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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 2, 2005 Commission File No. 0-6994
------
NEW BRUNSWICK SCIENTIFIC CO., INC.
State of Incorporation - New Jersey E. I. #22-1630072
---------- -----------
44 Talmadge Road, Edison, N.J. 08818-4005
Registrant's Telephone Number: 732-287-1200
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No __
--
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes No X
-
There are 8,933,353 Common shares outstanding as of April 29, 2005.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - April 2, 2005 and December 31, 2004 . 3
Consolidated Statements of Operations - Three Months Ended
April 2, 2005 and April 3, 2004 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended April 2, 2005 and April 3, 2004. . . . . . . . 5
Consolidated Statements of Comprehensive (Loss) Income -
Three Months Ended April 2, 2005 and April 3, 2004 . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk. 19
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports and Form 8-K . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit 31(a) 23
Exhibit 31(b) 24
Exhibit 32 25
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "will" or words of similar meaning and
include, but are not limited to, statements about the expected future business
and financial performance of the Company. 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.
Forward-looking statements are based on management's current expectations and
assumptions, which are inherently subject to uncertainties, risks and changes in
circumstances that are difficult to predict. Actual outcomes and results may
differ materially from these expectations and assumptions due to changes in
global political, economic, business, competitive, market, regulatory and other
factors. The Company undertakes no obligation to publicly update or review any
forward-looking information, whether as a result of new information, future
developments or otherwise.
2
PART I - FINANCIAL INFORMATION
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS
------
April 2, December 31,
2005 2004
--------- -------------
Current Assets:
Cash and cash equivalents . . . . . . . . $ 9,672 $ 10,846
Accounts receivable, net. . . . . . . . . 12,434 11,332
Inventories:
Raw materials and sub-assemblies. . . . 7,248 6,914
Work-in-process . . . . . . . . . . . . 1,907 1,366
Finished goods. . . . . . . . . . . . . 3,818 3,859
--------- -------------
Total inventories . . . . . . . . . . 12,973 12,139
Deferred income taxes . . . . . . . . . . 1,084 1,089
Prepaid expenses and other current assets 1,714 1,143
--------- -------------
Total current assets. . . . . . . . . . 37,877 36,549
--------- -------------
Property, plant and equipment, net. . . . . 6,328 6,495
Goodwill. . . . . . . . . . . . . . . . . . 8,599 8,769
Other assets. . . . . . . . . . . . . . . . 1,966 1,982
--------- -------------
Total assets . . . . . . . . . . . $ 54,770 $ 53,795
========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current installments of long-term debt. . . . . . . . . $ 1,746 $ 1,759
Accounts payable and accrued expenses . . . . . . . . . 8,839 7,592
--------- ---------
Total current liabilities . . . . . . . . . . . . . . 10,585 9,351
--------- ---------
Long-term debt, net of current installments . . . . . . . 5,772 6,022
Other liabilities . . . . . . . . . . . . . . . . . . . . 2,289 2,467
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . 18,646 17,840
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par;
authorized 25,000,000 shares; issued and outstanding,
2005 - 8,933,353 and 2004 - 8,866,262. . . . . . . . . 558 554
Capital in excess of par. . . . . . . . . . . . . . . . 53,101 52,793
Accumulated deficit . . . . . . . . . . . . . . . . . . (16,856) (17,263)
Accumulated other comprehensive loss. . . . . . . . . . (667) (106)
Notes receivable from exercise of stock options . . . . (12) ( 23)
--------- ---------
Total shareholders' equity. . . . . . . . . . . . . . 36,124 35,955
--------- ---------
Total liabilities and shareholders' equity. . . . . . $ 54,770 $ 53,795
========= =========
See notes to unaudited 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 2, April 3,
2005 2004
-------------------- ----------
Restated(1)
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 16,108 $ 14,622
Operating costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . 9,806 8,691
Selling, general and administrative expenses . . . . 4,522 4,272
Research, development and engineering expenses . . . 1,137 903
-------------------- ----------
Total operating costs and expenses . . . . . . . . 15,465 13,866
-------------------- ----------
Income from operations . . . . . . . . . . . . . . . . 643 756
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 53 18
Interest expense . . . . . . . . . . . . . . . . . . (36) (211)
Other, net . . . . . . . . . . . . . . . . . . . . . 19 (64)
-------------------- ----------
36 (257)
-------------------- ----------
Income before income tax expense . . . . . . . . . . . 679 499
Income tax expense . . . . . . . . . . . . . . . . . . 272 219
-------------------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 407 $ 280
==================== ==========
Basic income per share . . . . . . . . . . . . . . . . $ 0.05 $ 0.03
==================== ==========
Diluted income per share . . . . . . . . . . . . . . . $ 0.05 $ 0.03
==================== ==========
Basic weighted average number of shares outstanding. . 8,896 8,650
==================== ==========
Diluted weighted average number of shares outstanding. 8,990 8,794
==================== ==========
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to
Unaudited
Consolidated Financial Statements.
See notes to unaudited consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 2, April 3,
2005 2004
-------------------- ----------
Cash flows from operating activities: . . . . . . . . . . . . . . . . Restated(1)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 407 $ 280
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 308 343
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 47 (18)
Change in fair value of interest rate swaps. . . . . . . . . . (117) 46
Change in related balance sheet accounts:
Accounts and notes receivable . . . . . . . . . . . . . . . . . (1,270) (526)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (950) (730)
Prepaid expenses and other current assets . . . . . . . . . . . (589) (446)
Other assets and goodwill . . . . . . . . . . . . . . . . . . . (154) (119)
Accounts payable and accrued expenses . . . . . . . . . . . . . 1,262 249
Advance payments from customers . . . . . . . . . . . . . . . . 150 282
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . (108) (101)
-------------------- ----------
Net cash used in operating activities . . . . . . . . . . . . . . . . (1,014) (740)
-------------------- ----------
Cash flows used in investing activities -
Additions to property, plant and equipment. . . . . . . . . . . (188) (261)
-------------------- ----------
Cash flows from financing activities:
Repayments of long-term debt. . . . . . . . . . . . . . . . . . (207) (222)
Proceeds from issue of shares under stock option plans. . . . . 240 161
Payments on notes receivable related to exercised stock options 11 11
-------------------- ----------
Net cash provided by (used in) financing activities . . . . . . . . . 44 (50)
-------------------- ----------
Net effect of exchange rate changes on cash . . . . . . . . . . . . . (16) (6)
-------------------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . (1,174) (1,057)
Cash and cash equivalents at beginning of period. . . . . . . . . . . 10,846 10,536
-------------------- ----------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 9,672 $ 9,479
==================== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157 $ 197
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . $ 218 $ 131
1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated
Financial Statements.
See notes to unaudited consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
Three Months Ended
April 2, April 3,
2005 2004
-------------------- ---------
Restated(1)
Net income . . . . . . . . . . . . . . . . $ 407 $ 280
Other comprehensive income:
Foreign currency translation adjustment. (561) 168
-------------------- ---------
Comprehensive (loss) income. . . . . . . . $ (154) $ 448
==================== =========
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes
to Unaudited
Consolidated Financial Statements.
See notes to unaudited consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 2, 2005 and the results of its operations for the three months ended
April 2, 2005 and April 3, 2004 and its cash flows for the three months ended
April 2, 2005 and April 3, 2004. Interim results may not be indicative of the
results that may be expected for the year.
The accompanying unaudited 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, 2004.
Note 2 - Restatement of consolidated financial statements:
On March 21, 2005, the Company announced that certain of its historical
financial statements required restatement. Specifically, the Company determined
that the restatement was required because of a misapplication of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" as it applies to
three interest rate swaps that were entered into in 1999 and 2004 to fix the
interest rates on variable rate debt incurred primarily for acquisitions in 1999
and 2003.
The interest rate swaps were not previously disclosed or accounted for and were
not properly designated as effective cash flow hedges, as defined by SFAS No.
133 which went into effect on January 1, 2001. The accounting rules require
that changes in the fair value of swaps not properly designated as effective
cash flow hedges be recorded as a part of interest expense in each period's
statement of operations.
The required changes affected the previously filed financial statements for the
years ended December 31, 2001, 2002 and 2003, as well as for the 2003 quarters
and the 2004 quarters through October 2, 2004. The foregoing restatement
adjustments did not affect the Company's reported cash and cash equivalents or
income (loss) from operations in any of the above periods.
7
The following table presents the impact of the financial statement adjustments
on the Company's previously reported consolidated statements of operations for
the three months ended April 3, 2004 (in thousands):
Three Months Ended April 3, 2004
Previously
Reported Adjustments(1) As Restated
---------------------------------- --------------- -------------
Income from operations . . . . . . . . . . . . . . . . $ 756 $ - $ 756
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 18 - 18
Interest expense . . . . . . . . . . . . . . . . . . (165) (46) (211)
Other expense, net . . . . . . . . . . . . . . . . . (64) - (64)
--------------- -------------
(211) (46) (257)
--------------- -------------
Income before income tax expense (benefit). . . . . . 545 (46) 499
Income tax expense (benefit) . . . . . . . . . . . . . 237 (18) 219
--------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 308 $ (28) $ 280
================================== =============== =============
Basic income per share . . . . . . . . . . . . . . . . $ 0.04 $ (0.01) $ 0.03
================================== =============== =============
Diluted income per share . . . . . . . . . . . . . . . $ 0.04 $ (0.01) $ 0.03
================================== =============== =============
Basic weighted average number of shares outstanding. . 8,650 8,650 8,650
================================== =============== =============
Diluted weighted average number of shares outstanding. 8,794 8,794 8,794
================================== =============== =============
(1) Reflects adjustments to interest expense and related deferred tax benefit to correct
for the misapplication of SFAS No. 133 as it applies to interest rate swaps entered into in
1999 and 2004 primarily to fix the interest rates on variable rate debt incurred for
acquisitions in 1999 and 2003.
Note 3 - Interest rate swaps:
On April 1, 2005 the Company designated its three interest rate swaps as
effective interest rate hedges and as such, the negative fair values of the
swaps as of the designation date, which aggregated $146,000, will be recognized
into income over the remaining lives of the interest rate swaps. Any future
changes in fair value will be shown as an increase or decrease in other
comprehensive income on the Company's balance sheet. During the first quarter
of 2005 and 2004 the change in the fair value of the swap agreements were
recorded as a decrease (increase) to interest expense and amounted to $117,000
and $(46,000), respectively.
Note 4 - Income per share:
Basic income per share is calculated by dividing net income by the weighted
average number of shares outstanding. Diluted income per share is calculated by
dividing net income by the sum of the weighted average number of shares
outstanding plus the dilutive effect of stock options which have been issued by
the Company using the treasury stock method. Antidilutive options are excluded
from the calculation of diluted income per share. The dilutive effect of stock
options for the three month periods ended April 2, 2005 and April 3, 2004 is
94,000 and 144,000 shares, respectively. Stock options to purchase zero and
8
2,000 shares of common stock are excluded from the income per share calculation
for the three month periods ended April 2, 2005 and April 3, 2004, respectively,
because their inclusion would be antidilutive.
Note 5 - Long-term debt and credit agreement:
The Company and Wachovia Bank, National Association (the "Bank") are parties to
an agreement, which has had a number of amendments (the "Bank Agreement"), which
expires on May 31, 2005, and which provides the Company with a credit facility
for acquisitions, equipment loans, working capital and letters of credit, and
foreign exchange transactions. The Company expects that the Bank Agreement will
be renewed prior to its expiration date. The maturity of the outstanding debt
incurred related to the acquisition portion of the credit facility with respect
to a 1999 acquisition is December 1, 2006, and with respect to a 2003
acquisition is November 2008. The maturity date of the outstanding debt
incurred related to the equipment loan portion of the credit facility is
November 2008. There are no compensating balance requirements and any
borrowings under the Bank Agreement bear interest at the Bank's prime rate less
125 basis points or Libor plus 125 basis points, at the discretion of the
Company. At April 2, 2005, the Bank's prime rate was 5.75% and LIBOR was 2.87%.
All of the Company's domestic assets, which are not otherwise subject to lien,
have been pledged as security for any borrowings under the Bank Agreement. The
Bank Agreement contains various business and financial covenants including among
other things, a debt service ratio, a net worth covenant and a ratio of total
liabilities to tangible net worth. The Company is in compliance with its
covenants pursuant to the Bank Agreement at April 2, 2005.
The following amounts were outstanding and available under the Bank Agreement
(in thousands):
April 2, 2005 December 31, 2004
-------------- ------------------
Total
Line Available Outstanding Outstanding
-------------- ------------------ ------------- -------------
Acquisitions. . . . . . $ 10,000 $ 4,532 $ 5,468(a) $ 5,634(a)
Equipment loans . . . . 2,000 1,409 591(b) 646(b)
Working capital and
letters of credit . . 5,000 5,000 - 9(c)
Foreign exchange
transactions. . . . . 10,000 10,000 - -
-------------- ------------------ ------------- -------------
$ 27,000 $ 20,941 $ 6,059 $ 6,289
============== ================== ============= =============
_____________________
(a) $4,272,000 in 2005 and $4,366,000 in 2004 at fixed interest of 8% per annum and
$1,196,000 in 2005 and $1,268,000 in 2004 at fixed interest of 4.46% per annum through
the use of interest rate swap agreements
(b) Interest fixed at 4.14% per annum through the use of an interest rate swap
agreement
(c) Letters of credit
9
At April 2, 2005 and December 31, 2004, the interest rate swaps referred to
above had aggregate negative fair values of $146,300 and $263,600,
respectively, and are included in Other Liabilities in the accompanying
consolidated balance sheets. The interest rate swaps have the same notional
values as the related debt and expire on the same dates as the related debt.
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%. Accrued interest is
payable annually and principal is payable in five equal annual installments
which commenced in November 2003. At April 2, 2005 and December 31, 2004, the
balance due on the notes was 150,000 ($282,000) and 150,000 ($288,000),
respectively.
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 acquisition of RS Biotech.
The notes bear interest, payable semi-annually at the lower of 6% or the base
rate of the Bank of Scotland. Principal is payable 487,500 on the first and
second anniversary, respectively, of the acquisition. At April 2, 2005 and
December 31, 2004, the balance due on the notes was 487,500 ($918,000) and
487,500 ($936,000), respectively.
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 2, 2005, $103,000 and $138,000 was outstanding under the
first and second mortgages, respectively, and at December 31, 2004, $124,000 and
$153,000 was outstanding under the first and second mortgages, respectively.
Each mortgage requires 80 equal quarterly payments of principal.
Note 6 - Shareholders' Equity:
At April 2, 2005, 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, 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.
10
The following table illustrates the effect on net income and per share amounts
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation (in thousands, except per share amounts):
Three Months Ended
April 2, April 3,
2005 2004
------------------- ---------
Restated(1)
Net income as reported. . . . . . . . . . . . . . $ 407 $ 280
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects. 78 71
------------------- ---------
Pro forma net income. . . . . . . . . . . . . . . $ 329 $ 209
=================== =========
Income per share:
Basic-as reported . . . . . . . . . . . . . . . $ 0.05 $ 0.03
=================== =========
Basic-pro forma . . . . . . . . . . . . . . . . $ 0.04 $ 0.02
=================== =========
Diluted-as reported . . . . . . . . . . . . . . $ 0.05 $ 0.03
=================== =========
Diluted-pro forma . . . . . . . . . . . . . . . $ 0.04 $ 0.02
=================== =========
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to
Unaudited Consolidated Financial Statements.
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 2, April 3,
2005 2004
-------------------- --------
Expected life (years). . . . . . . . . 6.0 NA
Expected volatility. . . . . . . . . . 40.35% NA
Expected dividend yield. . . . . . . . - NA
Risk-free interest rate. . . . . . . . 3.99% NA
Weighed average fair value of options
granted during the period. . . . . . $ 6.14 NA
11
Note 6 - Pension plan:
Components of net period benefit cost for the three months ended April 2, 2005
and
April 3, 2004 are as follows (in thousands):
Three Months Ended
April 2, April 3,
2005 2004
-------------------- ----------
Service cost. . . . . . . . . . . . $ 88 $ 95
Interest cost . . . . . . . . . . . 124 120
Expected return on plan assets. . . (132) (115)
Amortization of net obligation. . . 5 5
Amortization of prior service costs (1) (1)
Amortization of net loss. . . . . . 48 54
-------------------- ----------
Net periodic pension cost . . . . . $ 132 $ 158
==================== ==========
The Company previously disclosed in its financial statements for the year ended
December 31, 2004, that it expects to contribute $1,022,000 to its pension plan
in 2005. As of April 2, 2005, $256,000 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 2, 2005 and April 3, 2004 was $41,000 and $38,000,
respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 2, 2005 and April 3, 2004,
respectively, which should be read in conjunction with the Company's December
31, 2004 Form 10-K.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As further described in Note 2 of the Notes to Unaudited Consolidated
Financial Statements, on March 21, 2005, the Company announced that certain of
its historical 2004 and earlier financial statements required restatement.
Consequently, Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended April 3, 2004 is being
restated.
Specifically, the Company determined that the restatement was required
because of a misapplication of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as it applies to three interest rate swaps
that were entered into in 1999 and 2004 to fix the interest rates on variable
rate debt incurred primarily for acquisitions in 1999 and 2003.
The required changes affected the previously filed financial
statements for the years ended December 31, 2001, 2002 and 2003 as well as for
the 2003 quarters and the 2004 quarters through October 2, 2004.
The foregoing restatement adjustments did not affect the Company's
reported cash and cash equivalents, or related cash flows, or income (loss) from
operations in any of the above periods.
Results of Operations
---------------------
EXECUTIVE 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 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
13
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, the Company's largest customer, is the exclusive U.S.
distributor of the Company's C-Line and I-Series biological shakers and is the
exclusive dealer for the Company's CO2 incubators in the U.S. Fisher Scientific
is also the exclusive distributor of 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, net orders and net sales
for the three months ended April 2, 2005 and April 3, 2004 (in thousands of
dollars):
Three Months Ended
April 2, April 3, (Decrease) %
2005 2004 Increase Change
------------------- --------- ----------- -------
Backlog - beginning. . $ 8,376 $ 9,018 $ (642) (7.1)%
Add net orders received 15,719 15,488 231 1.5
Less net sales. . . . . 16,108 14,622 1,486 10.2
------------------- --------- ----------- -------
Backlog - ending. . . . $ 7,987 $ 9,884 $ (1,897) (19.2)%
=================== ========= ===========
Net sales increased $1,486,000 or 10.2% to $16,108,000 for the three months
ended April 2, 2005 from $14,622,000 in the prior year period. Net sales
decreased 3.7% in the U.S. and increased 21.7% internationally, primarily in
Europe. The overall increase in sales was due principally to higher shipments
of fermentation and cell culture equipment, ultra low temperature freezers and
CO2 incubators, although, $294,000 was due to the effect of foreign currency
translation. The decrease in U.S. sales was due to the continuing slowdown in
purchases of research equipment by industry and government funded enterprises.
Orders during the 2005 period increased 1.5% while backlog decreased 19.2%. The
decrease in backlog is attributable to the shortening of lead times required to
manufacture equipment as a result of the Company's continuing efforts to
implement lean manufacturing techniques to its operations.
14
GROSS MARGIN
- -------------
The following table shows gross profit and gross margin for the three months
ended April 2, 2005 and April 3, 2004 (in thousands of dollars):
Three Months Ended
April 2, April 3,
2005 2004
-------------------- ----------
Net sales . . $ 16,108 $ 14,622
Cost of sales 9,806 8,691
-------------------- ----------
Gross profit. $ 6,302 $ 5,931
==================== ==========
Gross margin. 39.1 % 40.6%
==================== ==========
The decrease in gross margin to 39.1% for the 2005 quarter from 40.6% in 2004
was due primarily to product mix and the Company's aggressive pricing strategy,
which is aimed at gaining market share for its products in certain markets,
partially offset by higher absorbtion of overhead as a result of the increased
volume.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------
Selling, general and administrative expenses increased $250,000 or 5.9% to
$4,522,000 during the 2005 quarter from $4,272,000 during the first quarter of
2004. Approximately half of the increase is due to the Company's use of a
consulting firm to assist it in complying with the requirements of Section 404
of the Sarbanes-Oxley Act and $111,000 is due to the effect of foreign currency
translation.
RESEARCH, DEVELOPMENT AND ENGINEERING
- ----------------------------------------
Research, development and engineering expenses increased $234,000 or 25.9% to
$1,137,000 during the 2005 quarter from $903,000 during the comparable 2004
quarter. The increase is due to the Company's new product development program,
primarily the cost of outsourcing of certain engineering efforts and the
addition of personnel, in order to meet an aggressive development schedule.
INTEREST INCOME
- ----------------
Interest income increased to $53,000 during the 2005 quarter from $18,000 during
the first quarter of 2004 due primarily to rising interest rates on invested
cash.
15
INTEREST EXPENSE
- -----------------
Interest expense decreased to $36,000 during the quarter ended April 2, 2005
from $211,000 for the first quarter of 2004 due to a lower level of average
outstanding debt during the 2005 quarter as well as the positive effect of the
change in the fair value of interest rate swaps of $117,000 in 2005 versus the
negative effect of the change in the fair value of interest rate swaps of
$46,000 in the comparable 2004 quarter.
OTHER INCOME (EXPENSE), NET
- ------------------------------
The following table details other income (expense), net for the three months
ended April 2, 2005 and April 3, 2004 (in thousands):
Three Months Ended
April 2, April 3,
2005 2004
-------------------- ----------
Gain (loss) on foreign currency transactions (a) $ 32,000 $ (49,000)
Bank fees. . . . . . . . . . . . . . . . . . . . (8,000) (10,000)
Other, net . . . . . . . . . . . . . . . . . . . (5,000) (5,000)
-------------------- ----------
Total other income (expense), net. . . . . . $ 19,000 $ (64,000)
==================== ==========
_______________________
(a) Realized foreign exchange gains and 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 decrease in the Company's effective income tax rate to 40.0% for the quarter
ended April 2, 2005 from 43.9% for the first quarter of 2004 is due to the
inability to carryback losses incurred by one of the Company's European
subsidiaries in 2004 resulting in no financial tax benefit for those losses in
last year's first quarter.
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:
16
Payments Due by Period
(In thousands)
-------------------------
Contractual obligations:
Less than 1-3 4-5 More than
Total. .1 Year Years Years 5 Years
- ------------------------------- ------- ------- ------ --------
Long-term debt,
obligations (a) . . . . . . . $ 7,518 $ 1,746 $5,698 $ 74 $ -
Operating lease obligations (b) 3,863 913 1,511 728 711
Purchase obligations(c) . . . . 7,558 7,437 121 - -
Other long-term liabilities (d) 600 36 564 - -
------- ------- ------ -------- ----
Total contractual cash
Obligations . . . . . . . . . $19,539 $10,132 $7,894 $ 802 $711
======= ======= ====== ======== ====
_____________________
(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. Both of the subleased premises have been sublet for the entire terms of
their leases. One has a lease expiration date of 2014 and an annual rental of
99,750 ($188,000 at April 2, 2005). The second sublet premises has a lease
expiration date of September 28, 2009 and an annual rental of 45,000 ($85,000
at April 2, 2005).
(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.
OPERATING ACTIVITIES
- ---------------------
Cash and cash equivalents decreased $1,174,000 to $9,672,000 at April 2, 2005
from $10,846,000 at December 31, 2004. Net cash used in operating activities
amounted to $1,014,000. The overall factors primarily affecting operating cash
flows during the quarter ended April 2, 2005 were (i) an increase in accounts
receivable, primarily in Europe where payments are slower than in the U.S., (ii)
an increase in inventories due primarily to a buildup in preparation for the
2-week summer production shutdown and the production of some large fermentation
equipment for delivery in the second quarter, (iii) an increase in prepaid
expenses and other current assets, primarily insurance and taxes and (iv) a
decrease in other liabilities, partially offset by (i) net income of $407,000 as
adjusted for non-cash items such as depreciation and amortization, deferred
income taxes and a gain from the change in fair value of interest rate swaps,
(ii) an increase in accounts payable and accrued expenses due primarily to an
increase in sales commissions and the increase in inventories and (iii) an
increase in advance payments from customers.
17
INVESTING ACTIVITIES
- ---------------------
In the 2005 period, net cash used in investing activities of $188,000 was as a
result of normal additions to property, plant and equipment.
FINANCING ACTIVITIES
- ---------------------
In the 2005 period, cash flows provided by financing activities totaled $44,000
and primarily consisted of proceeds from the issue of shares under stock option
plans that totaled $240,000 which was partially offset by repayments of
long-term debt of $207,000.
BANK AGREEMENT
- ---------------
The Company and Wachovia Bank, National Association (the "Bank") are parties to
an agreement, which has had a number of amendments (the "Bank Agreement"), which
expires on May 31, 2005, and which provides the Company with a credit facility
for acquisitions, equipment loans, working capital and letters of credit, and
foreign exchange transactions. The Company expects that the Bank Agreement will
be renewed prior to its expiration date. The maturity of the outstanding debt
incurred related to the acquisition portion of the credit facility with respect
to a 1999 acquisition is December 1, 2006, and with respect to a 2003
acquisition is November 2008. The maturity date of the outstanding debt
incurred related to the equipment loan portion of the credit facility is
November 2008. There are no compensating balance requirements and any
borrowings under the Bank Agreement bear interest at the Bank's prime rate less
125 basis points or Libor plus 125 basis points, at the discretion of the
Company. At April 2, 2005, the Bank's prime rate was 5.75% and LIBOR was 2.87%.
Since the Bank Agreement requires that all borrowings be at variable interest
rates, the Bank provides the Company with a mechanism to fix interest rates on
borrowings by use of interest rate swaps. At April 2, 2005 the Company had
three interest rate swaps in place to fix the interest rates, primarily for debt
incurred for acquisitions in 1999 and 2003.
All of the Company's domestic assets, which are not otherwise subject to lien,
have been pledged as security for any borrowings under the Bank Agreement. The
Bank Agreement contains various business and financial covenants including among
other things, a debt service ratio, a net worth covenant and a ratio of total
liabilities to tangible net worth. The Company is in compliance with its
covenants pursuant to the Bank Agreement at April 2, 2005 and currently
anticipates to be in compliance with such covenants during 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 2, 2005.
18
RECENTLY ISSUED ACCOUNTING STANDARD
- --------------------------------------
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R supersedes APB No. 25 and requires that such transactions be
accounted for using a fair-value based method. SFAS No. 123R requires companies
to recognize an expense for compensation cost related to share-based payment
arrangements including stock options and employee stock purchase plans. The
Company was required to implement the proposed standard no later than July 1,
2005. The cumulative effect of adoption, applied on a modified prospective
basis, would be measured and recognized on July 1, 2005. On April 14, 2005, the
Securities and Exchange Commission deferred the effective date of SFAS No. 123R
to annual periods beginning after June 15, 2005, which would require the Company
to adopt SFAS No. 123R effective January 1, 2006. The Company is currently
evaluating option valuation methodologies and assumptions related to its stock
compensation plans. Current estimates of option values using the Black Scholes
method may not be indicative of results from valuation methodologies ultimately
adopted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The information required by Item 3 has been disclosed in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2004. There has been
no material change in the disclosures regarding market risk.
Item 4. Controls and Procedures
- -----------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, 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 as of the evaluation date, the Company's Chief Executive Officer
and the Company's Chief Financial Officer concluded that the disclosure controls
and procedures were effective. As previously discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, there existed a
material weakness in the Company's disclosure controls and procedures in 2004
and prior years, as detailed below. In March 2005 the Company's Chief Executive
Officer and Chief Financial Officer concluded that changes to the Company's
internal control structure have been made which they believe remediate the
weakness.
As more fully described in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Restatement of Consolidated Financial
Statements and in Note 2 of the Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004,
19
the Company announced on March 21, 2005, that it was restating its previously
issued financial statements for the years ended December 31, 2001, 2002 and
2003, including the interim periods for 2003, and the first three interim
periods of 2004, as a result of the misapplication of SFAS No. 133 as it applies
to three interest rate swaps that were entered into in 1999 and 2004 to fix the
interest rates on variable rate debt incurred primarily for acquisitions in 1999
and 2003.
These interest rate swaps were inadvertently not previously disclosed or
accounted for nor were they properly designated as effective cash flow hedges.
Accordingly, the accounting rules required the changes in the fair value of the
swaps to be recorded as a component of interest expense in each period's
statement of operations.
The only change in internal control for the quarter ended April 2, 2005 was a
change in March 2005 to implement new internal controls that would highlight and
appropriately account for and disclose interest rate swaps in accordance with
the required accounting literature. Specifically, the Company's Controller,
under the supervision of the Company's Chief Financial Officer, will be required
to document the existence and purpose of each interest rate swap agreement that
the Company has entered into or enters into in the future. Such documentation
will be in accordance with SFAS No. 133 and will set forth the accounting and
the disclosure required for such interest rate swaps in the Company's
consolidated financial statements as required by SFAS No. 133. Such
documentation will be reviewed and updated quarterly or more frequently as
circumstances may warrant. Each quarter the Controller will provide a summary
of the required accounting entries to the Chief Financial Officer for inclusion
in the quarterly financial statement closing process. Furthermore, all new
interest rate swap agreements or other derivative instruments can be entered
into only by the Company's Chief Financial Officer with the approval of the
Company's Chief Executive Officer and President and Chief Operating Officer (or
the board of directors in certain circumstances) and may not be for speculative
purposes. Periodic reporting to the board of directors, summarizing the status
of all of the Company's derivative transactions will also be required. A formal
written policy with regard to the foregoing is in the process of being
developed.
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.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------------
a) Exhibits:
(3a) Restated Certificate of Incorporation, as amended is incorporated
herein by reference to 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 to Exhibit (3b) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2004.
(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.
31(a) Section 302 Certification - CEO
31(b) Section 302 Certification - CFO
32 Section 906 Certifications
b) Reports on Form 8-K during the quarter ended April 2, 2005:
i) Change in non employee director fees.
ii) Restatement of previously issued financial statements
iii) 2004 year end earnings press release and executive bonuses granted for
2004.
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: May 4, 2005 /s/ David Freedman
--------------------
David Freedman
Chairman and
Chief Executive Officer
Date: May 4, 2005 /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer and
Treasurer
(Principal Accounting Officer)
22
EXHIBIT 31(A)
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: May 4, 2005 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
23
EXHIBIT 31(B)
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: May 4, 2005 /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.
May 4, 2005 /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.
May 4, 2005 /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