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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 0-14617
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RHEOMETRIC SCIENTIFIC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-0708419
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
One Possumtown Road, Piscataway, NJ 08854-2103
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(Address of principal executive offices) (Zip Code)
(732) 560-8550
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 2002
-------------------------------------- -----------------------------
Common Stock, $.01 par value per share 24,926,411
Rheometric Scientific, Inc.
Index to Form 10-Q
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Comprehensive Loss
for the three and six months ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
(a) Exhibits
(b) Reports on Form 8-K
2
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June December
30, 2002 31, 2001
---------- --------
ASSETS (unaudited)
Current Assets
Cash $ 926 $ 696
Accounts receivable, net 8,710 8,668
Inventories, net
Finished goods 2,544 2,558
Work in process 1,205 1,154
Assembled components, materials, and parts 3,808 4,455
------------- -------------
7,557 8,167
Prepaid expenses and other current assets 903 558
------------- -------------
Total current assets 18,096 18,089
------------- -------------
Property, plant, and equipment 17,193 16,843
Less accumulated depreciation and amortization 11,849 11,319
------------- -------------
Property, plant, and equipment, net 5,344 5,524
Goodwill 5,492 5,358
Other assets and deferred financing costs 612 658
------------- -------------
Total Assets $ 29,544 $ 29,629
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank borrowings $ 9,624 $ 8,919
Current maturity of long-term debt 1,473 901
Accounts payable 5,232 4,229
Borrowings against accounts receivable 610 923
Accrued liabilities 4,172 4,820
------------- -------------
Total current liabilities 21,111 19,792
------------- -------------
Long-term debt 4,534 5,319
Long-term debt - affiliate 500 600
Other long-term liabilities 122 122
------------- -------------
Total liabilities 26,267 25,833
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Commitments and Contingencies
Shareholders' Equity
Preferred Stock, par value of $.01, authorized one million
shares, No shares issued and outstanding at June 30, 2002 and
December 31, 2001. -- --
Common stock, par value of $.01, Authorized 49,000
shares; issued 27,726 shares at June 30, 2002 and
27,715 shares at December 31, 2001 277 277
Additional paid-in capital 37,356 37,337
Accumulated deficit (34,506) (33,731)
Treasury stock, at cost, 2,800 shares at June 30, 2002 and
December 31, 2001 -- --
Accumulated other comprehensive income/(loss) 150 (87)
------------- --------------
Total shareholders' equity 3,277 3,796
------------- --------------
Total Liabilities & Shareholders' Equity $ 29,544 $ 29,629
============= ==============
See Notes to Condensed Consolidated Financial Statements.
3
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 7,935 $ 7,396 $15,756 $15,041
Cost of sales 4,491 4,157 8,945 8,272
------- ------- ------- -------
Gross profit 3,444 3,239 6,811 6,769
------- ------- ------- -------
General and administrative expenses 1,125 764 2,189 1,469
Marketing and selling expenses 2,048 1,997 3,895 4,130
Engineering expenses 467 496 1,031 987
------- ------- ------- -------
Total operating expenses 3,640 3,257 7,115 6,586
------- ------- ------- -------
Operating income/(loss) (196) (18) (304) 183
Interest expense (313) (350) (619) (688)
Foreign currency gain/(loss) 41 (155) 98 (382)
-------- -------- -------- --------
Loss before income taxes (468) (523) (825) (887)
Income tax benefit 50 - 50 -
-------- -------- -------- --------
Net loss $ (418) $ (523) $ (775) $ (887)
======== ======== ======== ========
Net loss per share
Basic and diluted $(0.02) $ (0.02) $ (0.03) $ (0.04)
======== ======== ======== ========
Average number of shares outstanding
Basic and diluted 24,926 23,347 24,921 23,139
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
4
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net loss $ (775) $ (887)
Adjustments to reconcile net loss to net cash provided by/
(used in) operating activities:
Depreciation and amortization of plant and equipment 415 429
Amortization of intangibles 17 68
Provision for inventory reserves 51 89
Unrealized currency (gain)/loss (322) 348
Changes in assets and liabilities:
Accounts receivable 416 518
Inventories 713 (1,573)
Prepaid expenses and other current assets (300) 137
Accounts payable and accrued liabilities 98 (683)
Other assets 49 (21)
------------ ----------
Net cash provided by/( used in) operating activities 362 (1,575)
------------ ----------
Cash Flows from Investing Activities:
Cash acquired ($327) in excess of Aviv acquisition
cost - 40
PSI acquisition costs - (31)
Purchases of property, plant, and equipment (107) (169)
------------ ----------
Net cash used in investing activities (107) (160)
------------ ----------
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements 706 1,899
Net (repayment)/ borrowing against accounts receivables (373) 179
Proceeds from issuance of common stock net of issuance
costs 4 37
Repayment long-term debt affiliate - (50)
Net Borrowings long-term debt - 150
Repayment of long-term debt/lease obligation (397) (118)
------------ ----------
Net cash (used in)/ provided by financing activities (60) 2,097
------------ ----------
Effect of exchange rate changes on cash 35 (90)
------------ ----------
Net increase in cash 230 272
Cash at beginning of period 696 786
------------ ----------
Cash at end of period $ 926 $ 1,058
============ ==========
Cash payments for interest $ 593 $ 682
============ ==========
Cash payments for income taxes $ 1 $ -
============ ==========
See Notes to Condensed Consolidated Financial Statements.
5
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss $ (418) $ (523) $ (775) $ (887)
Other comprehensive (loss)/income
Foreign currency translation
Adjustments 309 (18) 237 (350)
------- ------- ------- --------
Comprehensive (loss) $ (109) $ (541) $ (538) $(1,237)
======= ======= ======= ========
See Notes to Condensed Consolidated Financial Statements.
RHEOMETRIC SCIENTIFIC, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of financial position and
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the entire year. This quarterly
report on Form 10-Q should be read in conjunction with the latest annual report
on Form 10-K for Rheometric Scientific, Inc. (referred to as "Rheometric" or the
"Company").
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), for fiscal years beginning
after June 15, 2000. Effective January 1, 2001, the Company adopted the
provisions of SFAS 133 as amended by SFAS 137 and SFAS 138. Under SFAS 133,
companies must recognize all derivative instruments on its balance sheet at fair
value. Changes in the value of derivative instruments, which are considered
hedges, are offset against the change in fair value of the hedged item through
operations, or recognized in other comprehensive income until the hedged item is
recognized in operations, depending on the nature of the hedge. SFAS 133
requires that unrealized gains and losses on derivatives not qualifying for
hedge accounting be recognized currently in operations. The Company recorded in
operations an unrealized loss of $72,000 and $0 for the six months ended June
30, 2002 and 2001, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets"("SFAS 142"). SFAS 141
requires that the purchase
6
method of accounting be used for all business combinations completed after June
30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual value, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 144"). Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 were
amortized through the end of 2001. Beginning January 1, 2002, in accordance with
SFAS 142, the Company is no longer recording amortization expense related to
goodwill.
The Company adopted the provisions of SFAS 141 immediately and adopted SFAS 142
effective January 1, 2002. In connection with the adoption of SFAS 142, the
Company performed a transitional goodwill impairment test as required to
determine that no goodwill impairment existed at January 1, 2002. The Company
completed its review and did not have to record a charge to operations as a
result of adopting these new standards. Additionally, management has evaluated
the Company's intangible assets and determined that the Company has no
indefinite useful life intangibles. Management has also evaluated the remaining
useful lives of the Company's intangible assets that will continue to be
amortized and have determined that no revision to the useful lives will be
required.
As of June 30, 2002, the Company has unamortized goodwill in the amount of
$5,492,000 and unamortized identifiable intangible assets consisting of patents
in the amount of $45,000. The goodwill is included in the assets of the Protein
Solutions group segment while the patents are included in the assets of the
Rheometric USA segment. Amortization expenses related to goodwill was zero in
2002 and $20,000 and $36,000 for the three and six months ended June 30, 2001.
Patent amortization was $8,000 and $17,000 for the three and six months ended
June 30, 2002 compared to $16,000 and $32,000 in the same period last year.
Although goodwill will no longer be systematically amortized, periodic reviews
will need to be conducted to assess whether or not the carrying amount of
goodwill may be impaired. Such reviews could result in future write-downs of
goodwill which would be reflected as a charge against operating income.
Excluding amortization expense related to goodwill of $20,000 and $36,000 for
the three and six months ended June 30, 2001, net loss for those periods would
have been $503,000 and $851,000 respectively. Basic and diluted loss per share
would have remained unchanged at $0.02 and $0.04 for the three and six months
ended June 30, 2001.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances occur measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment, or in a distribution to
owners) or is classified as held for sale. Assets to be disclosed are reported
at the
7
lower of the carrying amount or fair value less costs to sell. The Company has
adopted SFAS 144 on January 1, 2002. The provisions of this statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities,
and, therefore, will depend on future actions initiated by management. As a
result, we cannot determine the potential effects that adoption of SFAS 144 will
have on our consolidated financial statements with respect to future disposal
decisions, if any.
2. Loss Per Share
The Company calculates net income/(loss) per share as required by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effect of stock options,
warrants, and convertible securities. For the three and six months ended June
30, 2002 and 2001 common stock equivalents were anti-dilutive.
3. Long-Term Debt and Short-Term Borrowings
Long-term debt consisted of the following:
June 30, December 31,
2002 2001
-------- ------------
Obligation under sale/leaseback payable through
February 2011, with interest imputed at a rate
of 13.9% for 2002 and 2001 $ 4,526,000 $ 4,571,000
Term loan payable through March 2003. Loan
bears interest at prime plus 1.5% (6.25% at
June 30, 2002 and December 31, 2001) 825,000 975,000
Obligations under capital leases payable
2002 through 2006 with interest imputed
at rates from 8.5% to 13.3% 175,000 255,000
Term loan payable through June 2005.
Loan bears interest at prime plus 1.5%
(6.25% at June 30, 2002 and
December 31, 2001) 231,000 269,000
5,757,000 6,070,000
Less Current Maturities 1,223,000 751,000
------------ -----------
$ 4,534,000 $ 5,319,000
============ ===========
8
The Revolving Credit, Term Loan and Security Agreement (the "Loan Agreement"),
dated as of March 6, 2000, as amended, between the Company and PNC Bank,
National Association ("PNC Bank") provides for a total credit facility of
$14,500,000, of which $13,000,000 is a working capital revolving credit facility
with an initial three-year term expiring on March 6, 2003. The amount of
available credit is determined by the level of certain eligible receivables and
inventories. The line of credit bears interest at the prime rate, 4.75% at June
30, 2002 and December 31, 2001. Additionally, the Loan Agreement contains a net
worth covenant and a fixed charge coverage ratio covenant. On March 29, 2002 PNC
Bank amended the financial covenants for 2002 including a condition requiring a
cash infusion of at least $1,000,000 in the form of equity by July 31, 2002. As
of June 30, 2002 the Company was in violation of the fixed charge coverage ratio
covenant and as of July 31, 2002 the Company had not received the additional
equity financing.
On August 8, 2002 the Company entered into an agreement with Andlinger Capital
XXVI LLC ("Andlinger Capital"), the Company's principal stockholder, pursuant to
which Andlinger Capital would make an immediate preferred stock investment of
$1,500,000, with the right, subject to future Board determination of the need
for such capital, to invest up to an additional $500,000. Andlinger Capital
purchased 1,500 of the 2,000 authorized shares of the Company's newly created
Series B Preferred Stock. The Series B Preferred Stock does not carry a current
dividend, but is subject to redemption at the option of the Company, or upon the
sale of all or substantially all of the assets of the Company, upon the sale of
any major portion of the assets of the Company, upon the sale of a significant
subsidiary or division of the Company, upon a change in control of the Company,
upon the sale of common or preferred stock by the Company to the public, or upon
the acceleration of indebtedness for borrowed money in excess of $1,000,000. The
redemption price of the Series B Preferred Stock is the original Series B
Preferred Stock issue price plus a rate of 12% per annum.
On August 12, 2002, the sale of the shares of Series B Preferred Stock to
Andlinger Capital was consummated, which satisfied the cash infusion requirement
under the Loan Agreement. Effective as of August 13, 2002, subject to formal
delivery of Board resolutions, PNC Bank waived the fixed charge coverage ratio
covenant for June 30, 2002. There can be no assurance that the Company will be
able to meet the covenant in future periods.
The Loan Agreement also includes a term loan in the amount of $1,500,000 to be
repaid in 4 equal quarterly installments of $75,000, 23 monthly installments of
$25,000 and a final payment of $625,000 due at maturity on March 6, 2003. The
term loan bears interest at the prime rate plus 1.5 percent (6.25% at June 30,
2002 and December 31, 2001) which is due monthly. The outstanding balance of the
term loan obligation was $825,000 at June 30, 2002. On May 31, 2001, in
connection with the Aviv acquisition (see Note 6), the Company and PNC Bank
amended the Loan Agreement to provide for a second term loan in the amount of
$300,000. This second term loan is repayable in 48 monthly installments of
$6,250 and bears interest at the prime rate plus 1.5% (6.25% at June 30, 2002
and December 31, 2001). The outstanding balance of the second term loan was
$231,000 at June 30, 2002. The Loan Agreement is subject to customary event of
default and acceleration provisions and is collateralized by substantially all
of the Company's assets.
The Company at June 30, 2002, had total borrowings under its working capital
credit facility of $9,624,000 with remaining availability of approximately
$1,303,000.
9
4. Long-Term Debt - Affiliate
Long-term debt - affiliate consisted of the following:
June 30, December 31,
2002 2001
-------- ------------
Subordinated promissory note due
February 28, 2006 with interest at 6% $750,000 $750,000
Less Current Maturities 250,000 150,000
-------- --------
$500,000 $600,000
On March 6, 2000, in conjunction with the transaction pursuant to which
Andlinger Capital acquired a majority equity interest in the Company, Axess
Corporation ("Axess"), the majority shareholder of the Company prior to the
Andlinger transaction, cancelled its existing debt of $8,206,000 and the accrued
interest thereon in exchange for (x) the payment by the Company to Axess of
$3,500,000 in cash; (y) the issuance to Axess of a subordinated promissory note
in the principal amount of $1,000,000 and (z) the issuance to Axess, of a
warrant to purchase 1,000 shares of the Company's non-voting convertible
redeemable preferred stock (convertible into 1,000,000 shares of common stock)
to be issued, subject to stockholder approval, pursuant to an amendment to the
certificate of incorporation of the Company.
On September 28, 2001, Axess converted $200,000 of the principal balance of the
subordinated promissory note along with $63,000 of interest relating to the
period March 1, 2001 to March 1, 2002 into 65,762 shares of the Company's common
stock. As a result, the Company and Axess executed an amended and restated
subordinated promissory note for the remaining amount of $750,000 payable upon
the sale of one of the Company's product lines. In the absence of this sale,
payments of $50,000 per quarter plus accrued interest on the unpaid balance is
due beginning June 30, 2002. Interest at 6% per annum begins to accrue as of
April 1, 2002 and the entire unpaid principal and interest balance is due and
payable on February 28, 2006. On August 12, 2002, Axess extended the payment due
date for the June 30, 2002 payment. The principal payment of $50,000 plus
accrued interest from April 1, 2002 to August 31, 2002 is due and payable on
August 31, 2002.
On July 2, 2001, State Farm acquired from Axess 6,422,933 shares of the
Company's common stock along with 800 shares of the Company's convertible
redeemable preferred stock. The total shares acquired by State Farm (including
as outstanding the 800,000 shares issuable upon conversion of the 800 shares of
convertible redeemable preferred stock, which have subsequently been converted)
represents approximately 29% of the outstanding common stock of the Company at
June 30, 2002.
5. Operating Segments/Foreign Operations and Geographic Information
The Company's three reportable segments had been Domestic, Europe, and Japan.
Beginning June 30, 2002 the Domestic segment will be split between Rheometric
USA (RHEO US) and the Protein Solutions group (PSG) which is composed of Aviv
and Protein Solutions. Summarized financial information concerning the Company's
reportable segments is shown below:
10
(In thousands) RHEO US PSG Europe Japan Total
- --------------------------------------------------------------------------------
Trade Revenues:
6/30/02 7,967 2,904 2,347 2,538 15,756
6/30/01 6,685 2,137 3,174 3,045 15,041
Intercompany Revenues:
6/30/02 2,097 - 163 0 -
6/30/01 3,036 98 442 0 -
Operating Income/(Loss):
6/30/02 310 (264) (471) 121 (304)
6/30/01 21 128 (236) 270 183
Total Assets:
6/30/02 13,768 8,101 4,228 3,447 29,544
12/31/01 13,876 8,318 3,455 3,980 29,629
Depreciation and
Amortization
(including Intangibles):
6/30/02 312 71 38 11 432
6/30/01 365 71 43 18 497
Aviv was acquired effective May 31, 2001, and is included in the Protein
Solutions Group (PSG) segment. The 2001 figures include the following numbers
related to Aviv for the short period (in thousands): Sales of $250; Operating
Income $1; Total Assets of $4,629; and Depreciation and Amortization of $14. The
2002 amounts above include the following Aviv numbers: Sales of $1,405;
Operating loss of $144; Total Assets of $4,794; and Depreciation of $35.
Sales between geographic areas are priced on a basis that yields an appropriate
rate of return based on assets employed, risk and other factors.
6. Aviv Acquisition
Effective May 31, 2001, through the Company's wholly-owned subsidiary, Tel
Acquisition Corp., a Delaware corporation, the Company acquired all of the
issued and outstanding capital stock of Aviv Instruments, Inc., a New Jersey
corporation and Aviv Associates, Inc., a New Jersey corporation, pursuant to a
Merger Agreement, dated as of May 31, 2001, pursuant to which the Aviv companies
merged with and into Tel Acquisition Corp. In exchange for all of the issued and
outstanding capital stock of the Aviv companies, the Company issued to the
stockholders of the Aviv companies 805,882 shares of our common stock. Upon
consummation of the merger, Tel Acquisition Corp. changed its name to Aviv
Instruments, Inc. In addition, the Company and Aviv Instruments made cash
payments aggregating approximately $1,221,000 to pay off existing indebtedness
of the Aviv companies, approximately $1,145,000 of which was owed to the
stockholders of the Aviv companies and their affiliates. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the net
assets were allocated based upon their fair values at the acquisition's
effective date of May 31, 2001. The Company's consolidated statements of
operations do not include the revenues and expenses of Aviv prior to the
acquisition date. The excess of the purchase price over the fair value of the
net assets acquired (goodwill) was approximately $3,020,000 and was amortized on
a 40-year
11
straight-line basis through December 31, 2001. Commencing January 1, 2002,
goodwill is no longer amortized, but is reviewed for impairment.
7. Restructuring
In the fourth quarter of 2001, a restructuring provision totaling $1,496,000 was
recorded for the restructuring of certain Domestic and European operations and
the write down on inventories related to specific products the Company will no
longer sell. Key initiatives of the restructuring program include: a)
outsourcing the European service function, b) centralizing the European sales
function at European headquarters, c) centralizing shared services including
order processing, cash collections, and cash application at European
headquarters, and d) streamlining certain domestic functions. The charges
consist of approximately $702,000 relating to the inventory write down, and
approximately $566,000 for the termination of 28 U.S. and European employees.
The $566,000 includes severance pay as per company policy, payroll taxes,
accrued vacation for those employees under contract and for the U.S. employees
the cost of medical benefits for the severance period. A provision of $228,000
was made for the closing and consolidation of certain European offices. This
includes $96,000 related to lease termination costs and any impairment on fixed
assets in those locations, $67,000 for the elimination of certain European legal
entities, and $65,000 for the cost of lease terminations on automobiles for the
European service people. All charges for inventory and fixed assets have been
recorded net of any expected salvage value. The restructuring program is
expected to yield annualized savings of approximately $1,200,000 related to
reduced wages, facility related costs, and depreciation and will be reflected in
cost of sales, general and administrative expenses, marketing and selling
expenses and engineering expenses. Approximately $535,000 was charged to the
restructuring reserve in the first half of 2002. At June 30, 2002, $302,000 is
classified as accrued liabilities in the Consolidated Balance Sheet while
$725,000 is included as a reduction in inventory. These balance sheet amounts
reflect changes in the exchange rates since December 31, 2001 because certain
amounts are recorded in Euros and British pounds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements. This quarterly report on Form 10-Q should
be read in conjunction with the latest annual report on Form 10-K filed by the
Company.
Revenues
Revenues for the three- and six-month periods ended June 30, 2002 increased
$539,000 and $715,000 (or 7.3% and 4.8%), respectively, as compared to the
corresponding periods in 2001. These figures include an increase of $46,000 and
a decrease of $168,000 in sales for the three and six months ended June 30,
2002, respectively, due to the currency rates in effect compared to the same
periods last year. The increase in revenue for the six-month period ended June
30,
12
2002 resulted from an increase in Rheometric USA (RHEO US) and the Protein
Solutions Group (PSG) of $1,282,000 and $767,000, respectively, offset by
decreases in Europe and Japan of $827,000 and $507,000, respectively. Included
in PSG are revenues for Aviv for the six month period ended June 30, 2002 of
$1,405,000 compared to prior year revenues of $250,000 which consisted of sales
only for the month of June 2001. The increase in revenue for the three-month
period ended June 30, 2002 represents an increase in RHEO US and PSG of
$1,087,000 and $61,000, respectively, offset by decreases in Europe and Japan of
$450,000 and $159,000, respectively. Included in the second quarter 2002 PSG
revenues are $580,000 of sales for Aviv compared to $250,000 which was reflected
in the prior period. Foreign revenues decreased to 31.0% of consolidated revenue
compared to 41.3% in 2001.
Gross Profit
The gross profit percentages for the three and six months ended June 30, 2002
were 43.4% and 43.2%, respectively, compared to 43.8% and 45.0% over the same
periods in the prior year. The gross profit percentage decrease was the result
of unfavorable product mix and intensive pricing pressures in our Rheology and
Thermal Business. In addition, our gross profit percentage was negatively
affected by lower margins relating to Aviv which were included in the prior
period for only one month.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2002 increased by
$383,000 and $529,000, respectively, compared to the corresponding periods in
the prior year. This increase includes an increase in expenses for Aviv of
$123,000 and $414,000 for the three and six month periods, respectively, over
prior year expenses that consisted of only one month of expense activity. For
the three month period operating expenses have been unfavorably affected by
foreign currency translation of $2,000 while for the six month period operating
expenses have been favorably affected by foreign currency translation by
$47,000. Excluding the currency effect and the expenses related to the Aviv
acquisition, operating expenses for the six months ended June 30, 2002 have
increased by $162,000.
General and Administrative. General and Administrative expenses for the three
and six months ended June 30, 2002 increased by $361,000 and $720,000,
respectively, compared to the corresponding periods in the prior year. This
increase includes an increase in expenses for Aviv for the three and six month
periods ended June 30, 2002 of $174,000 and $351,000, respectively, over prior
period amounts that included only one month of expenses. The remaining increase
for the six months ended June 30, 2002 is primarily due to increases in bank
fees of $43,000, salaries of $134,000, consulting of $29,000, unallocated space
of $23,000, escrow refund of $53,000 and travel costs of $50,000.
Marketing and Selling. Marketing and selling expenses for the three and six
months ended June 30, 2002 increased by $51,000 and decreased by $235,000,
respectively, compared to the corresponding periods in the prior year. The
decrease for the six months ended June 30, 2002 of approximately $235,000 is due
to a decrease in marketing and selling expenses for Japan and Protein Solutions
of $222,000 and $121,000, respectively. These decreases are composed primarily
of decreases in salaries of $167,000 and advertising of $26,000. These decreases
on
13
Japan and Protein Solutions were offset by increases for RHEO US and Europe of
$74,000 and $34,000 respectively.
Engineering. Engineering expenses for the three and six months ended June 30,
2002 decreased by $29,000 and increased $44,000, respectively, compared to the
corresponding periods in the prior year. The increase in the six month period of
$44,000 is the result of the inclusion of the increase in Aviv expenses of
$63,000 offset by a decrease in RHEO US expenses of $19,000. The decrease in
RHEO US expenses is primarily the result of lower prototype development expense
of $15,000.
Interest Expense
Net interest expense for the three and six months ended June 30, 2002 decreased
$37,000 and $69,000, respectively, compared to the same periods in 2001. This
decrease is due to lower interest rates in effect for the period and is
partially offset by carrying larger loan balances.
Foreign Currency
The foreign currency adjustment for the three and six months ended June 30, 2002
was a gain of $41,000 and $98,000, respectively, compared to a loss of $155,000
and $382,000 for the same periods last year. The year to date adjustment was
primarily due to transaction gains of $270,000 resulting from the Euro and the
Japanese yen against the U.S. Dollar. These were offset by transaction losses of
$172,000 resulting from the British Pound against the U.S. Dollar.
Net Loss
Net loss for the three months ended June 30, 2002 was $418,000, compared to a
net loss of $523,000 for the same period in 2001. While sales increased $539,000
in 2002, cost of sales increased by $334,000. Additionally operating expenses
increased $383,000 offset by a decrease in interest expense, tax expense and
favorable currency transactions of $37,000, $50,000 and $196,000, respectively,
compared to the same period last year.
Net loss for the first half of 2002 was $775,000, compared to a net loss of
$887,000 for the same period in 2001. While sales increased $715,000 in 2002,
cost of sales increased by $673,000. Additionally operating expenses increased
$529,000 offset by a decrease in interest expense, tax expense and favorable
currency transactions of $69,000, $50,000 and $480,000, respectively, compared
to the same period last year.
Inherent in our business is the potential for inventory obsolescence for older
products as we develop new products. Our development efforts generally enhance
existing products or relate to new markets for existing technology. We do
however continuously monitor our exposure relating to excess and obsolete
inventory and establish reserves for any exposure.
Financing, Liquidity, and Capital Resources
The Company's Loan Agreement provides for a total credit facility of
$14,500,000, of which $13,000,000 is a working capital revolving credit facility
with an initial three-year term expiring on March 6, 2003. The amount of
available credit is determined by the level of certain eligible
14
receivables and inventories. The line of credit bears interest at the prime
rate, 4.75% at June 30, 2002. Additionally, the Loan Agreement contains a net
worth covenant and a fixed charge coverage ratio covenant. On March 29, 2002 PNC
Bank amended the financial covenants for 2002 including a condition requiring a
cash infusion of at least $1,000,000 in the form of equity by July 31, 2002. As
of June 30, 2002 the Company was in violation of the fixed charge coverage ratio
covenant and as of July 31, 2002 the Company had not received the additional
equity financing.
On August 8, 2002, the Company entered into an agreement with Andlinger Capital,
the Company's principal stockholder, pursuant to which Andlinger Capital would
make an immediate preferred stock investment of $1,500,000, with the right,
subject to future Board determination of the need for such capital, to invest up
to an additional $500,000. Andlinger Capital purchased 1,500 of the 2,000
authorized shares of the Company's newly created Series B Preferred Stock. The
Series B Preferred Stock does not carry a current dividend, but is subject to
redemption at the option of the Company, or upon the sale of all or
substantially all of the assets of the Company, upon the sale of any major
portion of the assets of the Company, upon the sale of a significant subsidiary
or division of the Company, upon a change in control of the Company, upon the
sale of common or preferred stock by the Company to the public, or upon the
acceleration of indebtedness for borrowed money in excess of $1,000,000. The
redemption price for the Series B Preferred Stock is the original Series B
Preferred Stock issue price plus a rate of 12% per annum.
On August 12, 2002, the sale of the shares of Series B Preferred Stock to
Andlinger Capital was consummated, which satisfied the cash infusion requirement
under the Loan Agreement. Effective as of August 13, 2002, subject to formal
delivery of Board resolutions, PNC Bank waived the fixed charge coverage ratio
covenant for June 30, 2002. There can be no assurance that the Company will be
able to meet the covenant in future periods.
The Loan Agreement also includes a term loan in the amount of $1,500,000 to be
repaid in 4 equal quarterly installments of $75,000, 23 monthly installments of
$25,000 and a final payment of $625,000 due at maturity on March 6, 2003. The
term loan bears interest at the prime rate plus 1.5 percent which is due monthly
(6.25% at June 30, 2002 and December 31, 2001). The outstanding balance of the
term loan obligation was $825,000 at June 30, 2002. On June 1, 2001, in
connection with the Aviv acquisition, we amended the Revolving Credit, Term Loan
and Security Agreement with PNC Bank to provide for a second term loan in the
amount of $300,000. This second term loan is repayable in 48 monthly
installments of $6,250 and bears interest at the prime rate plus 1.5% (6.25% at
June 30, 2002). The Revolving Credit, Term Loan and Security Agreement is
subject to customary events of default and acceleration provisions and is
collateralized by substantially all of our assets.
At June 30, 2001, total borrowings under our working capital credit facility was
$9,624,000, with remaining availability of approximately $1,303,000.
The current negative economic environment in our markets has adversely impacted
our liquidity. We have revised our sales forecast and business plan in light of
our view of current economic conditions, the additional $1,500,000 equity
financing obtained on August 12, 2002, and the anticipated results of our
restructuring plan, and believe that cash generated from operations and
15
funds available under our Loan Agreement should be sufficient to meet our
working capital needs through March 6, 2003, the current expiration date of our
Loan Agreement. There can be no assurance, however, that a continued slowdown in
the economy or other factors will not result in our company's failure to meet
our revised forecast, or otherwise result in liquidity concerns. Additionally,
our Loan Agreement expires March 6, 2003. In the event that the Loan Agreement
is not extended, there is no assurance that we will be able to secure a new
credit facility on comparable terms, or at all. An inability to extend or
replace our Loan Agreement on favorable terms would have a material adverse
effect on our financial condition and operations.
Cash Flows from Operations
Net cash provided by operating activities in the six months ended June 30, 2002
was $362,000. This compares to net cash used in operating activities of
$1,575,000 in the same period in 2001. The positive cash flow in 2002 was
comprised primarily of a decrease in accounts receivable, inventories and other
assets of $416,000, $713,000 and $49,000 respectively and an increase in
accounts payable and accrued liabilities of $98,000. These inflows were offset
by an increase in prepaid expenses and other current assets of $300,000. The
loss for the six months ended June 30, 2002 was $775,000. This was accompanied
by non-cash depreciation and amortization charges of $432,000, a provision for
inventory reserves of $51,000, and an unrealized currency gain of $322,000.
Cash Flows from Investing
We made capital expenditures of $107,000 during the six months ended June 30,
2002 as compared to $169,000 in the same period in 2001.
Cash Flows from Financing
Net cash used in financing activities for the six months ended June 30, 2002 was
$60,000. This compares to net cash provided by financing activities of
$2,097,000 in the same period in 2001. During the period, our borrowings under
line of credit agreements increased $706,000 and there were proceeds from
issuance of common stock of $4,000. Offsetting these inflows was the repayments
of long term debt and lease obligations totaling $397,000 and a decrease in our
borrowings against accounts receivables of $373,000.
Critical Accounting Policies and Estimates
Principles of Consolidation and Operations. Our consolidated financial
statements include the accounts of Rheometric Scientific, Inc. and our
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
16
Revenue Recognition. Product sales are recorded upon shipment. Service revenue
is recorded as services are performed. Maintenance agreement revenue is recorded
on a straight-line basis over the terms of the respective agreements.
Forward-Looking Statements
This report includes "forward-looking statements". Statements in this report
regarding future events or conditions, including statements regarding industry
prospects and our expected financial position, business and financing plans, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations are disclosed in
this report and in our other public filings with the SEC, and include the risks
associated with the expansion of our business, the possible inability of our
company to integrate the Protein Solutions and Aviv businesses we have acquired,
dependence on the capital spending policies of our customers, as well as factors
that affect the materials test systems industry generally. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") during the
fiscal quarter ended June 30, 2002.
(a) The date of the Meeting was May 16, 2002.
(b) At the Meeting, the following persons were elected as directors of the
Company, each receiving the number of votes set forth opposite their
names below:
For Against Abstain
--------- ------- -------
Robert M. Castello 20,667,401 32,686 ---
Merrick G. Andlinger 20,667,401 32,686 ---
Mark F. Callaghan 20,667,401 32,686 ---
Paul Woitach 20,650,401 49,686 ---
Robert K. Prud'homme 20,650,401 49,686 ---
David R. Smith 20,667,401 32,686 ---
(c) The Stockholders also approved a proposal to ratify the appointment of
Mahoney Cohen & Company, CPA, P.C., as the Company's independent public
accountants. Such proposal received 20,671,506 votes for such proposal,
15,531 votes against such proposal and 13,050 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Securities Purchase Agreement, dated as of February 17, 2000, by and
between Rheometric Scientific, Inc., Andlinger Capital XXVI LLC and
Axess Corporation, incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on March 21, 2000.
2.2 Merger Agreement, dated as of November 20, 2000, among Sheridan D.
Snyder, Robert P. Collins, Jr., PSI Holding Corporation, Rheometric
Scientific, Inc., and PSI Acquisition Corp., incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
November 29, 2000.
2.3 Merger Agreement, dated as of May 31, 2001, among the individuals listed
on Schedule A thereto as Company Shareholders, Aviv Instruments, Inc.,
Aviv Associates, Inc., Rheometric Scientific, Inc. and Tel Acquisition
Corp., incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on June 4, 2001.
18
2.4 Securities Purchase Agreement, dated as of August 8, 2002, by and
between Rheometric Scientific, Inc. and Andlinger Capital XXVI LLC.
3.1 Certificate of Incorporation of Rheometric Scientific, Inc.,
incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 2000.
3.2 Bylaws of Rheometric Scientific, Inc., as amended, incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000.
4.1 Specimen Certificate representing Common Stock of Rheometric Scientific,
Inc., incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1, File No. 33-807 filed on October 10,
1985.
4.2 Warrant to Purchase 132,617 shares Common Stock of Rheometric
Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc., incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K filed
on March 11, 1996.
4.3 Warrant to Purchase 331,543 shares of Common Stock of Rheometric
Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc., incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
on March 11, 1996.
4.4 Certificate of Designation, Preferences and Rights of Series B Preferred
Stock of Rheometric Scientific, Inc.
10.1 Rheometric Scientific, Inc. 1996 Stock Option Plan, incorporated by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
10.2 Rheometric Scientific, Inc. 2000 Stock Option Plan, incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
10.3 Revolving Credit, Term Loan and Security Agreement, dated as of March 6,
2000, by and among PNC Bank, National Association, as agent and a
lender, and Rheometric Scientific, Inc. and certain subsidiaries
thereof, as borrowers, incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000.
10.4 First Amendment to the Revolving Credit, Term Loan and Security
Agreement, dated as of August 31, 2000, incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.5 Second Amendment to the Revolving Credit, Term Loan and Security
Agreement, dated as of March 16, 2001, incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
19
10.6 Third Amendment of the Revolving Credit, Term Loan and Security
Agreement, dated as of May 31, 2001, incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June
4, 2001.
10.7 Lease Agreement by and between RSI (NJ) QRS 12-13, Inc., and Rheometric
Scientific, Inc. dated as of February 23, 1996, incorporated by
reference to Exhibit 5 to the Company's Current Report on Form 8-K filed
on March 11, 1996.
10.8 Subordination Agreement between Axess Corporation and RSI (NJ) QRS
12-13, Inc., incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K dated filed on April 16, 1996.
10.9 First Amendment to Lease Agreement dated June 10, 1996 between RSI (NJ)
QRS 12-13, Inc. and Rheometric Scientific, Inc. incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K
filed on May 19, 1997.
10.10 Second Amendment to Lease Agreement dated February 20, 1997 between RSI
(NJ) QRS 12-13, Inc. and Rheometric Scientific, Inc. incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
filed on May 19, 1997.
10.11 Amendment Letter dated May 6, 1997 by RSI (NJ) QRS-12-13, Inc., amending
paragraphs 7 and 8 of Exhibit D to the Lease Agreement dated as of
February 23, 1996, incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K filed on May 19, 1997.
10.12 Landlord Agreement and Amendment of Lease, dated as of March 6, 2000, by
among RSI (NJ) QRS 12-13, Inc., Rheometric Scientific, Inc. and Axess
Corporation, incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-3/A filed on November 9, 2001.
10.13 Registration Rights Agreement, dated as of March 6, 2000, as amended and
restated as of September 28, 2001, by and among Rheometric Scientific
Inc., Andlinger Capital XXVI, Axess Corporation, State Farm Mutual
Automobile Insurance Company, Trustee Under the Revocable Trust of R.
Michael Hendricks, and Robert E. Davis, incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-3/A
filed on November 9, 2001.
10.14 Stockholders' Agreement, dated as of March 6, 2000, by and between
Rheometric Scientific Inc., Andlinger Capital XXVI and Axess
Corporation, incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on March 21, 2000.
10.15 Voting Agreement, dated as of February 17, 2000, by and between
Rheometric Scientific Inc., Andlinger Capital XXVI and Axess
Corporation, incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on March 21, 2000.
20
10.16 Employment Agreement, dated as of August 27, 2001, by and between
Rheometric Scientific, Inc. and Paul Mangano, incorporated by reference
to Exhibit 10.16 to the Company's Registration Statement on Form S-3/A
filed on November 9, 2001.
10.17 Amended and Restated Subordinated Promissory Note, dated as of September
28, 2001, issued by Rheometric Scientific, Inc. to Axess Corporation,
incorporated by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-3/A filed on November 9, 2001.
21.1 Subsidiaries of Rheometric Scientific, Inc., incorporated by reference
to Exhibit 21.1 to the Company's Annual Report on Form 10-K filed on
April 1, 2002.
(b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K on July 19, 2002
relating to a potential additional equity investment by Andlinger
Capital.
(ii) The Company filed a Current Report on Form 8-K on August 13, 2002
relating to an additional equity investment by Andlinger Capital.
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.
RHEOMETRIC SCIENTIFIC, INC.
(Registrant)
August 14, 2002 By /s/ Joseph Musanti
------------------------------------
Joseph Musanti, Vice President,
Finance and Chief Financial Officer
22
EXHIBITS INDEX
Exhibit
Number Description
- ------- -----------
2.1 Securities Purchase Agreement, dated as of August 8, 2000, by and
between Rheometric Scientific, Inc. and Andlinger Capital XXVI
LLC.
4.1 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of Rheometric Scientific, Inc.
23