* Filed herewith.
63
------
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%
RS Biotech Laboratory Equipment Limited
Incorporated in the United Kingdom 100%
64
EXHIBIT 31
CERTIFICATION
I, Samuel Eichenbaum, certify that:
1. I have reviewed this annual report on Form 10-K of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: March 4, 2004 /s/ Samuel Eichenbaum
-----------------------
Vice President, Finance,
Chief Financial Officer and Treasurer
65
EXHIBIT 31
CERTIFICATION
I, David Freedman, certify that:
1. I have reviewed this annual report on Form 10-K of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent
evaluation of internal control over financial reporting, to the Registrant's
auditors and the audit committee of the Registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: March 4, 2004 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
66
EXHIBIT 32
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 4, 2004 /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 4, 2004 /s/ Samuel Eichenbaum
-----------------------
Name: Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer and Treasurer
A signed original of this written statement required by Section 906 has been
provided to New Brunswick Scientific Co., Inc. and will be retained by New
Brunswick Scientific Co., Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
67
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 4, 2004 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 4, 2004 By: /s/ Adele Lavender
--------------------
Adele Lavender
Corporate Secretary
Dated: March 4, 2004 By: /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance
Chief Financial Officer and Treasurer
Dated: March 4, 2004 By: /s/ James T. Orcutt
----------------------
James T. Orcutt
President and Director
68
Dated: March 4, 2004 By: /s/ Dr. Jerome Birnbaum
--------------------------
Dr. Jerome Birnbaum
Director
Dated: March 4, 2004 By: /s/ Kenneth Freedman
----------------------
Kenneth Freedman
Director
Dated: March 4, 2004 By: /s/ Ernest Gross
------------------
Ernest Gross
Director
Dated: March 4, 2004 By: /s/ Kiyoshi Masuda
--------------------
Kiyoshi Masuda
Director
Dated: March 4, 2004 By: /s/ Dr. David Pramer
-----------------------
Dr. David Pramer
Director
Dated: March 4, 2004 By: /s/ Peter Schkeeper
---------------------
Peter Schkeeper
Director
Dated: March 4, 2004 By: /s/ Daniel S. Van Riper
---------------------------
Daniel S. Van Riper
Director
69