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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended April 3, 2004 Commission File No. 0-6994
------
NEW BRUNSWICK SCIENTIFIC CO., INC.
State of Incorporation - New Jersey E. I. #22-1630072
-----------
44 Talmadge Road, Edison, N.J. 08818-4005
Registrant's Telephone Number: 732-287-1200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No __
--
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes No X
-
There are 8,692,230 Common shares outstanding as of April 30, 2004.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PAGE NO.
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PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
April 3, 2004 and December 31, 2003. . . . . . . . . . . 3
Consolidated Statements of Operations -
Three Months Ended April 3, 2004 and
March 29, 2003. . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended April 3, 2004 and
March 29, 2003 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended April 3, 2004 and
March 29, 2003. . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition. . . . . . . . . . 13
PART II. OTHER INFORMATION 21
2
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS
------
April 3, December 31,
2004 2003
---------- --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 9,479 $ 10,536
Accounts receivable, net . . . . . . . . . . . . . . . 10,589 10,012
Inventories:
Raw materials and sub-assemblies . . . . . . . . . . 6,128 5,194
Work-in-process. . . . . . . . . . . . . . . . . . . 2,300 2,088
Finished goods . . . . . . . . . . . . . . . . . . . 4,645 5,022
---------- --------------
Total inventories. . . . . . . . . . . . . . . . . 13,073 12,304
Deferred income taxes. . . . . . . . . . . . . . . . . 310 299
Prepaid expenses and other current assets. . . . . . . 1,489 1,049
---------- --------------
Total current assets . . . . . . . . . . . . . . . . 34,940 34,200
---------- --------------
Property, plant and equipment, net . . . . . . . . . . . 6,385 6,478
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 8,355 8,147
Other assets . . . . . . . . . . . . . . . . . . . . . . 2,499 2,496
---------- --------------
$ 52,179 $ 51,321
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
Current Liabilities:
- --------------------------------------------------------
Current installments of long-term debt . . . . . . . . $ 1,691 $ 1,661
Accounts payable and accrued expenses. . . . . . . . . 7,781 7,260
---------- --------------
Total current liabilities. . . . . . . . . . . . . . 9,472 8,921
---------- --------------
Long-term debt, net of current installments. . . . . . . 7,453 7,675
Other liabilities. . . . . . . . . . . . . . . . . . . . 2,747 2,866
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par;
authorized 25,000,000 shares; issued and outstanding,
2004 - 8,686,641 and 2003 - 8,636,865 . . . . . . . . 543 540
Capital in excess of par . . . . . . . . . . . . . . . 51,975 51,817
Accumulated deficit. . . . . . . . . . . . . . . . . . (18,571) (18,879)
Accumulated other comprehensive loss . . . . . . . . . (1,417) (1,585)
Notes receivable from exercise of stock options. . . . (23) ( 34)
---------- --------------
Total shareholders' equity . . . . . . . . . . . . . 32,507 31,859
---------- --------------
$ 52,179 $ 51,321
========== ==============
See notes to consolidated financial statements
..
3
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
April 3, March 29,
2004 2003
-------------------- -----------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 14,622 $ 11,585
Operating costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . 8,691 7,392
Selling, general and administrative expenses . . . . 4,272 4,104
Research, development and engineering expenses . . . 903 857
-------------------- -----------
Total operating costs and expenses . . . . . . . . 13,866 12,353
-------------------- -----------
Income (loss) from operations. . . . . . . . . . . . . 756 (768)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 18 18
Interest expense . . . . . . . . . . . . . . . . . . (165) (114)
Other, net . . . . . . . . . . . . . . . . . . . . . (64) 144
-------------------- -----------
(211) 48
-------------------- -----------
Income (loss) before income tax expense (benefit). . . 545 (720)
Income tax expense (benefit) . . . . . . . . . . . . . 237 (288)
-------------------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . . $ 308 $ (432)
==================== ===========
Basic net income (loss) per share. . . . . . . . . . . $ .04 $ (0.05)
==================== ===========
Diluted net income (loss) per share. . . . . . . . . . $ .04 $ (0.05)
==================== ===========
Basic weighted average number of shares outstanding . 8,650 8,570
==================== ===========
Diluted weighted average number of shares outstanding. 8,794 8,570
==================== ===========
See notes to consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 3, March 29,
2004 2003
------------------------------------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ (432)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 343 305
Gain on sale of property . . . . . . . . . . . . . . . . . . . . - (202)
Change in related balance sheet accounts:
Accounts and notes receivable. . . . . . . . . . . . . . . . . . (526) 312
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (730) (1,048)
Prepaid expenses and other current assets. . . . . . . . . . . . (446) (445)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . (101) -
Accounts payable and accrued expenses. . . . . . . . . . . . . . 249 (1,237)
Advance payments from customers. . . . . . . . . . . . . . . . . 282 133
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . (119) (21)
-------- --------
Net cash used in operating activities. . . . . . . . . . . . . . . (740) (2,635)
------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment . . . . . . . . . . . (261) (330)
Proceeds from sale of property and equipment . . . . . . . . . . - 253
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . (261) (77)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . (222) (65)
Proceeds from issue of shares under stock option plans . . . . . 161 -
Payments on notes receivable related to exercised stock options. 11 11
-------- --------
Net cash used in financing activities. . . . . . . . . . . . . . . (50) (54)
-------- --------
Net effect of exchange rate changes on cash. . . . . . . . . . . . (6) 23
-------- --------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (1,057) (2,743)
Cash and cash equivalents at beginning of period . . . . . . . . . 10,536 9,718
---------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . .$ 9,479 $ 6,975
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 197 $ 106
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 131 785
See notes to consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended
April 3, March 29,
2004 2003
------------------- -----------
Net income (loss). . . . . . . . . . . . . $ 308 $ (432)
Other comprehensive income (loss):
Foreign currency translation adjustment. 168 (117)
------------------- -----------
Comprehensive income (loss). . . . . . . . $ 476 $ (549)
=================== ===========
See notes to consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Interim results:
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly, the financial position of the Company
as of April 3, 2004 and the results of its operations for the three months ended
April 3, 2004 and March 29, 2003 and its cash flows for the three months ended
April 3, 2004 and March 29, 2003. Interim results may not be indicative of the
results that may be expected for the year.
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2003.
Note 2 - Net income (loss) per share:
Basic net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted net income (loss)
per share is calculated by dividing net income (loss) by the sum of the weighted
average number of shares outstanding plus the dilutive effect of stock options
which have been issued by the Company using the treasury stock method.
Antidilutive options are excluded from the calculation of diluted net income
(loss) per share. As the Company had a loss in 2003, the dilutive effect of
stock options was not considered for that period. Information related to
dilutive and antidilutive stock options is as follows (in thousands of shares):
Three Months Ended
April 3, March 29,
2004 2003
------- ---------
Dilutive effect. . . 144 -
Antidilutive options 2 359
Note 3 - 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
7
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 April 3, 2004, the bank's prime rate was 4.0% and LIBOR was
1.11%. 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. At April 3, 2004 the Company is in
compliance with its covenants pursuant to the Bank Agreement, as amended, and
currently anticipates to be in compliance with such covenants for the next 12
months.
At April 3, 2004, the following amounts were outstanding and available under the
Bank Agreement (in thousands):
Total
Line Outstanding Available
------- ------------- ----------
Acquisitions. . . . $10,000 $ 5,954(a) $ 4,046
Equipment loans . . 2,000 756(b) 1,244
Working capital and
letters of credit 5,000 33(c) 4,967
Foreign exchange
transactions. . . 10,000 - 10,000
------- ------------- ----------
$27,000 $ 6,743 $ 20,257
======= ============= ==========
_____________________
(a) $4,543,000 at fixed interest of 8% per annum and $1,411,000 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 April 3, 2004, the balance of the notes was 200,000
($366,000).
8
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 April 3, 2004, the balance
due on the notes was 975,000 ($1,786,000).
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
obligated to make monthly payments of interest and quarterly payments of
principal. At April 3, 2004, $124,000 and $158,000 was outstanding under the
first and second mortgages, respectively, and at March 29, 2003, $141,000 and
$165,000 was outstanding under the first and second mortgages, respectively.
Each mortgage requires 80 equal quarterly payments of principal.
Note 4 - Recently adopted 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 is 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 is being applied beginning on January 1, 2004. For
any VIEs 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, liabilities and noncontrolling
interest of the VIE. The adoption of FIN 46R had no effect on the Company's
consolidated results of operations, financial position or cash flows. See Note
7 for a discussion of the Company's one investment in a variable interest
entity, which is not consolidated.
Note 5 - Contingencies:
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 Asia. 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.
9
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.
Note 6 - Stockholders' Equity:
On February 20, 2003, the Company declared a 10% stock dividend, which was paid
on May 15, 2003 to shareholders of record as of April 18, 2003. The weighted
average number of shares outstanding used in the computation of basic and
diluted income (loss) per share for the 2003 period has been restated to reflect
this dividend.
At April 3, 2004, the Company has stock-based employee compensation plans, which
it accounts for 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:
Three Months Ended
April 3, March 29,
2004 2003
------------------- -----------
Net income (loss), as reported: . . . . . . . . . $ 308 $ (432)
Deduct: Total stock-based employee
compensation expense determined under fair. . . 71 96
value based method, net of related tax effects. ___ ___
Pro forma net income (loss) . . . . . . . . . . . $ 237 $ (528)
=================== ===========
Net income (loss) per share:
Basic-as reported . . . . . . . . . . . . . . . $ 0.04 $ (0.05)
=================== ===========
Basic-pro forma . . . . . . . . . . . . . . . . $ 0.03 $ (0.06)
=================== ===========
Diluted-as reported . . . . . . . . . . . . . . $ 0.04 $ (0.05)
=================== ===========
Diluted-pro forma . . . . . . . . . . . . . . . $ 0.03 $ (0.06)
=================== ===========
10
The fair value of each stock option granted during the period is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions (no options were granted in the first fiscal quarter of
2004):
Three Months Ended
April 3, March 29,
2004 2003
------- --------
Expected life (years). . . . . . . . . NA 6.0
Expected volatility. . . . . . . . . . NA 75.80
Expected dividend yield. . . . . . . . NA -
Risk-free interest rate. . . . . . . . NA 3.10
Weighed average fair value of options. NA $ 4.90
granted during the period
Note 7 - 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
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. The Company
has also guaranteed certain lease obligations of Antyra, which are accrued for
and total $55,000 as of April 3, 2004. The Company believes 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
second 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.
11
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 May 2004.
Note 8 - Pension plan:
Components of net period benefit cost for the three months ended April 3, 2004
and March 29, 2003 are as follows (in thousands):
2004 2003
------ ------
Service cost. . . . . . . . . . . . $ 95 $ 78
Interest cost . . . . . . . . . . . 120 120
Expected return on plan assets. . . (115) (96)
Amortization of net obligation. . . 5 5
Amortization of prior service costs (1) (1)
Amortization of the net (gain) loss 54 65
----- -----
Net periodic pension cost . . . . . $158 $171
===== ====
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expects to contribute $1,040,000 to its pension plan
in 2004. As of April 3, 2004, $347,000 of contributions have been made.
The Company has a defined contribution plan for its U.S. employees, with a
specified matching Company contribution. The expense to the Company for the
three months ended April 3, 2004 and March 29, 2003 was $38,000 and $49,000,
respectively.
12
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Forward-looking statements, within the meaning of Section 21E of the Securities
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis of Results of Operations and Financial Condition. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements.
The following is Management's discussion and analysis of significant factors
that have affected the Company's operating results and financial condition
during the three month periods ended April 3, 2004 and March 29, 2003,
respectively, which should be read in conjunction with the Company's December
31, 2003 financial statements.
Results of Operations
---------------------
EXECUTIVE OVERVIEW
- -------------------
The year 2003 was a very difficult one for the Company and for our industry as
capital spending by pharmaceutical companies declined significantly due to
tightened budgets and the acquisition of equipment by biotechnology companies
decreased due to their inability to raise funds in the financial markets. At the
same time, although government funding of the NIH and other agencies increased,
a large portion of their budgets were directed toward security as a consequence
of the September 11, 2001 terrorist attacks rather than to research. The Company
began to experience a turnaround from this negative situation during the fourth
quarter of 2003 during which it returned to profitability after three successive
quarterly losses. This trend has continued into the first quarter of 2004 during
which the Company experienced a significant increase in net sales and solid
profitability compared with the first quarter of 2003 when it sustained a large
net loss.
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 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.
13
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 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, our largest customer, 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.
NET SALES
- ----------
The following table summarizes consolidated backlog, orders and net sales for
the three months ended April 3, 2004 and March 29, 2003 (in thousands of
dollars):
%
2004 2003 Change
------- ------- ------
Backlog-beginning $ 9,018 $ 6,668 35.2 %
Add orders. . . . 15,488 10,370 49.4
Less net sales. . 14,622 11,585 26.2
------- ------ -----
Backlog-ending. . $ 9,884 $ 5,453 81.3%
======= ======= =====
Net sales increased $3,037,000 or 26.2% in the 2004 period from $11,585,000 in
2003. Net sales increased 18.2% in the U.S. and 33.8% internationally. The
increase in sales was due principally to higher unit volume aided by the
recovery in the economy, the weakening dollar in international markets and the
inclusion of $1.1 million in sales of RS Biotech, which was acquired in November
2003. In addition, $526,000 resulted from the dollar's weakness when the net
sales of the Company's UK and European subsidiaries were translated into
dollars. Excluding the foreign exchange effect, international sales increased
22.9%. The increase in net sales involved all of the Company's product lines.
Orders were very strong during the first quarter of 2004 for the reasons
discussed above relating to the increase in net sales and due to the continued
demand for the Company's fermentation, cell culture, shaker and freezer
products.
GROSS MARGIN
- -------------
The following table shows gross profit and gross margin for the three months
ended April 3, 2004 and March 29, 2003 (in thousands of dollars):
14
2004 . . 2003
-------- ------
Net sales . . $14,622 $11,585
Cost of sales 8,691 7,392
------- -------
Gross profit. $ 5,931 $ 4,193
======= ========
Gross margin. 40.6% 36.2%
======= ========
Gross margin increased to 40.6% from 36.2% in 2003 due primarily to the effect
of increased absorbtion of manufacturing overhead as a result of significantly
increased manufacturing activity.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------
As a result of the foreign exchange translation effect of the weak dollar on the
expenses of the Company's European subsidiaries and the inclusion of the
operating expenses of RS Biotech acquired in November 2003, 2004 selling,
general and administrative expenses increased $374,000 for the three months
ended April 3, 2003 compared with the three months ended March 29, 2003. If this
amount is excluded, there was a $206,000 decrease in 2004 expenses stemming from
the Company's cost reduction efforts offset partly by normal salary and other
annual cost increases.
RESEARCH, DEVELOPMENT AND ENGINEERING
- ----------------------------------------
As a result of the foreign exchange translation effect of the weak dollar on the
expenses of the Company's European manufacturing subsidiaries and the inclusion
of the expenses of RS Biotech acquired in November 2003, 2004 R&D and
Engineering expenses increased $115,000 for the three months ended April 3, 2003
compared with the three months ended March 29, 2003. If this amount is excluded,
there was a $69,000 decrease in 2004 expenses stemming from the Company's cost
reduction efforts offset partly by normal salary and other annual cost
increases.
INTEREST EXPENSE
- -----------------
Interest expense increased in the 2004 quarter due to the higher level of debt,
which was incurred during the latter part of 2003 to finance the acquisition of
RS Biotech and the purchase of equipment.
OTHER (EXPENSE) INCOME, NET
- ------------------------------
The following table details other expense, net for the quarters ended April 3,
2004 and March 29, 2003, (in thousands):
2004 2003
-------------------------
Gain on assets sold, primarily property . $ - $201,000
Loss on foreign currency transactions(a). (49,000) (44,000)
Other, net. . . . . . . . . . . . . . . . (15,000) (13,000)
-------- --------
Total other (expense) income , net. (64,000) $144,000
======== ========
15
________________________
(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.
INCOME TAX EXPENSE
- --------------------
The increase in the Company's effective income tax rate to 43.5% for the three
months ended April 3, 2004 is attributable to the inability to carryback losses
incurred by one of the Company's European subsidiaries resulting in no financial
tax benefit for those losses in 2004. During the three months ended March 29,
2003 when the Company sustained losses, its effective tax benefit rate of 40%
was higher than what might be expected due to an increase in the effective tax
rate for state income taxes.
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:
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) . . . . . . . $ 9,144 $1,691 $ 6,741 $ 712 $ -
Operating lease obligations(b) 4,163 787 1,639 953 784
Purchase obligations(c). . . . 5,039 4,764 275 - -
Other long-term liabilities(d) 677 37 640 - -
------ ------ ---------- -------- ----
Total contractual cash
Obligations. . . . . . . . . $ 19,023 $7,279 $ 9,295 $ 1,665 $784
====== ====== ========== ======= ====
_____________________
(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 ($183,000 at
April 3, 2004) 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 ($82,000
16
at April 3, 2004) 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 decreased to $9,479,000 at April 3, 2004 from
$10,536,000 at December 31, 2003. The $1,057,000 decrease resulted primarily
from net cash used in operating activities of $740,000, net cash used in
investing activities of $261,000 and net cash used in financing activities of
$50,000.
OPERATING ACTIVITIES
- ---------------------
The overall factors primarily driving negative cash flow during the three months
ended April 3, 2004 were increases in (i) accounts receivable, (ii) inventories,
(iii) prepaid expenses and other current assets, (iv) other assets and (v) a
decrease in other liabilities partially offset by (i) net income, (ii)
depreciation and amortization, (iii) an increase in accounts payable and accrued
expenses and (iv) an increase in advance payments from customers. The negative
cash flow factors during the 2004 period were primarily driven by the increased
volume of business during the period. Assuming the business trends experienced
in the fourth quarter of 2003 and the first quarter of 2004 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 2004, net cash used in investing activities was as a result of normal
additions to property, plant and equipment.
FINANCING ACTIVITIES
- ---------------------
In 2004, cash flows from financing activities primarily consisted of repayments
of long-term debt partially offset by proceeds from the issue of shares under
stock option plans.
17
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
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 October 2,
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. At April 3, 2004 the Company is in compliance with its
covenants pursuant to the Bank Agreement, as amended and expects to be in
compliance with such covenants for the next 12 months.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
No changes have been made in the Company's critical accounting policies during
the three months ended April 3, 2004.
RECENTLY ADOPTED 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 is 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 is being applied beginning on January 1, 2004. For
any VIEs 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 effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
18
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The adoption of FIN 46R had no effect on the Company's
consolidated results of operations, financial position or cash flows.
PROPOSED ACCOUNTING STANDARD
- ------------------------------
On April 22, 2003, the FASB determined that stock-based compensation should be
recognized as a cost in the financial statements and that such cost be measured
according to the fair value of stock options. On March 31, 2004, the FASB issued
an exposure draft on share-based payments, which is a proposed amendment to SFAS
No.123. The proposed statement is anticipated to be finalized in 2004 and
effective January 1, 2005. The Company will continue to monitor communications
on this subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
19
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ----------------------------
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 Asia. 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.
Item 2. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The information required by Item 2 has been disclosed in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2003. There has been
no material change in the disclosures regarding market risk.
Item 3. Controls and Procedures
- -----------------------------------
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 the end of the period covered by this Report. 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 April 3, 2004.
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
20
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
Item 4. Exhibits and Reports on Form 8-K
- ------------------------------------------------
The exhibits to this report are listed on the Exhibit Index included elsewhere
herein.
No reports on Form 8-K have been filed during the quarter ended April 3, 2004
with the exception of the report filed on March 9, 2004 referencing a press
release announcing the appointment of Joel Jaffe as a director of the Company.
21
------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW BRUNSWICK SCIENTIFIC CO INC.
------------------------------------
(Registrant)
Date: April 30, 2004 /s/ David Freedman
--------------------
David Freedman
Chairman and
Chief Executive Officer
Date: April 30, 2004 /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
22
EXHIBIT 31
CERTIFICATION
I, David Freedman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this 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: April 30, 2004 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
23
EXHIBIT 31
CERTIFICATION
I, Samuel Eichenbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this 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: April 30, 2004 /s/ Samuel Eichenbaum
-----------------------
Vice President, Finance,
Chief Financial Officer and Treasurer
24
EXHIBIT 32
CERTIFICATIONS
--------------
I, David Freedman, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
April 30, 2004 /s/ David Freedman
--------------------
Name: David Freedman
Chairman and
Chief Executive Officer
I, Samuel Eichenbaum, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
April 30, 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.
25
- ------
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Page No.
- ----------- -------------------------------------------------------
31. . . . . Section 302 Certification - David Freedman 21
31. . . . . Section 302 Certification - Samuel Eichenbaum 22
32. . . . . Section 906 Certifications 23
3b Restated By-Laws of the Company, as amended and restated
26