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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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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Proterion Corporation
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
One Possumtown Road, Piscataway, N.J. 08854
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 987-8200
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, $0.01 par value per share American Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 17, 2003: $2,483,351 (For purposes of this filing only,
all executive officers and directors have been classified as affiliates.)
The number of shares of the registrant's Common Stock outstanding as of March
17, 2003 was 26,032,835.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: Portions of the
registrant's definitive Proxy Statement to be filed on or before April 30, 2003
in connection with the registrant's Annual Meeting of Stockholders scheduled to
be held on May 15, 2003, are incorporated by reference into Part III of this
report.
The Exhibit Index appears on page: 47
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Page 1 of 52
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (this "10-K") includes forward-looking
statements, particularly in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section (See Item 7). In some
cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. Additional written
or oral forward-looking statements may be made by or on behalf of the Company
from time to time, in filings with the Securities and Exchange Commission, in
press releases and other public announcements, or otherwise. All such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but not be
limited to:
o projections of revenue, income, losses and cash flows;
o plans for future capital and other expenditures;
o plans for future operations;
o financing needs or plans;
o plans relating to products or services;
o estimates concerning the effects of litigation or other disputes; as well
as
o expectations and assumptions relating to any or all of the foregoing
relating to the Company, its subsidiaries and/or divisions.
Although the Company believes that its forward-looking statements are based on
expectations and assumptions that are reasonable, forward-looking statements are
inherently subject to risks and uncertainties, some of which can not be
predicted. Accordingly, no assurance can be given that such expectations or
assumptions will prove to have been correct, and future events and actual
results could differ materially from those described in or underlying the
forward-looking statements. Among the factors that could cause future events and
actual results to differ materially are:
o the demand for the Company's products and services and other market
acceptance risks;
o the presence in the Company's markets of competitors with greater financial
resources and the impact of competitive products and services and pricing;
o the ability of the Company to develop new technologies that may be more
accurate, reliable, user-friendly or cost-effective than those currently
utilized in the Company's products;
o the ability of the Company to procure the requisite intellectual property
rights to any such new technologies developed by others, and to incorporate
such technologies into new products;
o the loss of any significant customers or group of customers;
o further reductions in outside fundings or capital budgets for our customers
(such as universities) for whom purchases of the Company's products
represent substantial capital outlays;
o general economic and market conditions;
o the Company's ability to meet its current financial obligations and to
obtain new financing necessary to meet its working capital needs; and
o the effects of the Company's accounting policies.
Page 2 of 52
More detail regarding these and other important factors that could cause actual
results to differ materially from such expectations, assumptions and
forward-looking statements ("Cautionary Statements") may be disclosed in this
10-K, other Securities and Exchange Commission filings and other public
announcements of the Company. All subsequent written and oral forward-looking
statements attributable to the Company, its subsidiaries or divisions or persons
acting on their behalf are expressly qualified in their entirety by the
Cautionary Statements.
The Company assumes no obligation to update its forward-looking statements or
advise of changes in the expectations, assumptions and factors on which they are
based.
Page 3 of 52
PART I
(Items either not applicable or not material have been excluded)
Item I. Business
BACKGROUND
General
Proterion Corporation designs, manufactures, markets, and services
computer-controlled life sciences instrumentation for particle sizing and
biomolecular characterization of protein molecules. Our products, most of which
are proprietary or patented, consists of spectrometers and light scattering
laboratory instruments used for research and product development. These
instruments combine special sampling technologies and multiple sensor
technologies to provide various measurements. Pharmaceutical, biotechnology, and
government-funded research and development laboratories use our products to
understand the physical attributes of purified protein molecules. We market our
spectrometers under our "Aviv" trademark and we sell our light scattering
products under our "DynaPro" trademark.
On January 15, 2003, we completed the sale of our rheology instruments and
services business to the TA Instruments Division of Waters Corporation for $17
million in cash and the assumption of $6 million of accounts payable and accrued
expenses, plus certain other specified obligations. $15.3 million was paid at
closing and the purchaser is obligated to pay us $850,000 six months after
closing and $850,000 one year after closing. This transaction represented our
exit from this business, which at the time of the sale constituted the larger of
our two business segments. We applied substantially all of the proceeds from
this transaction to retire previously incurred indebtedness and other financial
obligations.
Our corporate executive offices are located in Piscataway, New Jersey. Our
operations are currently located in Piscataway and Lakewood, New Jersey and High
Wycombe, UK.
History
We were originally incorporated under the name Rheometrics, Inc. in Kentucky in
1970. We reincorporated in New Jersey in 1981. In 1985, we completed a $7
million initial public offering and became a public company. Through a series of
transactions between 1991 and 1994, Axess Corporation ("Axess") acquired 76.6%
of our Common Stock. We changed our name to Rheometric Scientific, Inc. in 1994.
We reincorporated in Delaware on or about October 31, 2000 and on January 15,
2003 we changed our name to Proterion Corporation.
Andlinger Capital XXVI. On March 6, 2000, pursuant to a securities purchase
agreement among our Company, Axess and Andlinger Capital XXVI LLC and certain
related agreements, Andlinger Capital XXVI acquired control of our Company by
purchasing: (i) 10,606,000 newly issued shares of our Common Stock and (ii)
warrants to purchase (x) an additional 2,000,000 shares of our Common Stock at
an exercise price of $1.00 per share, exercisable at any time prior to March 6,
2007 and (y) 4,000,000 shares of our Common Stock at an exercise price of $3.00
per share, exercisable at any time prior to March 6, 2003, for $1,825,000.
Also on March 6, 2000, in conjunction with the Andlinger Capital XXVI
transaction, Axess cancelled existing indebtedness of $8,206,000 owed to it by
the Company and the accrued interest thereon and surrendered to the Company
2,800,000 shares of our Common Stock. As consideration for these actions the
Company gave to Axess:
o $3,500,000 in cash;
o a subordinated promissory note in the principal amount of $1,000,000
and
Page 4 of 52
o a warrant to purchase 1,000 shares of our non-voting convertible
redeemable preferred stock (convertible into 1,000,000 shares of
Common Stock).
As a result of these transactions:
o Andlinger Capital XXVI acquired ownership of approximately 59% of our
issued and outstanding Common Stock; and
o designated a majority of our Board of Directors.
Protein Solutions Acquisition. Effective November 17, 2000, we acquired all of
the issued and outstanding capital stock of PSI Holding Corporation, a Virginia
corporation, and its wholly-owned US and UK subsidiaries. The consideration for
this transaction was approximately $525,000 cash and approximately 680,000
shares of our Common Stock.
In conjunction with this acquisition, Andlinger Capital XXVI exercised 1,000,000
of its warrants and acquired 1,000,000 shares of our Common Stock at an exercise
price of $1.00 per share. These warrants were acquired by Andlinger Capital XXVI
in March 2000 in connection with its majority equity investment in our Company.
Aviv Acquisition. Effective May 31, 2001, through our wholly-owned subsidiary,
Tel Acquisition Corp., we acquired all of the issued and outstanding capital
stock of Aviv Instruments, Inc., and Aviv Associates, Inc. The consideration for
this transaction was 805,882 shares of our Common Stock. In addition, our
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.
Together, Aviv and Protein Solutions products and services comprise our life
sciences business.
Infusion of Capital. In 2002, our rheology instruments and services business
experienced a very significant fall-off in order intake due to customer
procurement delays and cancellations. Given these shortfalls, we took cost
containment actions, which included layoffs.
Following certain breaches of financial covenants in our senior credit facility
with PNC Bank, we were required to obtain a cash infusion of at least
$1,000,000. As a result, representatives of our Company held discussions with a
number of potential investors, including Andlinger Capital XXVI, our principal
stockholder. We formed a special committee comprised of independent members of
our Board of Directors to consider a proposal made by Andlinger Capital XXVI.
None of the other potential investors offered to make investments on attractive
terms. On August 8, 2002, following discussions between Andlinger Capital XXVI
and the special committee, and upon the recommendation of the special committee,
our Board of Directors approved our entering into a securities purchase
agreement with Andlinger Capital XXVI.
Pursuant to this securities purchase agreement, Andlinger Capital XXVI purchased
$1,500,000 of our newly created Series B Preferred Stock, with the right,
subject to future Board determination of the need for such capital, to invest up
to an additional $500,000 on the same terms. The new Series B Preferred Stock
does not carry a current dividend and is subject to redemption at our option at
any time or, at Andlinger Capital XXVI's option, upon a change in control of our
Company or the occurrence of certain other major corporate events, including a
sale of substantially all of our assets. The redemption price is 101% of the
original issuance amount plus an additional 1% for each calendar month completed
following the date of original issuance.
On October 18, 2002, following our agreement to sell our rheology instruments
and services business (see "-Sale of Rheology Instruments and Services Business"
below), management reviewed with our Board of Directors our cash position and
projections for the remainder of the year and the Board of Directors determined
that there was a need for the remaining $500,000 available by the sale of Series
B Preferred Stock to Andlinger Capital XXVI under the securities purchase
agreement.
Page 5 of 52
On October 30, 2002, our Board of Directors approved our entry into an agreement
with Andlinger Capital XXVI, pursuant to which Andlinger Capital XXVI would:
o purchase an additional $500,000 of our Series B Preferred Stock;
o defer its right to have all of the outstanding Series B Preferred
Stock redeemed in full by us upon the closing of the sale of our
rheology instruments and services business; and
o subordinate such deferred redemption payments to amounts payable by us
to our landlord under the lease for our Piscataway, NJ facility and to
Axess.
In consideration for these actions, we issued to Andlinger Capital XXVI a new
warrant, with an expiration date of March 6, 2007, to purchase up to 1,000,000
shares of our Common Stock at an exercise price equal to $1.00 per share (the
average of the closing prices of our Common Stock over the ten trading days
immediately preceding October 30, 2002) and having substantially the same other
terms and conditions as the existing warrants to purchase shares of our Common
Stock held by Andlinger Capital XXVI.
Sale of Rheology Instruments and Services Business. On January 15, 2003, we
completed the sale of our rheology instruments and services business to the TA
Instruments Division of Waters Corporation for consideration of $17 million in
cash and the assumption of $6 million of accounts payable and accrued expenses
plus certain other specified obligations. $15.3 million was paid at closing and
the purchaser is obligated to pay us $850,000 six months after closing and
$850,000 one year after closing. The "Rheometric Scientific" and "Rheometrics"
names were included in the sale. We retained, however, our life sciences
business. We used the proceeds from this sale, in part, to retire all of our
bank debt, which amounted to approximately $9,600,000, and to discharge certain
other obligations (see "-Lease Termination" below). We are using the remaining
proceeds to provide interim working capital. As part of this transaction, we
changed our name from Rheometric Scientific, Inc. to Proterion Corporation.
In connection with the sale, we agreed to pay ANC Management Corp., an affiliate
of Andlinger Capital XXVI, an investment banking fee of $350,000. We believe
this arrangement is fair to the Company because ANC Management Corp.:
o developed interest from potential buyers, introduced potential buyers
to us and facilitated meetings and presentations;
o advised us on strategic issues relating to the sale of our rheology
instruments and services business;
o assisted us in developing negotiating strategies and participated in
negotiations; and
o is continuing to render financial advisory and investment banking
services to us.
We paid ANC Management Corp. $117,000 of this fee at the closing of this
transaction and we are obligated to deliver two additional installments of
$117,000 to ANC Management Corp. upon the six-month anniversary of the closing
and the twelve-month anniversary of the closing, respectively.
At the closing of the sale, we also paid Andlinger Capital XXVI $667,000 for the
redemption of one-third of the shares of our Series B Preferred Stock held by
it. Pursuant to our agreement with Andlinger Capital XXVI, we have agreed to
redeem its remaining shares of our Series B Preferred Stock in two equal
installments upon the six-month anniversary of the closing and the twelve-month
anniversary of the closing, respectively.
Page 6 of 52
As of the closing, we owed Axess $787,000 (including accrued interest) under the
terms of a promissory note. At the closing, we amended this note and agreed to
pay Axess:
o $287,000 at the closing (which we have paid);
o $250,000 upon the six-month anniversary of the closing;
o $250,000 upon the twelve month anniversary of the closing; and
o interest on the outstanding principal amount on a monthly basis until
the note's maturity date.
Lease Termination. In connection with the sale of our rheology instruments and
services business, we entered into a lease termination agreement with the
landlord under our lease for our Piscataway, New Jersey facility. This agreement
requires us to pay the landlord $3,000,000. In addition, the agreement provides
that the exercise price of the landlord's existing warrants for 464,160 shares
of Common Stock be reduced from $0.37 per share to $0.01 per share and for us to
issue 650,000 shares of Common Stock to the landlord, both of which have
occurred. The $3,000,000 cash payments we are required to make to the landlord
were and are to be paid as follows:
o $2,250,000 which we paid in January 2003;
o $500,000 to be paid at the release of the first escrow payment under
the terms of the sale of the rheology instruments and services
business; and
o $250,000 to be paid at the release of the second escrow payment under
the terms of the sale of the rheology instruments and services
business.
Page 7 of 52
DESCRIPTION OF BUSINESS
Products. We design, manufacture, market and service a complete line of
computer-controlled life sciences instruments for particle sizing and
biomolecular characterization for use in material and product research and
development, including:
o Dynamic Light Scattering (DLS). DLS systems are used to determine the size
of molecules. The instruments in which we specialize are designed
specifically for protein molecules.
o Circular Dichroism Spectrometers (CD). CDs determine secondary protein
structure and can predict how a protein will react under different
conditions.
o Automated Titrating Differential/Ratio Spectrofluorometers. These
instruments use florescence to determine protein behavior.
o Spectrophotometers. Spectrophotometers measure how light is absorbed by a
protein and can determine size and the conformation of the protein
molecule.
o Plasmon-Waveguide Resonance Spectroscopy (PWR). These instruments simplify
the process of identifying therapeutic proteins and drugs and simulate the
way in which proteins and drugs interact with membranes and each other.
Our DLS systems, which we market under our "DynaPro" trademark, are based upon
patented technology for which we have an application exclusive license. This
technology employs sophisticated optical components and advanced digital signal
processing to measure molecular physical properties such as size, mass, and
diffusion. Our spectrometers, which are used in molecular characterization and
sold under our "Aviv" trademark, are research grade optical instruments that
incorporate proprietary software.
We are currently developing new products that incorporate the PWR technology and
have released limited offerings to customers on an application-specific basis.
Manufacturing. We manufacture all of our systems at our New Jersey and UK
facilities. Manufacturing operations for our systems consist primarily of
assembly, test, burn-in and quality control. A number of raw materials,
primarily stainless steel and aluminum (produced to our specifications), are
used to fabricate the mechanical assemblies, and readily available electronic
components are used to build our electronic assemblies. Although we utilize a
number of outside suppliers for all of our raw materials and component parts, we
believe that each of these materials and components are available from alternate
suppliers.
Sales, Marketing, Distribution and Support. Our direct sales force includes
systems engineers, the majority of whom hold advanced degrees, and field
engineers. Our entire sales force has in-depth knowledge of the customers'
business and technology needs. Our systems engineers provide a combination of
consulting, systems integration and application and software engineering
services, and are instrumental in all stages of the sale, implementation and
support of our complex systems and solutions. Our direct sales force operates in
the US and Europe and we currently use distributors in the rest of the world.
Customers. Our customers generally fall into five major categories:
o pharmaceutical manufacturers;
o other product manufacturers;
o independent and nonprofit research laboratories;
o governmental agencies;
o universities and other educational institutions; and
o biotechnology and other life science manufacturers.
We do not have any customer that accounts for more than 10 percent of our sales.
Page 8 of 52
Competition. The market for life sciences instruments is highly competitive, and
we expect this competition to increase. We believe that the principal factors of
competition are:
o speed, accuracy and cost of instruments;
o breadth of product offerings;
o scalability and flexibility of products;
o ease of product use;
o ability to upgrade product platform;
o time to market of new technologies;
o adherence to industry standards;
o ability to support emerging industry protocols; and
o ability to provide localized service and support on a worldwide basis.
We believe that we compete favorably with respect to many of these factors and
have gained significant market share in many of our targeted markets as a
result. We believe our success has been driven by technology leadership, our
ability to generate customer loyalty and our track record of anticipating market
trends.
We believe that our principal competitors are several domestic and foreign
manufacturers, most of which possess greater financial and marketing resources
than the Company. These competitors include: Malvern Instruments, Wyatt
Technology Corporation, Precision Detectors, Jasco Corporation, and Biacore
International AB. To compete with these companies, we offer products of high
performance, quality and reliability, backed by service capabilities. We believe
that technological requirements and high initial capital expenditures represent
significant barriers to entry to the life sciences market. However, there can be
no assurance that:
o one of our large competitors will not invest substantially increased
resources into their competing business; or
o another large company with greater financial resources will not enter
this market at a later date, and that such entry would not have a
material adverse impact on our business and operations.
While we believe that we are well-positioned in the field of engineering and
technology to remain competitive in the face of technological changes that may
occur in the marketplace, there can be no assurance that technology superior to
ours will not be developed. If superior technology is developed, such an event
could have a material adverse effect on our operations.
Patents and Trademarks. We currently have patents pending for the design and
manufacture of certain of our instruments and systems.
We also have an exclusive, worldwide license from the University of Arizona to
commercialize PWR technologies. These technologies are supported by several
issued U.S. patents and patents pending. The license agreement does not expire
until the last patent then licensed under the agreement expires. The material
patents currently under license do not expire until 2013 to 2018.
The Company has unregistered trademarks including "Aviv" and "DynaPro". The
Company believes that these and other related marks are of material importance
to the Company's business.
Research and Development. Our research and development activities primarily
focus on the development of new products and new applications and enhancements
for existing products. In our development and testing of new products and
applications, we consult with professionals at universities and in industry. We
believe that our research and development activities are necessary to maintain
competitiveness and to better serve our customers.
Employees. At March 15, 2003, we had approximately 38 employees worldwide. We
consider our relations with our employees to be good. None of our employees is
covered by a collective bargaining agreement.
Page 9 of 52
Environmental Matters. Our business is subject to various federal, state and
local laws, rules and regulations relating to the protection of the environment,
which are considered by us to be typical for companies operating in our markets.
We believe that compliance therewith will have no material effect on our capital
expenditures, earnings or competitive position.
Cyclicality and Backlog. Historically, our earnings/(losses) have been cyclical.
Typically, the quarters ending June and December outperform the quarters ending
March and September. This cyclicality is primarily attributable to the capital
goods budgeting cycles of our customers. Many customers place their orders in
the first calendar quarter (after capital budgets have been approved) with
delivery in the second calendar quarter due to our average delivery times. For
example, as the fourth calendar quarter approaches, many customers review their
annual budgets and determine that they are able to place an order for delivery
by the end of December.
As of December 31, 2002 and December 31, 2001 our backlog was $1,500,000 and
$400,000, respectively. We expect that all items in our backlog as of December
31, 2002 will be delivered in the current calendar year.
Financial Information about Foreign and Domestic Operations and Export Sales
See Note 10 of Notes to Consolidated Financial Statements.
Page 10 of 52
Item 2. Properties
We lease approximately 10,000 square foot of space in Piscataway, New Jersey. We
also lease a 20,000 square foot building in Lakewood, New Jersey and a 5,000
square foot building in High Wycombe, UK. These facilities accommodate our
manufacturing, marketing, research and development, and general administrative
activities. We expect these facilities to accommodate our needs for the
foreseeable future.
Item 3. Legal Proceedings
There are no known material pending legal proceedings involving our Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 2002.
Page 11 of 52
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Common Stock Market Prices and Dividends
Our Common Stock began trading on the American Stock Exchange on September 5,
2001 under the symbol "RHM." Since January 23, 2003, our Common Stock has traded
on the American Stock Exchange under the symbol "PRC." The table below presents
the high and low closing sales prices per share for each quarter for the years
ended December 31, 2002 and 2001.
12 Months Ended December 31,
----------------------------
2002 2001
---- ----
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
March 31 $1.75 $0.80 $6.44 $2.44
June 30 1.56 0.60 5.40 3.20
September 30 1.15 0.45 7.00 3.95
December 31 1.27 0.40 3.70 1.65
Since our initial public offering in December 1985 we have not paid any cash
dividends, and we do not anticipate paying any cash dividends in the foreseeable
future.
At March 17, 2003, there were approximately 172 holders of record of our Common
Stock.
Page 12 of 52
Item 6. Selected Financial Data
(In thousands of dollars, except per share data)
12 Months Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
Sales $ 4,934 $ 5,730 $ 480 -- --
Loss from
continuing operations (4,362) (2,476) (178) -- --
(Loss)/earnings from
discontinued operations (1,016) (2,517) 269 $ (5,138) $ (1,144)
Net income/(loss) (5,378) (4,993) 91 (5,138) (1,144)
Basic and diluted
loss per share from
continuing operations (0.18) (0.10) (0.01) -- --
Basic and diluted
(loss)/earnings per
share from discontinued
operations (0.04) (0.11) 0.01 (0.39) (0.09)
Net (loss)/earnings per
share (0.22) (0.21) -- (0.39) (0.09)
Total assets (including
assets held for sale) 26,170 29,629 26,792 23,983 28,534
Long-term debt 2,012 5,919 6,395 2,731 10,901
Convertible redeemable
preferred stock -- -- 1,000 -- --
Redeemable preferred stock 2,105 -- -- -- --
On January 15, 2003, we completed the sale of our rheology instruments and
services business to the TA Instruments Division of Waters Corporation. The
results of operations of this business are included in discontinued operations.
The 2001 figures above include the acquisition of the Aviv companies on May 31,
2001. The 2000 figures relate to our sale of Protein Solutions products, which
were acquired November 17, 2000.
Page 13 of 52
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under the heading "Special Note Regarding Forward Looking
Statements" above and in our other filings with the SEC. The following
discussion should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this report.
12 Months Ended December 31, 2002 vs. 12 Months Ended December 31, 2001
Please note that the year ended December 31, 2002 included a full year of both
our Protein Solutions and Aviv operations. The year ended December 31, 2001,
however, included a full year of Protein Solutions operations, but only seven
months of our Aviv operations.
On January 15, 2003, the Company completed the sale of its rheology instruments
and services business. The discussion below does not include the results of this
business. The results of this business are included in discontinued operations.
For details of revenue and expenses compared to prior years see Note 2 of Notes
to Consolidated Financial Statements.
Revenues
In the fiscal year ended December 31, 2002, we achieved revenues of $4,934,000
compared to $5,730,000 for the fiscal year ended December 31, 2001. Our Protein
Solutions 2002 product revenue was $2,719,000 compared to $4,072,000 during the
previous year; a decrease of $1,343,000. This decrease was primarily
attributable to the overall decrease in laboratory equipment purchases
worldwide. This decrease, however, was offset by a $547,000 increase in revenue
of our Aviv products, as 2002 revenue equaled $2,215,000 compared to $1,668,000
in 2001. Our Aviv product unit order rate in 2002 was consistent with our 2001
rate, as a large percentage of orders for our Aviv products come from
universities and government-backed research projects whose demands for our
products did not substantially change in 2002. Although our Aviv product order
rate remained substantially flat between 2002 and 2001, we were able to attain
an increase in Aviv product revenue in 2002 because we had a full year of Aviv
product sales in 2002 as opposed to seven months of Aviv product sales in 2001.
Gross Profit
Gross profit for the year ended December 31, 2002 was $883,000, or 17.9% of
revenue, compared to $2,121,000, or 37.0% of revenue, in 2001. The 19% decline
in the gross profit percentage is attributable to (i) a 4% decline in Protein
Solutions product volume, (ii) Aviv product production changes which resulted in
higher costs of sales of 10%, and (iii) a decline of 5% in gross profit due to
product mix. Our gross profit dollars were negatively affected by: (i) a
$734,000 reduction in our Protein Solutions products sales volume, as our fixed
costs were spread over less revenue; (ii) $400,000 in costs incurred in
connection with changes in the production process and inventory in our Aviv
product line; and (iii) $104,000 due an unfavorable change in product mix. We
have taken steps in both product lines to improve our gross margins in 2003
including: headcount reduction, outsourcing of machine shop operations, and
supplier changes.
Operating Expenses
Operating expenses increased by $710,000 to $5,026,000 for fiscal 2002 compared
to 4,316,000 in fiscal 2001.
General and Administrative. General and Administrative expenses were $4,252,000
in 2002 compared to $3,413,000 in 2001. Of these amounts, $2,595,000 and
$2,330,000 in the years ended December 31, 2002 and 2001, respectively,
consisted of corporate general and administrative expenses. The increase in
corporate general and administrative expenses in 2002 resulted from increases in
salaries of $105,000, increases in legal expenses of $100,000, and increases in
various other expenses of $60,000. The remaining increase of $574,000 in general
and administrative expenses between 2002 and 2001 was primarily due to reporting
a full year of Aviv operations in fiscal 2002 equaling $972,000 compared to
seven months in fiscal 2001 equaling $398,000.
Page 14 of 52
Sales and Marketing. Sales and Marketing expenses decreased by $125,000 to
$520,000 in fiscal 2002 as compared to $645,000 in fiscal 2001. This was
attributable to a $44,000 reduction in advertising and trade show expenses,
a $75,000 reduction in salary expense, and an $80,000 reduction in various other
selling expenses, which was offset by an increase of $74,000 in commission
expense, relating a change in the commission plan.
Engineering. Engineering expenses were $255,000 in fiscal 2002 compared to
$258,000 in fiscal 2001 as we maintained the same level of headcount and
expenses from period to period.
Interest Expense
Interest expense for fiscal 2002 was $232,000 compared to $247,000 in fiscal
2001. The decrease of $15,000 was primarily attributable to lower interest rates
on our revolving credit facility, offset by a higher revolving credit loan
balance through 2002 compared to 2001.
Foreign Currency
The foreign currency adjustment for year ended December 31, 2002 was a loss of
$67,000 compared to a loss of $33,000 for fiscal 2001. The loss was primarily
due to transaction losses caused by the strengthening of the British Pound
against the U.S. Dollar.
Net loss from continuing operations
Net loss from continuing operations for the period ended December 31, 2002 was
$4,362,000, compared to a net loss of $2,476,000 for fiscal 2001. The gross
margin decline of $1,237,000 was primarily the result of unfavorable product mix
and lower sales volume. Also contributing to the higher loss was an increase in
operating expenses of $711,000, an increase in currency loss of $34,000, which
were offset by a decrease in interest expense of $16,000, and a decrease in tax
expense of $81,000 as compared to fiscal 2001.
Net loss from discontinued operations
Loss from discontinued operations before a deferred tax benefit for the period
ended December 31, 2002 was $4,416,000, compared to a loss of $2,512,000 before
income taxes for fiscal 2001. This increase in loss was caused by lower
sales in 2002 versus 2001 in our rheology instruments and services business. The
loss in 2002 is reduced for a tax benefit of $3,400,000 as a result of the
Company recording of a deferred tax benefit relating to the utilization of a net
operating loss carryforward which will be used in 2003 to offset the taxes on
the gain from the sale of the rheology instruments and services business.
12 Months Ended December 31, 2001 vs. 12 Months Ended December 31, 2000
Please note that the year ended December 31, 2001 included a full year of
Protein Solutions operations, but only seven months of Aviv operations. The year
ended December 31, 2000 included only one and half months of Protein Solutions
operations and no Aviv operations.
Revenues
In the year ended December 31, 2001, we achieved revenues of $5,730,000 compared
to $480,000 for the same period in 2000. Included in the 2001 revenues is a full
year of our Protein Solution products totaling $4,062,000 and revenue for Aviv
products (acquired May 31, 2001) totaling $1,668,000. Revenues for 2000 include
the acquisition (effective November 17, 2000) of the Protein Solution products,
which accounted for all of the $480,000 revenues.
Gross Profit
Gross profit for the year ended December 31, 2001 was 36.9% of sales, compared
to 40.0% for 2000. The gross profit for 2001 includes a full year of Protein
Solutions products at 42.2% and seven months of Aviv products at 24.3%. Gross
profit for 2000 includes only Protein Solutions and equaled 40.0%.
Page 15 of 52
General and Administrative, Selling and Engineering Expenses.
Operating expenses increased by $3,955,000 to $4,316,000 for the year ended
December 31, 2001, compared to 2000. The expenses include a full year of Protein
Solutions and seven months of Aviv, which is not included in 2000. These
expenses have not been broken out for comparison purposes, since the period
ended 2000 includes only one and a half months of Protein Solutions and no
expenses for Aviv. The 2001 expenses are made up of $4,316,000 in general and
administrative, $645,000 selling expense and $258,000 in engineering expenses.
Interest Expense
Interest expense increased to $247,000 for the period ended December 31, 2001,
compared to $3,000 in 2000. This increase is due to higher borrowings and
interest for 12 months in 2001 compared to one and one-half months in 2000.
Foreign Currency
The foreign currency adjustment for year ended December 31, 2001 was a loss of
$33,000 compared to a gain of $2,000 for the same period last year. The loss was
primarily due to the strengthening of the British Pound against the U.S. Dollar.
Net Loss from Continuing Operations
Net loss from continuing operations for the period ended December 31, 2001 was
$2,476,000, compared to a net loss of $178,000 for the same period in 2000.
Gross margin improvement of $1,928,000 was the result of a full year of the
Protein Solutions products and the acquisition of the Aviv products, offset by
higher operating expenses of $3,955,000, an increase in the currency loss of
$35,000, an increase in interest expense of $244,000, and a decrease in tax
expense of $8,000, as compared to the same period last year.
Net loss from discontinued operations
Net loss from discontinued operations for the period ended December 31, 2001 was
$2,517,000, compared to a net profit of $269,000 for the same period in 2000.
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.
Liquidity and Capital Resources
The Company has received and will receive cash from the sale of the rheology
instruments and services business as follows: $15,300,000 was paid on January
15, 2003, $850,000 is due six months after January 15, 2003 and $850,000 is due
one year after January 15, 2003. We used the initial cash proceeds received to
pay off our senior credit facility with PNC Bank and vendor obligations, which
were not assumed by the TA Instruments Division of Waters Corporation. In
addition, we were required to make substantial payments at the closing of this
transaction: (i) to the landlord of our Piscataway, New Jersey facilities in
connection with a lease termination agreement; (ii) to repay, in part, certain
obligations to Axess, our former controlling stockholder; (iii) to satisfy, in
part, certain obligations owed to Andlinger Capital XXVI with respect to amounts
provided as interim financing by Andlinger Capital XXVI; (iv) to pay certain
other obligations to Andlinger Capital XXVI; and (v) to pay legal, accounting
and other expenses incurred relative to the sale transaction. We made payments
totaling $14,400,000 to satisfy these obligations.
We also have a liability under the lease for our Epsom facility in the United
Kingdom. We believe that our maximum liability under the lease is $100,000.
Following the sale of our rheology instruments and services business, and the
payment in full of all outstanding indebtedness thereunder, our senior credit
facility with PNC Bank was terminated. We anticipate, however, that we will have
negative cash flow in the second half of 2003 unless we obtain financing. If
this occurs, the Company may approach Andlinger Capital XXVI and request a
further delay of the redemption of all or a portion of the Series B Preferred
Stock or pursue other alternatives. There can be no assurance, however, that
Andlinger Capital XXVI would agree to such a deferral or that other alternatives
sought by the Company will be successful.
Page 16 of 52
To conserve cash and manage our liquidity, in 2002 we implemented expense
reductions. For example, our employee headcount was 50 at June 30, 2002, which
has been reduced to 38 at March 15, 2003. We will continue to assess our cost
structure as it relates to our revenues and cash position in 2003, and we may
make further reductions if the actions are deemed necessary.
We are currently seeking bank or similar financing on acceptable terms in order
to obtain added flexibility for our operations, but there can be no assurance
that we will be able to obtain such financing or that it will be available on
terms acceptable to us. If we cannot obtain such financing, there can be no
assurance that our operations will generate an adequate level of cash flow. Our
long-term liquidity is contingent upon our consistently meeting our sales
forecast and our continued improvement in the area of asset management, however,
our customers are decreasing their capital spending activities and the sales
trends in our industry have been decreasing over the past year. If we do not
meet our sales forecasts or improve our asset management and we continue to
experience a decline in orders due to the negative economy, there can be no
assurance that we will be successful in maintaining an adequate level of cash
resources. We are currently considering further reductions in headcount and may
be forced to act more aggressively in the area of expense reduction in order to
conserve cash resources as we look for alternative solutions.
Cash Flows from Operations
Net cash used in operating activities in the fiscal year ended December 31, 2002
was $482,000, compared to net cash used by operating activities of $2,229,000 in
fiscal 2001, and net cash provided by operating activities of $1,682,000 in
2000. This is a decrease in net cash used in operating activities of $1,747,000
over the same period last year. The changes in cash flow in 2002 were comprised
primarily of decreases in inventories of $3,280,000, decreases in accounts
receivable of $3,687,000, an increase of $1,418,000 in accounts payable, and a
decrease in other assets of $38,000. The positive cash flow from inventory,
accounts receivable and accounts payable were the result of the Company
aggressively managing these areas to maintain working capital through the sale
of the rheology business. These inflows were offset by a decrease in accrued
expenses of $101,000, an unrealized currency gain of $347,000, and a decrease in
accrued restructuring of $794,000. The loss for the year was $5,378,000. This
was accompanied by non-cash depreciation and amortization charges of $844,000,
the recording of a deferred tax benefit of $3,400,000, $30,000 in amortization
of previously issued options, and a loss on retirement of assets of $241,000.
Cash Flows from Investing
During the year ended December 31, 2002, the Company made capital expenditures
of $118,000 as compared to $186,000 and $201,000 in 2001 and 2000, respectively.
Cash Flows from Financing
Net cash provided by financing activities for the twelve months ended December
31, 2002 was $379,000. This compares to net cash provided by financing
activities of $2,626,000 in 2001 and net cash used in financing activities of
$575,000 in 2000. During 2002, our borrowings against accounts receivables
decreased by $607,000, our borrowings under line of credit agreements decreased
by $217,000 and long term debt and lease obligations payments equaled $631,000.
Offsetting these outflows were the proceeds we received from the issuance of
Common Stock of $4,000, and $1,830,000 in net proceeds received from the
issuance of Preferred Stock.
Page 17 of 52
Contractual Obligations and Commercial Commitments
Our Company and subsidiaries are parties to various leases relating to office
facilities, transportation vehicles, and certain other equipment (principally
data processing). We are also obligated to make payments related to our long
term borrowing. (See Notes 4, 5 and 9 of Notes to Consolidated Financial
Statements.)
The minimum commitments under noncancellable leases consisted of the following
at December 31, 2002:
(in thousands) Operating Capital
Year Leases Leases
---- ------ -------
2003 $ 158 $ 15
2004 2 15
2005 1 16
------ -------
Total minimum lease payments $ 161 46
======
Less amounts representing interest 7
------
Total lease obligation 39
Less current maturities 11
------
Long-term lease obligation $ 28
======
The cash flows of principal repayments of long term debt obligations (including
Axess debt) consisted of the following at December 31, 2002:
(in thousands) Long-term
Year Debt
---- ---------
2003 $ 4,131
2004 2,016
2005 14
---------
Total principal payments long-term debt $ 6,161
=========
On February 23, 1996, we entered into a sale/leaseback arrangement whereby we
sold our corporate headquarters and main manufacturing facility, and the 19
acres of real property on which the facility is located in Piscataway, NJ (the
facility and the real estate being referred to herein as the "Facility") for
$6,300,000. Simultaneously with this sale, we entered into a long-term lease of
the Facility from the new owner. The initial term of the lease was 15 years
(expiring in 2011), subject to five-year extensions through 2026.
At December 31, 2002 we were leasing the Facility. In connection with the sale
of our rheology instruments and services business in January 2003, however, we
entered into a lease termination agreement with the owner of the Facility under
which our lease now expires in January 2004. The lease termination agreement
also requires us to pay the owner $3,000,000: (i) $2,250,000 of which we paid in
January 2003; (ii) $500,000 of which is to be paid at the release of the first
escrow payment under the terms of the sale of the rheology instruments and
services business; and (iii) $250,000 of which is to be paid at the release of
the second escrow payment under the terms of the sale of the rheology
instruments and services business.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets."("SFAS
142"). Under these new Standards the FASB eliminated accounting for any mergers
and acquisitions as poolings of interests, eliminated amortization of goodwill
and indefinite life intangible assets, and established new impairment
measurement procedures for goodwill. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is July
1, 2001 or later. The Company adopted SFAS 142 for 2002.
Page 18 of 52
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. The Company is currently assessing the impact of
this new standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets" which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model for
impairment of long-lived assets and intangibles with a definite life. SFAS 144
requires the Company to review such assets for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. The Company adopted SFAS 144 in 2002.
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"),
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. EITF 94-3 allowed for an
exit cost liability to be recognized at the date of an entity's commitment to an
exit plan. SFAS 146 also requires that liabilities recorded in connection with
exit plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company is evaluating the effect of
the adoption of SFAS 146 and does not expect the adoption of SFAS 146 to have a
material impact, if any, on the Company's consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis management evaluates its estimates, including those related to
inventory reserves and the allowance for doubtful accounts. Management bases its
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form a basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions, however,
management believes that its estimates, including those for the above described
items, are reasonable and that the actual results will not vary significantly
from the estimated amounts.
The following critical accounting policies relate to the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Inventory Reserves
The Company continuously monitors its exposure relating to excess and obsolete
inventory and we establish reserves for any exposure that may be required.
Factors considered in evaluating the reserves include product changes, usage,
technology changes, shifts in sales patterns and quantities on hand. An estimate
is made of the market value, less costs to dispose, of products whose value is
determined to be impaired. If these products are ultimately sold at less than
estimated amounts, additional reserves may be required.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from customers or other parties failure to make payments on a trade
receivable due to the Company. The estimates for the allowance and discounts are
based on a number of factors, including: (1) historical experience; (2) aging of
the trade accounts receivable; (3) specific information obtained by the Company
on the financial condition and current credit worthiness of customers or other
parties; and (4) specific agreements or negotiated amounts with customers.
Page 19 of 52
If the financial condition on the Company's customers were to deteriorate and
reduce the ability of the Company's customers to make payments on their
accounts, the Company may be required to increase its allowances by recording
additional bad debt expense. Likewise, should the financial condition of the
Company's customers or other parties improve and result in payments or
settlements of previously reserved amounts, the Company may be required to
record a reduction in bad debt expense to reverse recorded allowances.
Impairment of Long-lived Assets
The Company reviews long-lived assets and intangible assets with a definite life
for impairment whenever events or changes in circumstances indicate the carrying
value of such assets may not be recoverable.
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.
Revenue Recognition
Product sales are recorded upon shipment, provided that the price is fixed,
title has been transferred, collection of the resulting receivable is reasonably
assured, and there are no significant obligations. Maintenance agreement revenue
is recorded on a straight-line basis over the terms of the respective
agreements. Other service revenue is recorded as services are performed. We
accrue for expected warranty cost on product sales.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. We do not
enter into derivatives, or other financial instruments for trading or
speculative purposes. We are exposed to market risk related to changes in
foreign exchange and interest rates.
Page 20 of 52
Item 8. Financial Statements and Financial Statements Schedule
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Proterion Corporation
We have audited the accompanying consolidated balance sheets of
Proterion Corporation (formerly Rheometric Scientific, Inc.) and Subsidiaries as
of December 31, 2002 and 2001, and the consolidated statements of operations,
shareholders' equity/(deficiency) and comprehensive income (loss), and cash
flows and the related Schedule II for each of the years in the three-year period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Proterion
Corporation (formerly Rheometric Scientific, Inc.) and Subsidiaries as of
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
In addition, in our opinion, the financial statements schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
March 17, 2003
Page 21 of 52
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONSOLIDATED BALANCE SHEETS
December 31,
Assets (in thousands) 2002 2001
-------- --------
Current Assets
Cash $ 710 $ 696
Receivables - less allowance for doubtful accounts of $13
and $178 at December 31, 2002 and 2001 677 8,668
Inventories, net
Finished goods 100 2,558
Work-in-process 307 1,154
Assembled components, materials and parts 540 4,455
-------- --------
Total Inventory 947 8,167
Deferred tax asset 3,400 --
Prepaid expenses and other current assets 597 558
Assets held for sale 8,899 --
-------- --------
Total current assets 15,230 18,089
-------- --------
Property, plant and equipment 658 7,631
Less accumulated depreciation and amortization 280 2,689
-------- --------
Property, plant and equipment, net 378 4,942
-------- --------
Assets held for sale and disposal 4,338 582
Goodwill 5,609 5,358
Patents 121 --
Other assets 494 658
-------- --------
Total Assets $ 26,170 $ 29,629
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Short-term bank borrowings $ 8,700 $ 8,919
Current maturities of long-term debt 3,631 751
Current maturities affiliate debt 500 150
Accounts payable 2,294 4,229
Borrowings against accounts receivable -- 923
Accrued restructuring 40 794
Accrued liabilities 1,900 4,026
Liabilities to be transferred 6,466 --
-------- --------
Total current liabilities 23,531 19,792
-------- --------
Long-term debt 1,752 5,319
Long-term debt - affiliate 250 600
Other long-term liabilities 28 122
-------- --------
Total liabilities 25,561 25,833
-------- --------
Commitments and Contingencies (Note 8)
Redeemable Preferred Stock 2,105 --
-------- --------
Shareholders' Equity
Common Stock, par value of $.01,
Authorized 49,000 shares; issued 27,726
at December 31, 2002 and 27,715 at December 31,2001 277 277
Additional paid-in capital 37,096 37,337
Treasury Stock, at cost, 2,800 shares at December 31, 2002 and 2001 -- --
Accumulated deficit (39,109) (33,731)
Accumulated other comprehensive income\(loss) 240 (87)
-------- --------
Total Shareholders' Equity\(deficiency) (1,496) 3,796
-------- --------
Total Liabilities and Shareholders' Equity/(deficiency) $ 26,170 $ 29,629
======== ========
See Notes to Consolidated Financial Statements.
Page 22 of 52
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
2002 2001 2000
-------- -------- --------
Sales $ 4,934 $ 5,730 $ 480
Cost of sales 4,051 3,610 288
-------- -------- --------
Gross profit 883 2,120 192
-------- -------- --------
Marketing and selling expenses 520 645 89
Engineering expenses 255 258
General and administrative expenses 4,252 3,413 272
-------- -------- --------
5,027 4,316 361
-------- -------- --------
Operating loss (4,144) (2,196) (169)
Interest expense (222) (227) (1)
Interest expense - affiliate (10) (20) (2)
Foreign currency (loss)/gain (67) (33) 2
-------- -------- --------
Loss before income tax benefit\(expense) (4,443) (2,476) (170)
Income tax benefit\(expense) 81 -- (8)
-------- -------- --------
Loss from continuing
operations (4,362) (2,476) (178)
(Loss)\income from discontinued
Operations, net of income tax
benefit/(expense) of $3,393 in
2002, $(5) in 2001 and $0 on 2000 (1,016) (2,517) 269
-------- -------- --------
Net (loss)/income (5,378) (4,993) 91
Increase in redemption value of preferred stock (105) -- --
-------- -------- --------
Net loss available to common shareholders $ (5,483) $ (4,993) $ 91
======== ======== ========
Loss per share from
continuing operations
Basic $ (0.18) $ (0.10) $ (0.01)
======== ======== ========
Diluted $ (0.18) $ (0.10) $ (0.01)
======== ======== ========
(Loss)/income per share from
discontinued operations
Basic $ (0.04) $ (0.11) $ 0.01
======== ======== ========
Diluted $ (0.04) $ (0.11) $ 0.01
======== ======== ========
Net (loss)/income per share
Basic $ (0.22) $ (0.21) $ 0.00
======== ======== ========
Diluted $ (0.22) $ (0.21) $ 0.00
======== ======== ========
Average number of shares outstanding
Basic 24,924 23,963 18,937
======== ======== ========
Diluted 24,924 23,963 22,959
======== ======== ========
See Notes to Consolidated Financial Statements.
Page 23 of 52
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,
2002 2001 2000
------- ------- -------
Cash Flows from Operating Activities:
Net (loss)/income $(5,378) $(4,993) $ 91
Adjustments to reconcile net income/(loss) to net cash
(used in)/provided by operating activities:
Depreciation and amortization of plant and equipment 816 834 829
Amortization of goodwill -- 105 7
Provision for slow moving inventory -- 452 --
Deferred tax benefit (3,400) -- --
Amortization of intangibles 28 41 163
Loss on retirement of property, plant and equipment 241 27 --
Amortization of options issued as compensation 30 10 --
Restructuring reserve (includes inventory reserve of $702 in 2001)
(754) 1,496 --
Unrealized currency loss/(gain) (347) 520 458
Changes in assets and liabilities (net of effect of PSI
Acquisition in 2000 and Aviv in 2001):
Receivables 3,687 1,414 571
Inventories 3,280 (2,103) (261)
Prepaid expenses and other current assets (101) 348 (146)
Accounts payable and accrued liabilities 1,378 (434) 248
Other assets 38 94 (326)
Other non-current liabilities -- (40) 48
------- ------- -------
Net cash (used in)/ provided by operating activities (482) (2,229) 1,682
Cash Flows from Investing Activities:
Aviv acquisition costs net of cash acquired ($327) in 2001 -- (177) --
PSI acquisition costs -- (50) (385)
Purchases of property, plant and equipment (118) (186) (201)
------- ------- -------
Net cash used in investing activities (118) (413) (586)
Cash Flows from Financing Activities:
Net borrowing from/(repayments of) line of credit (217) 2,290 1,775
(Repayments)/borrowings against accounts receivable - net (607) 631 (594)
Proceeds from long-term debt -- 300 1,500
Repayment of long-term debt/lease obligation (631) (641) (419)
Repayment of long-term debt affiliate -- (50) (3,500)
Proceeds from issuance of common stock, net of Issuance costs 4 96 875
Proceeds from warrants exercised -- -- 1,000
Proceeds from issuance of preferred stock, net of issuance cost 1830 -- --
Repayment of Mettler liability -- -- (1,212)
------- ------- -------
Net cash provided by/(used in) financing activities 379 2,626 (575)
Effect of Exchange Rate Changes on Cash 235 (74) --
------- ------- -------
Net (decrease)/increase in cash 14 (90) 521
Cash at beginning of year 696 786 265
------- ------- -------
Cash at end of year $ 710 $ 696 $ 786
======= ======= =======
See Notes to Consolidated Financial Statements.
Page 24 of 52
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY\(DEFICIENCY)
AND COMPREHENSIVE INCOME/(LOSS)
(in thousands) Accumulated Total
Additional Other Shareholders'
Common Stock Paid-In Treasury Stock Accumulated Comprehensive Equity/
------------ --------------
Shares Amount Capital Shares Amount Deficit Income/(Loss) (Deficiency)
------ ----- ------- ------ ------ ------- ------------ ------------
Balance at December 31, 1999 13,162 $ 132 $ 25,571 -- -- $(28,829) $ 139 $ (2,987)
Net income -- -- -- -- 91 -- 91
Currency translation adjustment -- -- -- -- -- -- (65) (65)
--------
Comprehensive income -- -- -- -- -- -- -- 26
--------
Axess indebtedness contributed
to capital -- -- 3,727 -- -- -- -- 3,727
Common Stock issued to
Andlinger Capital XXVI
net of offering costs 10,606 106 769 -- -- -- -- 875
Exercise of stock warrants 1,268 13 987 -- -- -- -- 1,000
Treasury stock -- -- 2,800 -- -- -- --
Common Stock issued pursuant
to Protein Solutions Acquisition 680 6 2,194 -- -- -- -- 2,200
------ -------- -------- ----- --- -------- -------- --------
Balance at December 31, 2000 24,716 $ 257 $ 33,248 2,800 -- $(28,738) $ 74 $ 4,841
Net loss -- -- -- -- -- (4,993) -- (4,993)
Currency translation adjustment -- -- -- -- -- -- (161) (161)
--------
Comprehensive loss -- -- -- -- -- -- -- (5,154)
--------
Common Stock issued pursuant 806 8 2,732 -- -- -- -- 2,740
to Aviv Acquisition
Conversion of preferred stock 1,000 10 990 -- -- -- -- 1,000
Axess conversion debt to equity 66 1 262 -- -- -- -- 263
Options exercised 127 1 95 -- -- -- -- 96
Fair Value of options granted -- -- 10 -- -- -- -- 10
------ -------- -------- ----- --- -------- -------- --------
Balance at December 31, 2001 27,715 $ 277 $ 37,337 2,800 -- $(33,731) $ (87) $ 3,796
Net loss -- -- -- -- -- (5,378) -- (5,378)
Currency translation adjustment -- -- -- -- -- -- 327 327
--------
Comprehensive loss (5,051)
--------
Options exercised 11 -- 4 -- -- -- -- 4
Preferred Stock issuance costs -- -- (170) -- -- -- -- (170)
Increase in redemption value of
preferred stock -- -- (105) -- -- -- -- (105)
Amortization of prior year options -- -- 30 -- -- -- -- 30
------ -------- -------- ----- --- -------- -------- --------
Balance at December 31, 2002 27,726 $ 277 $ 37,096 2,800 -- $(39,109) $ 240 $ (1,496)
====== ======== ======== ===== ==== ======== ======== ========
See Notes to Consolidated Financial Statements.
Page 25 of 52
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Proterion
Corporation (formerly Rheometric Scientific, Inc.) and its wholly-owned
subsidiaries (referred to as "Proterion", the "Company" or "we"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
On March 6, 2000, pursuant to a securities purchase agreement, dated as of
February 17, 2000, among the Company, Axess Corporation ("Axess") and Andlinger
Capital XXVI LLC ("Andlinger Capital XXVI"), as amended (the "Purchase
Agreement") and certain related agreements, Andlinger Capital XXVI purchased:
(i) 10,606,000 shares of our newly issued common stock (the "Investor Shares")
and (ii) warrants to purchase (x) an additional 2,000,000 shares of Common Stock
at an exercise price of $1.00 per share, exercisable at any time prior to March
6, 2007 (the "Investor A Warrants") and (y) an additional 4,000,000 shares of
our Common Stock at an exercise price of $3.00 per share, exercisable at any
time prior to March 6, 2003 (the "Investor B Warrants," and collectively with
the Investor A Warrants, the "Investor Warrants"), for the aggregate
consideration of $1,825,000 (the "Purchase Price"). Prior to the purchase by
Andlinger Capital XXVI of the Investor Shares and the Investor Warrants, Axess
agreed to contribute 2,800,000 shares of Common Stock to the Company. As a
result of these transactions, Andlinger Capital XXVI became our controlling
stockholder.
The Company designs, manufactures, markets, and services computer-controlled
life sciences instrumentation in the areas of particle sizing and biomolecular
characterization for use in material and product research and development.
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.
Revenue Recognition
Product sales are recorded upon shipment, provided that the price is fixed,
title has been transferred, collection of the resulting receivable is reasonably
assured, and there are no significant obligations. Maintenance agreement revenue
is recorded on a straight-line basis over the terms of the respective
agreements. Other service revenue is recorded as services are performed. We
accrue for expected warranty cost on product sales. Service revenue from
continuing operations was nominal for 2002, 2001 and 2000. Deferred revenue from
continuing operations related to maintenance agreements amounted to $109,000 and
$7,000 at December 31, 2002 and 2001, respectively, and is included in accrued
liabilities on the consolidated balance sheet. Deferred revenue for the rheology
instruments and service business is included in liabilities transferred on the
consolidated balance sheet.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-out
method) or market. As of December 31, 2002 and 2001, the Company had a reserve
of approximately $104,000 and $3,090,000, respectively, for excess and obsolete
inventory. Included in the obsolescence reserve in 2001 is $702,000 relating to
the restructuring provision booked in the fourth quarter of 2001. (See Note 11.)
We continuously monitor our exposure relating to excess and obsolete inventory
and establish reserves for any exposure.
Page 26 of 52
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation and amortization
of plant and equipment are computed based on the estimated service lives of the
assets or lease terms, whichever is shorter, using the straight-line method.
Betterments and major renewals are capitalized, while repairs, maintenance and
minor renewals are expensed. When assets are disposed of, the assets and related
allowances for depreciation are eliminated from the accounts and any resulting
gain or loss is reflected in operations.
The estimated useful lives for each class of fixed assets are as follows:
Assets under direct
financing lease 15 years Transportation equipment 3-5 years
Machinery and equipment 5-8 years Leasehold improvements 5 years
Office equipment 5-8 years Assets under capital lease 5 years
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
No provision has been made for U.S. income taxes which would be payable if
undistributed earnings of approximately $314,000 as of December 31, 2002 of
foreign subsidiaries were distributed to the Company in the form of dividends,
since it is management's intention to permanently reinvest such earnings in the
related foreign operations.
Goodwill
Prior to 2002, goodwill was being amortized using the straight-line method over
40 years. Commencing January 1, 2002 as a result of adopting SFAS 142, goodwill
is no longer being amortized, but is reviewed for impairment at least annually.
(See "Accounting for the Impairment of Long-Lived Assets.") Goodwill
amortization for the years ended December 31, 2001 and 2000 totaled $105,000 and
$7,000, respectively. If SFAS 142 had been in effect for the 12 months ended
December 31, 2001 and 2000 net loss would have decreased by $105,000 and net
income would have increased by $7,000, respectively. The per share impact would
have been less than $.01 per share in each year.
Patents
Patents are amortized by the straight-line method over their respective useful
lives.
Deferred Financing Costs
Deferred financing costs are amortized over the life of the loan. The
unamortized balance of deferred financing costs at December 31, 2002 and 2001
was $39,000 and $188,000, respectively. Deferred financing costs are included in
other assets in the Consolidated Balance Sheet.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated at current
exchange rates and the effects of these translation adjustments are reported as
a separate component of shareholders' equity. Realized gains and losses from
foreign currency transactions are included in the consolidated statements of
operations, as are unrealized gains and losses arising from the translation of
the foreign subsidiaries' intercompany liability accounts into U.S. dollars.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange rates.
Page 27 of 52
Research and Development Costs
Research and development costs are charged to expense as incurred.
Cash Flow Information
Foreign currency cash flows have been converted to U.S. dollars at an
appropriately weighted-average exchange rate or the exchange rates in effect at
the time of the cash flows, where determinable.
Net cash used in operating activities for the year ended December 31, 2002 and
net cash provided by operating activities for the years ended December 31, 2001
and 2000 reflects cash payments for interest of $926,000, $1,365,000 and
$1,301,000, respectively, and income taxes of $5,000, $7,000 and $194,000,
respectively. The bad debt expense for the years ended December 31, 2002, 2001
and 2000 was $157,000, $47,000, and $22,000, respectively.
In 2000, noncash transactions from investing activities resulted in the issuance
of approximately 680,000 shares of Common Stock valued at approximately
$2,200,000 in connection with the acquisition of Protein Solutions.
Additionally, noncash transactions from financing activities resulted in an
increase in paid in capital of $3,730,000 from the Axess debt forgiveness.
In 2001, noncash transactions from investing activities resulted in the issuance
of approximately 806,000 shares of Common Stock valued at approximately
$2,740,000 in connection with the acquisition of Aviv. Additionally fixed assets
increased approximately $234,000 for assets under capital leases. Noncash
transactions from financing activities resulted in an increase in Common Stock
and paid in capital of $1,000,000 due to the conversion of Preferred Stock to
Common Stock and $263,000 related to the conversion of Axess debt and accrued
interest to Common Stock.
In 2002, the Company sold property, plant and equipment for net proceeds of
$140,000. The proceeds from these sales were used to pay down indebtedness.
Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments as of December
31, 2002 and 2001 approximates the carrying amounts.
Concentration of Credit Risk
The Company's product line is sold worldwide, principally to large corporations,
research, and educational and governmental institutions. The Company does not
require collateral from its customers. The accounts receivable are spread among
a number of customers and are geographically dispersed such that in management's
opinion credit risk is minimized.
Accounting for the Impairment or Disposal of Long-Lived Assets
Financial Accounting Standards Board Statement of Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets and for the Disposal of
Long-Lived Assets" requires companies to review their long-lived assets and
intangibles with a definite life for impairment whenever events or changes in
circumstances indicate that the carrying value of a such assets may not be
recoverable.
Earnings (Loss) Per Share
The Company calculates net income per share as required by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which requires the
Company to calculate basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effect of stock options, warrants, and convertible
securities.
Page 28 of 52
The following table sets forth the computation of diluted earnings per share for
the year ended December 31, 2000:
(dollars in thousands except per share data)
Net income available to Common
Stockholders $ 91
------
Denominator for basic earnings per share:
Weighted average:
Common shares outstanding 18,937
Effect of dilutive securities:
Preferred Stock 833
Stock options 381
Warrants 2,808
------
Denominator for diluted earnings per share 22,959
------
Diluted earnings per share $ 0.00
------
For the years ended December 31, 2002 and 2001 Common Stock equivalents were
anti-dilutive.
On May 26, 2000 the Company changed its authorized number of shares of Common
Stock from 20,000,000 to 49,000,000 and adjusted the par values from no par with
a stated value of $.001 to par value of $.01. The Company's financial statements
give effect to the change in the par value for all years presented.
Reclassifications
Certain amounts reported on the 2001 financial statements have been reclassified
to conform with the 2002 presentation, principally relating to assets held for
sale and disposal and the segregation of continuing and discontinued operations.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other
Intangible Assets."("SFAS 142") Under these new Standards the FASB eliminated
accounting for any mergers and acquisitions as poolings of interests, eliminated
amortization of goodwill and indefinite life intangible assets, and established
new impairment measurement procedures for goodwill. SFAS 141 is effective for
all business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company adopted SFAS 142 for 2002.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company is currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets." which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model for
impairment of long-lived assets and intangibles with a definite life. SFAS 144
requires the Company to review such assets for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. The Company adopted SFAS 144 in 2002.
In June 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF
94-3"), "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. EITF
94-3 allowed for an exit cost liability to be recognized at the date of an
entity's commitment to an exit plan. SFAS 146 also requires that liabilities
recorded in connection with exit plans be initially measured at fair value. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002, with early adoption encouraged. The Company
is evaluating the effect of the adoption of SFAS 146 and does not expect the
adoption of SFAS 146 to have a material impact, if any, on the Company's
consolidated financial statements.
Page 29 of 52
2. Sale of the Rheology Instruments and Services Business
On January 15, 2003, we completed the sale of our rheology instruments and
services business to the TA Instruments Division of Waters Corporation, for
consideration of $17 million in cash and the assumption of $6 million of
accounts payable, and accrued expenses, plus certain other specified
obligations. $15.3 million was paid at closing and the purchaser is obligated to
pay us $850,000 six months after closing and $850,000 one year after closing.
The "Rheometric Scientific" and "Rheometrics" names were included in the sale.
We used the proceeds from this sale, in part, to retire all of our bank debt,
which amounted to approximately $9,600,000, and to discharge certain other
obligations. We are using the remaining proceeds to provide interim working
capital. As part of this transaction, we changed our name from Rheometric
Scientific, Inc. to Proterion Corporation, which represents the Company's life
sciences business.
The assets and liabilities transferred as of January 15, 2003 are included in
assets held for sale and liabilities transferred, respectively, on the Balance
Sheet. The details of these items as of December 31, 2002 are presented below.
Assets held for sale and disposal December 31, 2002
(000s)
Current Assets
Net accounts receivable $ 4,754
Inventory 4,065
Other assets 80
-------
Total current assets $ 8,899
=======
Long-lived fixed assets
Assets to be sold to TA Waters less accumulated
depreciation of $8,912 433
Assets under direct financing lease to be disposed
less accumulated depreciation of $2,949 3,905
-------
Total long-lived fixed assets $ 4,338
=======
Liabilities transferred
Accounts payable and accrued expenses $ 6,000
Discounted accounts receivable 380
Capitalized lease 86
-------
Total liabilities transferred $ 6,466
=======
Page 30 of 52
Discontinued Operations
The results of operations of the rheology instruments and services business have
been shown as discontinued operations.
Summarized financial information is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
-------- -------- --------
Sales $ 21,316 $ 25,583 $ 29,382
Cost of sales 14,384 14,575 15,412
-------- -------- --------
Gross margin 6,932 11,008 13,970
Operating expenses 10,310 11,907 11,776
-------- -------- --------
(Loss)\income from operations (3,378) (899) 2,194
Interest (979) (1,128) (1,305)
Foreign currency loss (52) (485) (620)
Income tax (expense)\benefit 3,393 5 --
-------- -------- --------
Net (loss)\income $ (1,016) $ (2,517) $ 269
======== ======== ========
Page 31 of 52
The following unaudited pro forma condensed balance sheet was prepared to give
effect of the January 15, 2003 sale of the rheology instruments and services
business and lease termination (See Note 5):
PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(in thousands)
Assets
transferred Lease
to TA Use of termi-
Historical Waters(a) Proceeds nation (b) Total
---------- --------- -------- ---------- -------
Assets
Current Assets
Cash $ 710 $ 15,300 $(12,303) $ (2,276) $ 1,431
Receivables 677 -- -- -- 677
Inventory 947 -- -- -- 947
Deferred tax asset 3,400 (3,400) -- -- --
Prepaid expenses and other current assets 597 -- -- -- 597
Assets held for sale 8,899 (8,899) -- -- --
Cash in escrow -- 850 -- -- 850
-------- -------- -------- -------- --------
Total current assets 15,230 3,851 (12,303) (2,276) 4,502
-------- -------- -------- -------- --------
Property, plant and equipment, net 378 -- -- -- 378
Assets held for sale and disposal 4,338 (432) -- (3,906) --
Goodwill 5,609 -- -- -- 5,609
Patents 121 -- -- -- 121
Cash in escrow -- 850 -- -- 850
--------
Other assets 494 -- -- -- 494
-------- -------- -------- -------- --------
Total Assets $ 26,170 $ 4,269 $(12,303) $ (6,182) $ 11,954
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY\(DEFICIENCY)
Current Liabilities
Bank borrowing $ 8,700 $ (8,700)
Current maturities of long-term debt 3,631 -- (845) $ (2,286) $ 500
Current maturities affiliate debt 500 -- (250) -- 250
Accounts payable 2,294 -- (1,241) -- 1,053
Accrued liabilities 1,940 900 (600) -- 2,240
Liabilities to be transferred 6,466 (6,466) -- -- --
-------- -------- -------- -------- --------
Total current liabilities 23,531 (5,566) (11,636) (2,286) 4,043
Long-term debt 1,752 -- -- (1,502) 250
Long-term debt - affiliate 250 -- -- -- 250
Other long-term liabilities 28 -- -- -- 28
-------- -------- -------- -------- --------
Total Liabilities 25,561 (5,566) (11,636) (3,788) 4,571
Redeemable Preferred Stock 2,105 -- (667) -- 1,438
-------- -------- -------- -------- --------
Total Shareholders' Equity (1,496) 9,835 -- (2,394) 5,945
-------- -------- -------- -------- --------
Total Liabilities and Shareholders' Equity(a)(b) $ 26,170 $ 4,269 $(12,303) $ (6,182) $ 11,954
======== ======== ======== ======== ========
(a) This represents the sale of certain assets and the assumption
of certain liabilities, net of income tax. See first paragraph
of this footnote.
(b) See Note 5.
Page 32 of 52
3. Property, Plant and Equipment
Property, plant and equipment as of December 31 consisted of the following:
2002 2001
--------- --------
Machinery and equipment 384,000 647,000
Office equipment 274,000 219,000
--------- --------
$ 658,000 $866,000
========= ========
On February 23, 1996, the Company entered into a sale/leaseback arrangement
whereby the Company sold its corporate headquarters and main manufacturing
facility, and the 19 acres of real property on which the facility is located
(the facility and the real estate being referred to herein as the "Facility")
for $6,300,000. The transaction was treated as a financing. A lease obligation
was recorded and the asset was written down to the amount of the proceeds.
Simultaneously with this sale, the Company entered into a long-term lease of the
Facility from the new owner. The initial term of the lease is 15 years, subject
to five-year extensions through 2026.
In connection with the sale of our rheology instruments and services business,
we entered into a lease termination agreement with the owner of the Facility
under our lease. The lease termination agreement requires us to pay the landlord
$3,000,000: (i) $2,250,000 of which we paid in January 2003; (ii) $500,000 of
which is to be paid at the release of the first escrow payment under the terms
of the sale of the rheology instruments and services business; and (iii)
$250,000 of which is to be paid at the release of the second escrow payment
under the terms of the sale of the rheology instruments and services business.
The lease termination agreement also provides that the owner's existing warrants
for 464,160 shares of Common Stock be reduced from $0.37 per share to $0.01 per
share and for us to issue 650,000 newly issued shares of Common Stock to the
landlord at closing. (See Note 4. "Long-Term Debt and Short-Term Borrowings.")
The net book value of such assets under direct financing lease in the amount of
$3,905,000 and $4,242,000 at December 31, 2002 and 2001, respectively, has been
included in assets held for sale and disposal in the accompanying consolidated
balance sheets. (See Note 2.)
Property, Plant and Equipment sold to the TA Instruments Division of Waters
Corporation in January 2003 with a net book value of $433,000 and $541,000 at
December 31, 2002 and 2001, respectively, has been included in assets held for
sale and disposal in the accompanying consolidated balance sheets. (See Note 2.)
Page 33 of 52
4. Long-Term Debt and Short-Term Borrowings
Long-term debt as of December 31 consisted of the following:
2002 2001
---- ----
Obligation under sale/leaseback payable through
February 2011, with interest imputed at a rate
of 13.9% for 2002 and 2001 (a) $ 4,503,000 $ 4,571,000
Term loan payable through March 2003. Loan bears
interest at prime plus 1.5% (5.75% at December
31, 2002 and 6.25% at December 31, 2001) (b) 675,000 975,000
Obligations under capital leases payable
2002 through 2005 with interest imputed at
rates from 8.5% to 13.3% 39,000 255,000
Term loan payable through June 2005. Loan bears
interest at prime plus 1.5% (5.75% at December
31, 2002 and 6.25% at December 31, 2001) (b) 194,000 269,000
------------ ------------
5,411,000 6,070,000
Less current maturities 3,631,000 751,000
------------ ------------
$ 1,780,000 $ 5,319,000
============ ============
(a) In connection with the sale of our rheology instruments and services
business, we entered into a lease termination agreement with the owner of the
Facility under our lease. The lease termination agreement requires us to pay the
landlord $3,000,000: (i) $2,250,000 of which we paid in January 2003; (ii)
$500,000 of which is to be paid at the release of the first escrow payment under
the terms of the sale of the rheology instruments and services business; and
(iii) $250,000 of which is to be paid at the release of the second escrow
payment under the terms of the sale of the rheology instruments and services
business. Payments due within the next 12 months, are classified as short-term.
(b) In connection with the sale of the rheology instruments and services
business on January 15, 2003, the two term loans payable were paid in full.
Following are the annual maturities of long-term debt (in thousands): 2003
$3,631; 2004 $1,766; 2005 $14.
Short-Term Borrowings
At December 31, 2002, the Company had total borrowings under its working capital
credit facility of $8,700,000 with remaining availability of approximately
$200,000. The weighted-average interest rate on short-term debt outstanding was
5.2% and 6.7% as of December 31, 2002 and 2001, respectively. The credit
facility is collaterized by substantially all of the Company's assets.
On January 15, 2003 in connection with the sale of the rheology instruments and
services business the entire working capital credit facility was paid in full.
Page 34 of 52
5. Long-Term Debt - Affiliate
Long-term debt - affiliate as of December 31 consisted of the following:
2002 2001
---- ----
Subordinated promissory note with interest at 6% $750,000 $750,000
On September 28, 2001 Axess converted $200,000 of the principal balance 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, repayment was to begin on June 30,
2002 in the amount of $50,000 per quarter plus accrued interest on the unpaid
balance at a rate of 6% per annum. Interest began to accrue as of April 1, 2002.
The entire unpaid principal and interest balance is due and payable on February
28, 2006.
Immediately prior to the sale of our rheology instruments and services business,
we owed Axess $787,000 (including accrued interest) under the term of the
subordinated promissory note. On January 15, 2003, at the closing of the sale,
we amended this note and agreed to pay Axess: (i) $287,000 at the closing; (ii)
$250,000 upon the six-month anniversary of the closing; (iii) $250,000 upon the
twelve month anniversary of the closing; and (iv) interest on the outstanding
principal amount on a monthly basis until the note's maturity date.
6. Income Taxes
The components of deferred tax assets and liabilities for both continuing and
discontinued operations as of December 31 consisted of the following:
2002 2001
---- ----
Inventory reserves, inventory capitalization and
intercompany profit in inventory $ 887,000 $ 843,000
Other 459,000 453,000
Restructuring expense 14,000 387,000
Net operating loss carryforwards 13,529,000 9,873,000
Research and development and other tax
credit carryforwards 1,002,000 1,002,000
---------- ----------
Gross deferred tax assets 15,891,000 12,558,000
Gross deferred tax liabilities (4,000) (16,000)
---------- ----------
Net deferred tax asset before valuation
allowance 15,887,000 12,542,000
Valuation allowance on deferred tax assets (12,487,000) (12,542,000)
------------ ------------
Net deferred tax asset $ 3,400,000 $ --
============ ============
A valuation allowance is established when it is more likely than not that a
portion or all of the deferred tax assets will not be realized.
At December 31, 2002, the Company had federal net operating loss carryforwards
for income tax purposes of approximately $18,958,000 that expire through 2022,
state net operating losses of approximately $13,245,000 that expire through
2012, and foreign loss carryforwards of approximately $6,985,000, a portion of
which may be carried forward indefinitely. The Company also has other tax credit
carryforwards aggregating approximately $1,002,000 at December 31, 2001, which
expire through 2011.
A change in ownership resulting from the Company's August 21, 1992 sale of
Common Stock and a subordinated convertible debenture has resulted in a
limitation on future annual utilization of domestic tax credits and net
operating losses, pursuant to Internal Revenue Code Sections 382 and 383.
Page 35 of 52
On March 6, 2000 pursuant to a Securities Purchase Agreement between Rheometric
Scientific, Axess Corporation and Andlinger Capital XXVI, Andlinger Capital
acquired the power to vote an aggregate of 16,606,000 shares of the Company's
Common Stock representing approximately 74% of the issued and outstanding Common
Stock of the Company. This includes 6,000,000 shares issuable upon exercise of
the Investor Warrants. This will result in a further limitation on future annual
utilization of domestic tax credits and net operating losses, pursuant to
Internal Revenue Code Sections 382 and 383.
Income/(loss) before income taxes as of December 31 consisted of the following:
2002 2001 2000
---- ----- ----
Domestic $ (6,254,000) $ (3,068,000) $ 55,000
Foreign (2,598,000) (1,920,000) 45,000
------------- ------------- ---------
$ (8,852,000) $ (4,988,000) $ 100,000
============= ============= =========
The components of income tax expense (benefit) for the years ended December 31
consisted of the following:
2002 2001 2000
---- ----- ----
Continuing Operations
Federal:
Current -- -- $ --
Deferred -- -- --
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Foreign:
Current (81,000) -- 4,000
Deferred -- -- --
----------- ----------- -----------
(81,000) -- 4,000
----------- ----------- -----------
State:
Current -- -- 4,000
Deferred -- -- --
----------- ----------- -----------
-- -- 4,000
----------- ----------- -----------
$ (81,000) $ -- $ 8,000
=========== =========== ===========
2002 2001 2000
---- ----- ----
Discontinued Operations
Federal:
Current -- -- $ --
Deferred (3,400,000) -- --
----------- ----------- -----------
(3,400,000) -- --
----------- ----------- -----------
Foreign:
Current 5,000 4,000 --
Deferred -- -- --
----------- ----------- -----------
5,000 4,000 --
----------- ----------- -----------
State:
Current 2,000 1,000 --
Deferred -- -- --
----------- ----------- -----------
2,000 1,000 --
----------- ----------- -----------
$(3,393,000) $ 5,000 $ --
=========== =========== ===========
Total Continuing
and Discontinued
Operations $(3,474,000) $ 5,000 $ 8,000
=========== =========== ===========
Page 36 of 52
Company's effective tax rate varies from the statutory federal tax rate
(applied to both continuing and discontinued operations) as of December 31 as a
result of the following:
2002 2001 2000
---- ---- ----
Computed statutory income
tax (benefit) $(3,010,000) $(1,696,000) $ 34,000
State income taxes, net of Federal
tax benefit 2,000 1,000 4,000
Foreign taxes in excess of/(less than)
statutory rate 807,000 649,000 (11,000)
Utilization of net operating losses (1,042,000) -- (19,000)
Benefit of loss carryforwards not
recognized -- 631,000 --
Effect of temporary differences (254,000) 821,000 --
Permanent differences 23,000 (388,000) --
Other -- (13,000) --
----------- ----------- ---------
$(3,474,000) $ 5,000 $ 8,000
=========== =========== =========
7. Capital Stock and Stock Option and Incentive Plans
The Company has two stock option plans under which stock options may be granted:
the 1996 Stock Option Plan (the "1996 Plan") and the 2000 Stock Option Plan (the
"2000 Plan"). The 1996 Plan, as amended, authorizes the issuance of up to
500,000 shares of the Company's Common Stock as incentive stock options pursuant
to Section 422 of the Internal Revenue Code. The 2000 Plan authorizes the
issuance of up to 1,000,000 shares of the Company's Common Stock. Stock options
are generally granted at prices, which equate to the market value of the stock
on the date of option grant. Options generally become exercisable in ratable
installments over a four-year period, with unexercised options expiring no later
than 10 years from the date of grant.
Page 37 of 52
Stock option activity for the years 2002, 2001 and 2000 under the 1996 Plan and
the 2000 Plan is as follows:
2002 2001 2000
------------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ -------- ------ --------
Outstanding at January 1, 734,100 $ 2.97 724,100 $ 2.28 414,400 $ 0.84
Granted 77,850 1.06 217,000 4.44 333,700 4.19
Exercised 11,250 0.39 127,500 0.74 -- --
Canceled 59,500 4.07 79,500 3.71 24,000 3.83
Outstanding at December 31, 741,200 2.72 734,100 2.97 724,100 2.28
Exercisable at December 31, 416,075 2.13 298,250 1.68 328,650 0.93
Available for grant at December
31, 747,500 638,400 775,900
Weighted average fair value of
options granted during the period $ 0.33 $ 1.82 $ 3.39
The following table summarizes the information about stock options outstanding
under the 1996 Plan and the 2000 Plan at December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Outstanding at Exercise
Exercise Prices December 31, Life (Years) Price December 31, Price
--------------- ------------ ------------ ----- ------------- -----
$0.28 - $6.25 741,200 7.24 $2.72 416,075 $2.13
The Company has adopted the "disclosure only" provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation
("SFAS 123") and will continue to apply APB No. 25 to account for stock options.
Had the Company accounted for stock options under the fair value method of SFAS
123, net loss and net loss per share would have increased by $163,000 and $.01
in 2002. Net loss would have increased by $160,000 in 2001, and net income would
have decreased by approximately $39,000 in 2000. The per share impact was less
than $0.01 in 2001 and 2000.
Page 38 of 52
The fair value of the options granted were estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
---- ---- ----
Risk free interest rate 5.10% 4.31% 5.75%
Expected volatility 29.65% 31.42% 36.10%
Expected life (years) 4 4 4
Dividend yield 0% 0% 0%
In connection with the sale/leaseback arrangement, the Company issued the
following three warrants to acquire shares of its Common Stock, all having an
exercise price of $2.00 per share: (1) a warrant to the owner of the Facility to
purchase 132,617 shares of Common Stock of the Company, exercisable during the
term of the lease; (2) a conditional warrant to the owner of the Facility to
purchase 331,543 shares of Common Stock of the Company which was only
exercisable if the indebtedness owed by the owner under its mortgage loan for
the Facility ("Mortgage Loan") was repaid prior to February 23, 1997, or if the
Landlord was unable to refinance the indebtedness owed under the Mortgage Loan
prior to February 23, 1997, solely as a result of environmental contamination
relating to the 11 acres of undeveloped real estate constituting a portion of
the Facility (the "Excess Land"); and (3) a conditional warrant to the owner's
lender (the "Lender") to purchase 331,543 shares of Common Stock which was only
exercisable if the indebtedness owed under the Mortgage Loan by Landlord to the
Lender was not refinanced prior to February 23, 1997. On February 20, 1997, the
Landlord refinanced the Mortgage Loan and the Company's interest in the Mortgage
Loan was repaid. On that same day, the conditional warrant to the owner of the
Facility to purchase 331,543 shares of Common Stock of the Company became
exercisable and the conditional warrant held by the owner terminated. On July
22, 1998, in consideration for waiving certain covenant violations, the exercise
price for the outstanding warrants was reduced to $1.00 per share. Additionally,
on December 29, 1999, in consideration of waiving certain covenant violations,
the exercise price for the outstanding warrants was reduced to $0.37 per share.
On January 15, 2003, in connection with the execution of our lease termination
agreement with the owner of the Piscataway, NJ Facility, we amended the exercise
price of the owner's existing warrants for 464,160 shares of Common Stock from
$0.37 per share to $0.01 per share.
In conjunction with the acquisition of Protein Solutions, Andlinger Capital XXVI
exercised Investor A Warrants for the purchase of one million shares of Common
Stock of the Company at an exercise price of $1.00 per share.
8. Employee Benefit Plans
The Company has a 401(k) Savings and Investment Retirement Plan (the "401(k)
Plan") under which the Company matches a portion of the employees' salary
deduction contributions. Substantially all domestic employees are eligible to
participate in the 401(k) Plan. Contributions included in both continuing and
discontinuing operations by the Company were $119,000, $95,000, and $110,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. The Company's
foreign subsidiaries also sponsor employee retirement plans. The expense
recorded by the Company for such plans was insignificant for the years ended
December 31, 2002, 2001, and 2000. The Company does not sponsor any
post-retirement health, life insurance or related benefit plans, nor any
significant post-employment benefit plans.
Page 39 of 52
9. Commitments and Contingencies
The Company and its subsidiaries are parties to various operating leases
relating to office facilities, transportation vehicles, and certain other
equipment, principally data processing. Real estate taxes, insurance and
maintenance expenses are normally obligations of the Company. All leasing
arrangements contain normal leasing terms without unusual purchase options or
escalation clauses. Rent expense from continuing operations was $123,000,
$175,000, and $8,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Rent expense from discontinuing operations was $447,000, $445,000
and $352,000 for the years ended December 31, 2002, 2001, and 2000,
respectively.
The Company and its subsidiaries are parties to various capital leases relating
to office furniture and fixtures and machinery and equipment. See Note 4 -
Long-Term Debt.
On February 23, 1996, the Company entered into a sale/leaseback arrangement that
is recorded as a financing on the Facility. As a result of this transaction, the
Company is committed to a 15-year lease with an initial annual payment of
$1,180,000 payable quarterly. The facility lease is treated as debt for
financial reporting purposes. See Note 4 - Long-Term Debt.
Lease Termination. In connection with the sale of our rheology instruments and
services business on January 15, 2003, we entered into a lease termination
agreement with the owner of the Facility. This agreement requires us to pay the
owner $3,000,000 as follows: (i) $2,250,000 which we paid in January 2003; (ii)
$500,000 to be paid at the release of the first escrow payment under the terms
of the sale of the rheology instruments and services business; and (iii)
$250,000 to be paid at the release of the second escrow payment under the terms
of the sale of the rheology instruments and services business.
The minimum commitments under noncancellable leases (excluding the direct
financing lease, which was terminated on January 15, 2003) consisted of the
following at December 31, 2002:
(in thousands) Operating Capital
Year Leases Leases
---- ------ ------
2003 $158 $ 15
2004 2 15
2005 1 16
---- ----
Total minimum lease payments $161 46
===
Less amounts representing interest 7
----
Total lease obligation 39
Less current maturities 11
----
Long-term lease obligation $ 28
====
On August 27, 1998, the Company consummated the assignment of the lease of its
Epsom facility in the United Kingdom to a third party and moved its sales and
service personnel to offices located in Leatherhead. The Company's UK
subsidiary, however, remained liable to the landlord under the lease.
In January 2003, the Company was informed that the tenant in the UK facility was
insolvent and could no longer perform under the terms of the lease assignment.
The Company has recorded an accrued liability of $100,000 (of which it has paid
$50,000 subsequent to December 31, 2002) as of December 31, 2002 covering six
months of lease payments in the belief that its maximum liability under the
lease is six months of lease payments. The Company has also instructed the
Property Manager to pursue other tenants for the property.
The Company has employment agreements with key management executives. The
agreements provide for severance upon termination of eight months. The minimum
aggregate obligation related to these agreements approximates $238,000.
Page 40 of 52
In the ordinary conduct of its business, the Company may be party to litigation.
At December 31, 2002, in the opinion of management, there are no matters pending
or threatened, which would have a material adverse effect on the consolidated
financial position or results of operations of the Company.
10. Operating Segments/Foreign Operations and Geographic Information
On January 15, 2003, we completed the sale of our rheology instruments and
services business to the TA Instruments Division of Waters Corporation. The
results of operations of this business are included in discontinued operations.
Our life sciences instrumentation business is the only remaining segment.
Summarized financial information concerning the Company's reportable segments is
shown below:
Discontinuing Operations Total
-----------------------
RHEO Discontinued Life
(In thousands) US Japan Europe Operations Science Total
--------- ----- ------ ---------- ------- -----
Trade Sales:
2002 13,313 4,066 3,937 21,316 4,934 26,250
2001 13,886 6,281 5,416 25,583 5,730 31,313
2000 16,405 5,877 7,100 29,382 480 29,863
Intercompany Sales:
2002 3,071 0 940 -- -- --
2001 5,941 0 1,352 -- -- --
2000 6,972 0 1,242 -- -- --
Operating Income/(Loss):
2002 (450) (140) (2,788) (3,378) (4,144) (7,422)
2001 381 490 (1,770) (899) (2,196) (3,095)
2000 2,465 410 (681) 2,194 (169) 2,025
Total Assets:
2002 11,590 1,513 134 13,237 12,933 26,170
2001 13,876 3,980 3,455 21,311 8,318 29,629
2000 13,982 4,636 4,419 23,037 3,755 26,792
Depreciation and
Amortization
(including Intangibles):
2002 574 6 66 646 198 844
2001 737 39 82 941 39 980
2000 841 26 129 973 26 999
We acquired our Aviv product line effective May 31, 2001, and it is included in
our life sciences business. Protein Solutions was acquired November 17, 2000 and
is included in our life sciences business.
Sales between geographic areas are priced on a basis that yields an appropriate
rate of return based on assets employed, risk and other factors. Included in
Rheo US domestic sales are export sales of $3,285,000, $2,611,000, and
$2,996,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
11. Restructuring of Operations
In the fourth quarter of 2001, a restructuring provision was recorded for the
restructuring of certain Domestic and European operations. Key initiatives of
the restructuring program included: 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 consisted of $566,000 for the termination of 28
U.S. and European employees.
Page 41 of 52
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
included $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. In 2002, $754,000 of restructuring costs have been
charged against the restructuring reserve. The restructuring reserve at December
31, 2002 was $40,000.
12. Convertible Redeemable Preferred Stock
On March 6, 2000, in connection with Andlinger Capital XXVI investment in the
Company, the Company issued to Axess 1,000 shares of convertible redeemable
preferred stock with a $1,000 per share liquidation preference, redeemable over
a five-year period. These securities are entitled to mandatory redemption at
$1,000 per share, or are convertible at the holder's option into 1,000,000
shares of the Company's Common Stock.
On May 2, 2001, Axess converted 200 shares of the convertible redeemable
preferred stock into 200,000 shares of Common Stock of the Company. Subsequently
on July 2, 2001, Axess transferred the remaining 800 shares of convertible
redeemable preferred stock to State Farm.
On July 10, 2001, State Farm converted the 800 shares of convertible redeemable
preferred stock into 800,000 shares of Common Stock of the Company.
13. Redeemable Preferred Stock
On August 8, 2002, our Board of Directors approved our entering into a
securities purchase agreement with Andlinger Capital XXVI under which Andlinger
Capital XXVI purchased $1,500,000 of our newly created Series B Preferred Stock,
with the right, subject to future Board determination of the need for such
capital, to invest up to an additional $500,000 on the same terms. The new
Series B Preferred Stock does not carry a current dividend and is subject to
redemption at our option at any time or, at Andlinger Capital XXVI's option,
upon a change in control of our Company or the occurrence of certain other major
corporate events, including a sale of substantially all of our assets. The
redemption price is 101% of the original issuance amount plus an additional 1%
for each calendar month completed following the date of original issuance.
On October 30, 2002, our Board of Directors approved our entry into an agreement
with Andlinger Capital XXVI, pursuant to which Andlinger Capital XXVI would: (i)
purchase an additional $500,000 of our Series B Preferred Stock; (ii) defer its
right to have all of the outstanding Series B Preferred Stock redeemed in full
by us upon the closing of the sale of our rheology instruments and services
business; and (iii) subordinate such deferred redemption payments to amounts
payable by us to our landlord under the Piscataway facility lease and to Axess.
In consideration for these actions, we issued to Andlinger Capital XXVI a new
warrant, with an expiration date of March 6, 2007, to purchase up to 1,000,000
shares of our Common Stock at an exercise price equal to $1.00 per share (the
average of the closing prices of our Common Stock over the ten trading days
immediately preceding October 30, 2002) and having substantially the same other
terms and conditions as the existing warrants to purchase shares of our Common
Stock held by Andlinger Capital XXVI.
At the closing of the sale of our rheology instruments and services business, we
repaid Andlinger Capital XXVI $667,000 for the redemption of one-third of the
shares of our Series B Preferred Stock held by it. Pursuant to our agreement
with Andlinger Capital XXVI, we have agreed to redeem its remaining shares of
our Series B Preferred Stock in two equal installments upon the six-month
anniversary of the closing and the twelve-month anniversary of the closing,
respectively.
Page 42 of 52
14. Protein Solutions Acquisition
Effective November 17, 2000, the Company acquired all of the issued and
outstanding capital stock of PSI Holding Corporation, a Virginia corporation
("PSI"), and its wholly-owned subsidiaries, Protein Solutions, Inc., a Virginia
corporation and its affiliate Protein Solutions Ltd., a corporation organized
under the laws of England and Wales. PSI was acquired for approximately $525,000
cash and approximately 680,000 shares of our Common Stock. 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 November 17, 2000. The Company's consolidated statements of
operations do not include the revenues and expenses of PSI prior to this date.
The excess of the purchase price over the fair value of the net assets acquired
(goodwill) was approximately $2,452,000 and was amortized on a 40-year
straight-line basis through December 31, 2001. Commencing January 1, 2002,
goodwill was no longer being amortized, but is being reviewed for impairment.
In conjunction with this transaction, Andlinger Capital XXVI exercised Investor
A Warrants for the purchase of one million shares of Common Stock of the Company
at an exercise price of $1.00 per share. These warrants were acquired by
Andlinger Capital XXVI in March 2000 in connection with its equity investment in
the Company. A portion of the one million dollars received by the Company upon
such exercise was applied to the cash portion of the purchase price of PSI.
15. 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. 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 acquisition, Tel Acquisition Corp.
changed its name to Aviv Instruments, Inc. In addition, the Company and Aviv
Instruments, Inc. 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 straight-line basis through December 31, 2001. Commencing
January 1, 2002, goodwill was no longer being amortized, but is being reviewed
for impairment.
Page 43 of 52
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PROTERION CORPORATION
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
(in thousands)
Column C Column D
Column A Column B Additions Deductions Column E
-------- -------- --------- ---------- --------
Reclassifi
-cation
Balance at Charged to to Assets
Beginning of Costs and Held Balance at
Period Expenses Utilization for Sale End of Period
------ -------- ----------- -------- -------------
Allowance for returns, discounts
and bad debts
Year ended December 31, 2002 $ 178 $ 157 $ 195 $ 127 $ 13
Year ended December 31, 2001 188 47 57 -- 178
Year ended December 31, 2000 216 22 50 -- 188
Inventory reserve
Year ended December 31, 2002 3,090 420 1,243 2,158 109
Year ended December 31, 2001 1,941 1,236 87 -- 3,090
Year ended December 31, 2000 2,909 600 1,568 -- 1,941
Accrued restructuring
Year ended December 31, 2002 794 -- 754 -- 40
Year ended December 31, 2001 -- 794 -- -- 794
Year ended December 31, 2000 -- -- -- -- --
Page 44 of 52
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding this item is incorporated by reference to the Company's
definitive Proxy Statement relating to the Company's 2003 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A on or prior to April 30,
2003, and is made a part hereof.
Item 11. Executive Compensation
Information regarding this item is incorporated by reference to the Company's
definitive Proxy Statement relating to the Company's 2003 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A on or prior to April 30,
2003, and is made a part hereof.
Item 12. Security Ownership Certain Beneficial Owners and Management and Related
Stockholder Matters
Equity Compensation Plan Information
We maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as our fiscal year ended December 31, 2002
regarding the shares of our Common Stock available for grant or granted under
stock option plans that (i) were approved by our stockholders; and (ii) were not
approved by our stockholders.
- ------------------------ ---------------------------- ------------------------- ----------------------------
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
- ------------------------ ---------------------------- ------------------------- ----------------------------
(a) (b) (c)
- ------------------------ ---------------------------- ------------------------- ----------------------------
Equity compensation
plans approved by
security holders 741,200 $ 2.72 747,500
- ------------------------ ---------------------------- ------------------------- ----------------------------
Equity compensation
plans not approved by 0 0 0
security holders
- ------------------------ ---------------------------- ------------------------- ----------------------------
Total 741,200 $2.72 747,500
- ------------------------ ---------------------------- ------------------------- ----------------------------
All other information regarding this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Company's 2003 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or prior to
April 30, 2003, and is made a part hereof.
Page 45 of 52
Item 13. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference to the Company's
definitive Proxy Statement relating to the Company's 2003 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A on or prior to April 30,
2003, and is made a part hereof.
Page 46 of 52
PART IV
Item 14. Controls and Procedures
Within the 90-day period prior to the date of this report, our chief executive
officer and chief financial officer performed an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in SEC Rule 13a-14), which
have been designed to ensure that material information related to the Company is
timely disclosed. Based upon that evaluation, they concluded that the disclosure
controls and procedures were effective.
Since the last evaluation of the Company's internal controls and procedures for
financial reporting, the Company has made no significant changes in those
internal controls and procedures or in other factors that could significantly
affect our internal controls and procedures for financial reporting.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report.
(1) Financial statements - All financial statements are set forth
under Item 8, pages 22 through 25
Independent auditor's report on consolidated financial
statements is on page 21
(2) Schedules: Schedule II
(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
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 2.3 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.
2.4 Securities Purchase Agreement, dated as of August 8, 2002, by and
between Rheometric 2.4 Scientific, Inc. and Andlinger Capital
XXVI LLC, incorporated by reference to Exhibit 2.1 to
Rheometric's Quarterly Report on Form 10-Q filed on August 14,
2002.
2.5 Asset Purchase Agreement, dated October 14, 2002, by and between
Waters TechnologieCorporation and Rheometric Scientific, Inc.,
incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on October 16, 2002
3.1 Certificate of Incorporation of Rheometric Scientific, Inc.,
incorporated by reference to 3.1 Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
2000.
Page 47 of 52
3.2* Certificate of Amendment of Certificate of Incorporation of
Rheometric Scientific, Inc.
3.3 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., incorporated by
reference to Exhibit 4.1 to Rheometric's Quarterly Report on Form
10-Q filed on August 14, 2002.
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 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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, 2002.
10.9* Amendment Letter dated October 11, 2002 by and among Rheometric
Scientific, Inc., RSI (NJ) QRS 12-13, Inc., and Andlinger Capital
XXVI LLC.
Page 48 of 52
10.10* Amendment to Lease Termination Agreement, dated as of October
20, 2002, by and among Rheometric Scientific, Inc., RSI (NG)
QSR 12-13, Inc., and Andlinger Capital XXVI LLC.
10.11 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, 2002.
10.12 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.
10.13 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.
10.14 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, 2002.
10.15 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, 2002.
21.1* Subsidiaries of Proterion Corporation
23.1* Consent of Mahoney Cohen & Company, CPA, P.C.
99.1* Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* Filed herewith
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the quarterly period
ended December 31, 2002:
(1) Current Report on Form 8-K filed on December 31, 2002 relating to
segment financial reporting.
(2) Current Report on Form 8-K filed on November 1, 2002 relating to
agreements between the Company and each of Andlinger Capital XXVI, LLC and RSI
(NJ) QRS 12-13, Inc.
(3) Current Report on Form 8-K filed on October 16, 2002 relating to the
Company's agreement to sell its rheology instruments and services business to
the TA Instruments Division of Waters Technologies Corporation for consideration
of $17 million.
Page 49 of 52
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT ON FORM
10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PROTERION CORPORATION
Date: March 27, 2003 By: /s/ ROBERT M. CASTELLO
-------------------------------
Robert M. Castello, Chairman
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
- ------------------------------------- ----------------------------------- ----------------------------------
Signature Title Date
--------- ----- ----
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ ROBERT M. CASTELLO Chairman and Chief Executive March 27, 2003
- ---------------------- Officer (Principal Executive
Robert M. Castello Officer)
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ PAUL MANGANO President and Chief Operating March 27, 2003
- ---------------- Officer
Paul Mangano
- ------------------------------------- ----------------------------------- ----------------------------------
Vice President, Finance and
/s/ JOSEPH MUSANTI Materials; Chief Financial
- ------------------ Officer and Assistant Secretary March 27, 2003
Joseph Musanti (Principal Financial and
Principal Accounting Officer)
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ MARK F. CALLAGHAN Director March 27, 2003
- ---------------------
Mark F. Callaghan
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ DAVID R. SMITH Director March 27, 2003
- ------------------
David R. Smith
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ MERRICK G. ANDLINGER Director March 27, 2003
- ------------------------
Merrick G. Andlinger
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ ROBERT K. PRUD'HOMME Director March 27, 2003
- ------------------------
Robert K. Prud'homme
- ------------------------------------- ----------------------------------- ----------------------------------
/s/ PAUL WOITACH Director March 27, 2003
- ----------------
Paul Woitach
- ------------------------------------- ----------------------------------- ----------------------------------
Page 50 of 52
CERTIFICATIONS
I, Robert M. Castello, certify that:
1. I have reviewed this annual report on Form 10-K of Proterion Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
------------------------------
By: /s/ ROBERT M. CASTELLO
--------------------------------
Robert M. Castello
Chairman, Chief Executive Officer
Page 51 of 52
I, Joseph Musanti, certify that:
1. I have reviewed this annual report on Form 10-K of Proterion Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date March 27, 2003
-----------------------------
By /s/ JOSEPH MUSANTI
-------------------------------
Joseph Musanti
Vice President, Finance and Materials,
Chief Financial Officer and Assistant Secretary
(Principal Accounting Officer)
Page 52 of 52