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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
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
Proterion Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-0708419
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
One Possumtown Road, Piscataway, NJ 08854-2103
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(732) 987-8200
----------------------------------------------------
(Registrant's telephone number, including area code)
Rheometric Scientific, Inc.
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at May 9, 2003
-------------------------------------- --------------------------
Common Stock, $.01 par value per share 26,032,835
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2002 5
Condensed Consolidated Statement of Shareholders' Equity 6
(Deficiency) for the three months ended March 31, 2003
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 7
Condensed Consolidated Statements of Comprehensive Income/(Loss)
for the three months ended March 31, 2003 and 2002 9
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
(a) Exhibits
(b) Reports on Form 8-K
Signatures 22
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 23
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets (in thousands) March 31, December 31,
2003 2002
------------ ------------
(unaudited)
Current Assets
Cash $ 320 $ 710
Restricted Cash 186 --
Receivables - less allowance for doubtful accounts of $13
at March 31, 2003 and December 31, 2002 834 677
Inventories, net
Finished goods 188 100
Work-in-process 314 307
Assembled components, materials and parts 316 540
------------ ------------
Total Inventory 818 947
Due from TA Waters 1,700 --
Deferred tax asset -- 3,400
Prepaid expenses and other current assets 33 597
Assets held for sale -- 8,899
------------ ------------
Total current assets 3,891 15,230
------------ ------------
Property, plant and equipment 530 658
Less accumulated depreciation and amortization 244 280
------------ ------------
Property, plant and equipment, net 286 378
------------ ------------
Assets held for sale and disposal -- 4,338
Goodwill 5,568 5,609
Patents 118 121
Other assets 212 494
------------ ------------
Total Assets $ 10,075 $ 26,170
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Short-term bank borrowings $ -- $ 8,700
Obligations under lease termination agreement 750 --
Current maturities of long-term debt 11 3,631
Affiliate debt 500 500
Accounts payable 1,382 2,294
Accrued restructuring 40 40
Accrued liabilities 2,201 1,900
Liabilities to be transferred -- 6,466
------------ ------------
Total current liabilities 4,884 23,531
------------ ------------
Long-term debt -- 1,752
Long-term debt - affiliate -- 250
Other long-term liabilities 25 28
------------ ------------
Total liabilities 4,909 25,561
------------ ------------
3
Redeemable Preferred Stock 1,478 2,105
------------ ------------
Shareholders' Equity (Deficiency)
Common Stock, par value of $.01,
Authorized 49,000 shares; issued 28,832
at March 31, 2003 and 27,726 at December 31,2002 288 277
Additional paid-in capital 37,470 37,096
Treasury Stock, at cost, 2,800 shares at March 31, 2003 and
December 31,2002 --
Accumulated deficit (34,330) (39,109)
Accumulated other comprehensive income 260 240
------------ ------------
Total Shareholders' Equity\(Deficiency) 3,688 (1,496)
------------ ------------
Total Liabilities and Shareholders' Equity/(Deficiency) $ 10,075 $ 26,170
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31
------------------------
(In thousands, except per share amounts) 2003 2002
---------- ----------
Sales $ 1,428 $ 1,642
Cost of Sales 906 1,169
---------- ----------
Gross profit 522 473
---------- ----------
Marketing and selling expenses 193 114
Engineering expenses 62 114
General and administrative expenses 627 1,025
---------- ----------
882 1,253
---------- ----------
Operating loss (360) (780)
Interest expense (1) (59)
Interest expense - affiliate (8) (3)
Foreign currency gain 11 19
---------- ----------
Loss from continuing operations (358) (823)
Discontinued Operations:
Income/(loss) from discontinued operations (1,438) 466
Gain on sale of discontinued operations, (net of $3,900 in tax) 6,575 --
---------- ----------
Income from discontinued operations 5,137 466
---------- ----------
Net Income/(loss) 4,779 (357)
Increase in redemption value of preferred stock 40 --
---------- ----------
Net income/(loss) available to common shareholders $ 4,739 $ (357)
========== ==========
Loss per share from continuing operations
Basic $ (.02) $ (0.03)
========== ==========
Diluted $ (.02) $ (0.03)
========== ==========
Earnings per share from discontinued operations
Basic $ .20 $ 0.02
========== ==========
Diluted $ .20 $ 0.02
========== ==========
Earnings/(loss) per share
Basic $ .18 $ (0.01)
========== ==========
Diluted $ .18 $ (0.01)
========== ==========
Average number of shares outstanding
Basic 25,858 24,917
========== ==========
Diluted 25,858 24,917
========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DEFICIENCY) FOR THE THREE MONTHS ENDED MARCH 31, 2003
(unaudited)
(in thousands)
Accumulated Total
Common Stock Other Shareholders'
--------------------------- Additional Accumulated Comprehensive Equity
Shares Amount Paid-in-Cap Deficit Income (Deficiency)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 27,726 $ 277 $ 37,096 $ (39,109) $ 240 $ (1,496)
31, 2002
Amortization of options -- -- 8 -- -- 8
issued as
compensation
Increase in redemption -- -- (40) -- -- (40)
value of preferred
stock
Stock and replacement 1,106 11 406 -- -- 417
options issued to
landlord in connection
with lease termination
agreement
Translation Adjustment -- -- -- -- 20 20
Net income -- -- -- 4,779 -- 4,779
------------ ------------ ------------ ------------ ------------ ------------
Balances at March 31, 2003 28,832 $ 288 $ 37,470 $ (34,330) $ 260 $ 3,688
------------ ------------ ------------ ------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements.
6
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net Income/(loss) $ 4,779 $ (357)
Adjustments to reconcile net income/(loss) to net cash
(used in)/provided by operating activities:
Depreciation and amortization of plant and equipment 8 207
Gain on sale of rheology instruments and services business (10,475) --
before income taxes
Provision for slow moving inventory -- 45
Deferred tax expense 3,400 --
Amortization of intangibles 3 9
Amortization of options issued as compensation 8 --
Unrealized currency loss 20 65
Changes in assets and liabilities:
Receivables (156) 702
Inventories 128 (104)
Prepaid expenses and other current assets 15 (210)
Accounts payable and accrued liabilities 778 26
Other assets 252 (16)
------------ ------------
Net cash (used in)/provided by operating activities (1,240) 367
------------ ------------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment 83 --
Proceeds from sale of rheology instruments and services 13,758 --
business, net of costs
Purchases of property, plant and equipment -- (41)
------------ ------------
Net cash provided by (used in) investing activities 13,841 (41)
------------ ------------
Cash Flows from Financing Activities:
Net borrowing from/(repayments of) line of credit (8,754) 270
Repayments of discounted notes payable -- (125)
Repayment of long-term debt (844) --
Repayment of long-term debt/lease obligation (2,250) (196)
Repayment of long-term debt affiliate (250) --
Restricted Cash (186) --
Proceeds from issuance of Common Stock, net of
Issuance costs -- 4
Redemption of preferred stock (667) --
------------ ------------
Net cash used in financing activities (12,951) (47)
------------ ------------
Effect of Exchange Rate Changes on Cash (40) (7)
------------ ------------
Net (decrease)/increase in cash (390) 272
Cash at beginning of year 710 696
------------ ------------
Cash at end of period $ 320 $ 968
============ ============
7
March 31, December 31,
2003 2002
------------ ------------
Cash payments for interest 38 291
Cash payments for taxes -- 1
Supplemental disclosure of non-cash investing and
financing activities:
Stock and replacement options
to landlord in connection with lease termination
agreement $ 417 --
Amount due from TA Waters on sale of rheology
instruments and services business $ 1,700 --
See Notes to Condensed Consolidated Financial Statements.
8
PROTERION CORPORATION AND SUBSIDIARIES
(FORMERLY RHEOMETRIC SCIENTIFIC, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
(Unaudited)
Three Months
Ended March 31,
---------------------------
2003 2002
------------ ------------
Net income/(loss) $ 4,779 $ (357)
Other comprehensive income/(loss)
Foreign currency translation
Adjustments 20 (72)
------------ ------------
Comprehensive income/(loss) $ 4,799 $ (429)
============ ============
See Notes to Condensed Consolidated Financial Statements.
PROTERION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods presented have been
reflected herein. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the entire year. This
quarterly report on Form 10-Q should be read in conjunction with the latest
annual report on Form 10-K for Proterion Corporation (referred to as "Proterion"
or the "Company").
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). This Statement rescinds the provisions of SFAS No. 4
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." In addition, this
Statement amends SFAS No. 13, "Accounting for Leases," ("SFAS 13") to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Rescissions for SFAS 13 are effective for transactions entered into
after May 15, 2002. The adoption of SFAS 145 has not and is not expected to have
a material impact on the Company's financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). 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
9
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
adopted SFAS 146 in 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party. The initial recognition and initial measurement provisions
of FIN 45 are effective for financial statements for periods ending after
December 15, 2002 and are applicable to all guarantees issued by the guarantor
subject to FIN 45's scope, including guarantees issued prior to FIN 45. We have
evaluated the accounting provisions of the interpretation and the Company has no
guarantees as defined by FIN 45. Accordingly, there was no material impact on
our financial condition, results of operations, or cash flows for the period
ended March 31, 2003 attributable to FIN 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The amendments to SFAS 123 regarding disclosure are
effective for financial statements for fiscal years ending after December 15,
2002. The Company has adopted the annual disclosure provisions of SFAS 148 in
its financial statements for the year ended December 31, 2002 and has adopted
the interim disclosure provisions for its financial statements for the quarter
ended March 31, 2003. The Company did not opt to change to the fair value based
method of accounting for stock-based compensation.
At March 31, 2003, the Company had two stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The only stock-based employee compensation cost
reflected in net income are options granted with an exercise price less than the
market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation.
Three Months Ended
March 31
-------------------------
2003 2002
----------- -----------
Net income/(loss) as reported $ 4,779 ($ 357)
Less: Additional stock-based employee compensation
expense under fair value based method 38 41
----------- -----------
Pro forma net income/(loss) $ 4,741 ($ 398)
=========== ===========
Earnings/(loss) per Share:
Basic: as reported $ 0.18 $ (0.01)
Basic: pro-forma $ 0.18 $ (0.01)
Diluted: as reported $ 0.18 $ (0.01)
Diluted: pro-forma $ 0.18 $ (0.01)
10
2. Earnings (Loss) Per Share.
The Company calculates net earnings/(loss) per share as required by SFAS No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of stock options, warrants, and convertible securities. For the
three months ended March 31, 2003 and 2002, the effects of stock options,
warrants, and convertible securities were anti-dilutive.
3. Sale of the Rheology Instruments and Services Business/Lease
Termination.
On January 15, 2003, the Company completed the sale of its 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 the Company $850,000 six months after closing and $850,000 one year after
closing, which amounts have been put into escrow. The "Rheometric Scientific"
and "Rheometrics" names were included in the sale. The Company used the proceeds
from this sale, in part, to retire all of its bank debt, which amounted to
approximately $9,600,000, and to discharge or reduce certain other obligations.
The Company is using the remaining proceeds to provide interim working capital.
As part of this transaction, the Company changed its name from Rheometric
Scientific, Inc. to Proterion Corporation, which represents the Company's focus
on its remaining life sciences business.
In connection with the sale of the Company's rheology instruments and services
business in January 2003, the Company entered into a lease termination agreement
with the landlord of the facilities which house the Company's corporate
headquarters and main manufacturing plant in Piscataway, NJ (the "Facility").
The lease termination agreement requires the Company to pay the landlord
$3,000,000: (i) $2,250,000 of which the Company 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. In addition, the agreement provided that the exercise price of the
landlord's existing warrants for 464,160 shares of Common Stock be reduced from
$.37 per share to $.01 per share and for the issuance of 650,000 shares of
Common Stock to the landlord.
The Company also signed a one-year agreement with the landlord to lease
significantly less space in the same building. This lease is classified as an
operating lease. The Company recorded a net loss on the lease termination of
$2,929,000, which is included in the gain from the sale of discontinued
operations.
As a result of the sale of the rheology instruments and services business, the
Company recorded a gain before taxes, net of the loss on the lease termination
of $2,929,000, of $10,475,000.
In addition, the results of operations for the rheology instruments and services
business for the periods ended March 31, 2003 and 2002 are included in the
accompanying Condensed Consolidated Statements of Operations as discontinued
operations.
11
4. Long-Term Debt and Short-Term Borrowings
Long-term debt as of March 31, 2003 and December 31, 2002, respectively,
consisted of the following:
March 31, December 31,
2003 2002
------------ ------------
Obligation under sale/leaseback payable
through February 2011, with interest
imputed at a rate of 13.9% for 2002 (a) $ -- $ 4,503,000
Term loan payable through March 2003
Loan bears interest at prime plus 1.5% (b) -- 675,000
Obligations under capital leases payable
2002 through 2006 with interest imputed
at rates from 8.5% to 13.3% 36,000 39,000
Term loan payable through June 2005
Loan bears interest at prime plus 1.5% (b) -- 194,000
------------ ------------
36,000 5,411,000
Less Current Maturities 11,000 3,631,000
------------ ------------
$ 25,000 $ 1,780,000
============ ============
(a) In connection with the sale of the Company's rheology instruments and
services business on January 15, 2003, the Company terminated its existing
lease. (See footnote 3 above.)
(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.
Short-Term Borrowings
On January 15, 2003 and in connection with the sale of the rheology instruments
and services business, the Company's entire working capital credit facility in
the amount of approximately $8,700,000 was paid in full.
5. Affiliate Debt
Affiliate debt consisted of the following:
March 31, December 31,
2003 2002
------------ ------------
Promissory note with interest at 6% $ 500,000 $ 750,000
12
Immediately prior to the sale of the Company's rheology instruments and services
business, the Company owed Axess Corporation ("Axess") $787,000 (including
accrued interest) under the terms of a promissory note, as amended and restated
(the "Axess Note"). On January 15, 2003, at the closing of the sale, the Company
and Axess amended the Axess Note and the Company 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. Operating Segments/Foreign Operations and Geographic Information
Effective with the sale of the Company's rheology instruments and services
business, the Company operates in one segment which is life sciences.
7. Redeemable Preferred Stock
On August 8, 2002, the Company's Board of Directors approved our entering into a
securities purchase agreement with Andlinger Capital XXVI LLC ("Andlinger
Capital XXVI"), an entity which has acquired control of the Company, under which
Andlinger Capital XXVI purchased $1,500,000 of the Company's 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 the Company's option at any time or, at Andlinger
Capital XXVI's option, upon a change in control of the Company or the occurrence
of certain other major corporate events, including a sale of substantially all
of the Company's 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, the Company's 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 the Company's Series B Preferred
Stock; (ii) defer its right to have all of the outstanding Series B Preferred
Stock redeemed in full by the Company upon the closing of the sale of our
rheology instruments and services business; and (iii) subordinate such deferred
redemption payments to amounts payable by the Company to our landlord under the
Facility lease and to Axess.
In consideration for these actions, the Company 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 the Company's Common Stock at an exercise price equal to
$1.00 per share (the average of the closing prices of the Company's 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 the Company's Common Stock held by Andlinger Capital XXVI.
At the closing of the sale of the Company's rheology instruments and services
business, we 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
the Company's agreement with Andlinger Capital XXVI, the Company has agreed to
redeem Andlinger Capital XXVI's 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.
13
ITEM 2. 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 that are referred to or described in more detail below under the
caption "Forward Looking Statements." The Company's actual results could differ
materially from those anticipated in these forward-looking statements. This
quarterly report on Form 10-Q should be read in conjunction with the latest
annual report on Form 10-K filed by the Company. The terms "Proterion," "our,"
"we" and "us," as used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations refer to Proterion Corporation and its
wholly owned subsidiaries, except where it is clear that the term refers only to
the parent company.
Comparison of First Quarter 2003 Results to First Quarter 2002 Results
Please note that except where specifically noted in the comparative discussion
below, the three months ended March 31, 2003 does not include the first quarter
operations of our rheology instruments and services business which we sold to
the TA Instruments Division of Waters Corporation on January 15, 2003
(discontinued operations). Similarly, when discussing the fiscal quarter ended
March 31, 2002 below, except where specifically noted we have not included the
operations of our rheology instruments and services business, but only the
operations of our life sciences business.
Continuing Operations
Revenues
In the three months ended March 31, 2003, we achieved revenues of $1,428,000
from continuing operations compared to revenues of $1,642,000 in the
corresponding period in 2002; a decrease of $214,000, or 13%. The decrease in
revenue for the three month period was primarily the result of a slowdown in
order intake during the first two months of the quarter, which we believe was
caused by global economic and political uncertainties, government-sponsored
funding delays to major researach organizations, primarily in North America, as
well as the reorganization of the new sales and marketing group. Orders,
however, did pick up in the last month of the quarter.
Gross Profit
The gross profit from continuing operations for the three month period ended
March 31, 2003 totaled $522,000, or 37% of revenues, compared to $473,000, or
29% of revenues, in the corresponding period in 2002. The increase of $49,000
was achieved despite lower sales volume.
The improved gross profit was largely the result of changes made to the
Company's Aviv product line manufacturing strategy. These changes resulted in
the outsourcing of most major mechanical operations. The outsourcing reduced
overhead and the overall cost of each instrument. Gross profit during the period
also improved, in part, as a result of new pricing initiatives on all of our
products.
Operating Expenses
The operating expenses for our Life Sciences business for the three months ended
March 31, 2003 were $882,000, compared to $1,253,000 for the same period in the
prior year.
Included in the operating expenses for the three months ended March 31, 2002 are
the corporate general and administrative expenses for both our life sciences and
our former rheology instruments and services business.
14
General and Administrative. General and administrative expenses for the three
months ended March 31, 2003 were $627,000 compared to $1,025,000, a decrease of
$398,000 compared to the corresponding period in the prior year. The $398,000
decrease primarily relates to corporate expenses that were eliminated with the
sale of the rheology instruments and services business.
Marketing and Selling. Marketing and selling expenses for the three months ended
March 31, 2003 were $193,000 compared to $114,000 during the same period in the
prior year; an increase of $79,000.
This increase resulted primarily from increases in salaries of $50,000, a result
of adding sales people, and $21,000 in advertising expenses and travel.
Engineering. Engineering expenses for the three months ended March 31, 2003 were
$62,000 compared to $114,000 incurred during the corresponding period in the
prior year; a decrease of $52,000.
The decrease was mainly the result of reduced headcount, no longer needed to
support the Aviv product line manufacturing operation.
Interest Expense
Net interest expense for the three months ended March 31, 2003 was $9,000; a
decrease of $53,000 compared to the same period in 2002. This decrease was due
in large part to the payoff of the Company's line of credit with PNC Bank that
accompanied the sale of our rheology instruments and services business in
January 2003. Remaining interest expense is mostly related to affiliate debt.
Foreign Currency
The foreign currency transactions for the three months ended March 31, 2003
resulted in a gain of $11,000, compared to a gain of $19,000 in the
corresponding three month period in the prior year. The gain resulted from
exchanges of British Pounds into U.S. Dollars.
Loss from continuing operations
Loss for the three months ended March 31, 2003 was $358,000 compared to a loss
of $823,000 for the same period in 2002. The reduction in loss of $465,000
resulted from a margin improvement of $49,000, a decrease in operating expenses
of $371,000, a decrease in interest expense of $53,000, offset slightly by a
reduction in foreign currency gain of $8,000.
Discontinued Operations:
Loss from discontinued operations
In the first quarter of 2003, the rheology instruments and services business
incurred a loss from discontinued operations of $1,438,000, compared to income
last year of $466,000 during the same period. Last year's first quarter profit
resulted from three months of operations, whereas this year's loss resulted from
15 days of expenses, with no associated revenue.
Gain from the sale of the rheology instruments and services business
As a result of the sale of the rheology instruments and services business, the
Company recorded a net gain on the transaction of $6,575,000, after income tax
expense of $3,900,000.
Liquidity and Capital Resources
The Company has received and expects to receive cash from the sale of the
rheology instruments and services business as follows: $15,300,000 paid on
January 15, 2003, $850,000 due on July 15, 2003 and $850,000 due on January 15,
15
2004. We used the cash proceeds already received to pay off our senior credit
facility with PNC Bank and satisfy, in whole or in part, vendor obligations
which were not assumed by the purchaser. 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 Corporation
("Axess"), our former controlling stockholder; (iii) to redeem a portion of the
shares of Series B Preferred Stock issued to Andlinger Capital XXVI LLC
("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.
Following the sale of our rheology instruments and services business, and the
payment in full of all outstanding indebtedness thereunder, we terminated our
senior credit facility with PNC Bank. We anticipate, however, that we will have
negative cash flow in the second half of 2003 due to the payments required to
our landlord under the lease termination agreement, Axess and Andlinger Capital
XXVI. Our long-term liquidity is contingent upon increasing our sales and
continuing our improvement in the area of asset management. Our customers,
however, are decreasing their capital spending activities and the sales trends
in our industry have been decreasing over the past fifteen months.
To conserve cash and manage our liquidity, in 2002 we implemented expense
reductions. For example, our employee headcount was 50 at June 30, 2002 and has
been reduced to 38 at March 31, 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 also currently seeking bank or similar financing on acceptable terms in
order to obtain the liquidity necessary to fund our operations and meet our
other obligations, 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 do not increase our sales or improve our asset management, are not
successful in our expense reduction efforts and do not obtain such financing, we
are unlikely to have an adequate level of cash and other financial resources to
fund our operations and meet our other obligations. In that event, we may be
required to approach Andlinger Capital XXVI and request a further delay of the
redemption of all or a portion of the Series B Preferred Stock of the Company
held by Andlinger Capital XXVI or pursue other alternatives. There can be no
assurance, however, that: (a) Andlinger Capital XXVI would agree to delay the
redemption of all or a portion of its Series B Preferred Stock; (b) even if
Andlinger Capital XXVI did so agree the Company would have sufficient financial
resources to meet all of its cash flow needs and obligations; or (c) any
alternatives sought by the Company would be successful and/or result in positive
cash flow for the Company.
Cash Flows from Operations
In 2003, excluding the gain on the sale of the Company's discontinued
operations, the Company incurred a loss of $1,796,000 before income taxes, of
which $358,000 was from continuing operations and $1,438,000 was from
discontinued operations. The net cash used in operating activities was reduced
primarily from an increase in accounts payable and accrued liabilities of
$778,000 and a decrease in other assets of $252,000. Net cash provided by
operating activities in 2002 was $367,000 which was primarily comprised of a net
loss of $357,000 and a decrease in accounts receivable of $702,000.
16
Cash Flows from Investing
The proceeds from the sale of our rheology instruments and services business
provided net cash of $13,758,000. We also generated $83,000 on the sale of
property and equipment. We made no capital expenditures during the three months
ended March 31, 2003 as compared to capital expenditures of $41,000 during the
same period in 2002.
Cash Flows from Financing
Net cash used by financing activities for the three months ended March 31, 2003
was $12,951,000 compared to net cash used of $47,000 in the same period in 2002.
The cash generated from the sale of the rheology instruments and services
business was used for the repayment of our borrowings under our now terminated
line of credit with PNC Bank of $9,598,000, a payment on our lease termination
agreement of $2,250,000, a redemption payment on our Series B Preferred Stock to
Andlinger Capital XXVI of $667,000, and repayment of affiliate debt of $250,000.
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.
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.
17
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.
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.
Contractual Obligations
The Company is a party 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.
The minimum commitments under noncancellable leases consisted of the following
at March 31, 2003:
(in thousands) Operating Capital
Year Leases Leases
--------------------------------
Remainder 2003 $ 122 $ 10
2004 -- 15
2005 -- 16
-------- --------
Total minimum lease payments $ 161 46
========
Less amounts representing interest 5
--------
Total lease obligation 36
Less current maturities 11
--------
Long-term lease obligation $ 25
========
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "10-Q") includes forward-looking
statements, particularly in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section. 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:
18
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 cannot 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; and
o the Company's ability to meet its current financial obligations and to
obtain new financing necessary to meet its working capital needs.
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-Q, 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.
19
ITEM 3. 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. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes. The Company is exposed to market risk related to changes
in foreign exchange and interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, the Company's chief
executive officer and chief financial officer performed an evaluation of the
effectiveness of the Company's 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 the Company's internal controls and procedures for financial reporting.
20
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on January 15, 2003.
At the meeting, the stockholders:
o approved the sale of the Company's rheology instruments and
services business pursuant to an Asset Purchase Agreement,
dated as of October 14, 2002, between the Company and Waters
Corporation; and
o approved an amendment to the Company's Certificate of
Incorporation changing the Company's name from "Rheometric
Scientific, Inc." to "Proterion Corporation."
With regard to the resolution to approve the sale of the Company's
rheology instruments and services business, holders of 13,663,344 shares of the
Company's Common Stock voted for the resolution to approve the sale, while
holders of 14,307 shares of Common Stock voted against the resolution and
holders of 7,224,829 shares of Common Stock abstained from the vote.
Concerning the resolution to amend the Company's Certificate of
Incorporation to change the Company's name, holders of 13,663,314 shares of the
Company's Common Stock voted to approve the name change, while holders of 14,627
shares of Common Stock voted against the resolution and holders of 7,224,539
shares of Common Stock abstained from the vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1* Certification of Robert M. Castello pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2* Certification of Steven M. Obeda pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K on January 27,
2003 relating to the sale of its rheology instruments and services
business to the TA Instruments division of Waters Corporation and the
change of the Company's name to Proterion Corporation.
* Filed herewith
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTERION CORPORATION
(Registrant)
May 20, 2003 By /s/ STEPHEN M. OBEDA
-------------------------------------
Stephen M. Obeda, Vice President,
Finance, Chief Financial Officer and
Authorized Officer
22
CERTIFICATION
-------------
I, Robert M. Castello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Proterion
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
function):
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
quarterly report whether or not 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: May 20, 2003
/s/ ROBERT M. CASTELLO
- -------------------------------
Robert M. Castello
Chief Executive Officer
23
CERTIFICATION
-------------
I, Stephen M. Obeda, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Proterion
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
function):
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
quarterly report whether or not 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: May 20, 2003
/s/ STEPHEN M. OBEDA
- ---------------------------
Stephen M. Obeda
Chief Financial Officer
24