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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2002
------------------
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
RHEOMETRIC SCIENTIFIC, INC.
------------------------------------------------------
(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) 560-8550
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 5, 2002
-------------------------------------- -------------------------------
Common Stock, $.01 par value per share 24,926,411
Rheometric Scientific, Inc.
Index to Form 10-Q
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Comprehensive Income/Loss
for the three and nine months ended September 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
(a) Exhibits
(b) Reports on Form 8-K
Signatures 30
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31
2
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September December
ASSETS 30, 2002 31, 2001
--------- --------
(unaudited)
Current Assets
Cash $ 710 $ 696
Accounts receivable, net 7,051 8,668
Inventories, net
Finished goods 2,712 2,558
Work in process 1,335 1,154
Assembled components, materials, and parts 3,299 4,455
------------- -------------
7,346 8,167
Prepaid expenses and other current assets 895 558
------------- -------------
Total current assets 16,002 18,089
------------- -------------
Property, plant, and equipment 17,159 16,843
Less accumulated depreciation and amortization 11,982 11,319
------------- -------------
Property, plant, and equipment, net 5,177 5,524
Goodwill 5,539 5,358
Other assets and deferred financing costs 534 658
------------- -------------
Total Assets $ 27,252 $ 29,629
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank borrowings $ 9,437 $ 8,919
Current maturity of long-term debt 1,275 751
Current maturity affiliate debt 750 150
Accounts payable 4,191 4,229
Borrowings against accounts receivable 864 923
Accrued liabilities 3,973 4,820
------------- -------------
Total current liabilities 20,490 19,792
------------- -------------
Long-term debt 4,356 5,319
Long-term debt - affiliate - 600
Other long-term liabilities 121 122
------------- -------------
Total liabilities 24,967 25,833
------------- -------------
Commitments and Contingencies
Series B Preferred Stock, par value of $.01, authorized two thousand shares, one
thousand five hundred shares issued and Outstanding at September 30, 2002 and
none at December 31, 2001. Redemption price is $1,515 plus 1% for each calendar
month completed following the date of original
issuance 1,500 -
------------- -------------
Shareholders' Equity
Common stock, par value of $.01, Authorized 49,000 shares;
issued 27,726 shares at September 30, 2002
and 27,715 shares at December 31, 2001 277 277
Additional paid-in capital 37,179 37,337
Accumulated deficit (36,862) (33,731)
Treasury stock, at cost, 2,800 shares at September 30, 2002 and
December 31, 2001 -- --
Accumulated other comprehensive income/(loss) 191 (87)
------------- -------------
Total shareholders' equity 785 3,796
------------- -------------
Total Liabilities & Shareholders' Equity $ 27,252 $ 29,629
============= =============
See Notes to Condensed Consolidated Financial Statements
3
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales $5,691 $8,409 $21,447 $23,450
Cost of sales 4,005 4,869 12,950 13,141
----- ----- ------ ------
Gross profit 1,686 3,540 8,497 10,309
----- ----- ----- ------
General and administrative expenses 1,044 816 3,233 2,285
Marketing and selling expenses 2,119 1,923 6,014 6,053
Engineering expenses 538 555 1,569 1,542
--- --- ----- -----
Total operating expenses 3,701 3,294 10,816 9,880
----- ----- ------ -----
Operating (loss)/income (2,015) 246 (2,319) 429
Interest expense (325) (355) (944) (1,043)
Foreign currency gain/(loss) (47) 131 51 (251)
---- --- -- -----
Income/(loss) before income taxes (2,387) 22 (3,212) (865)
Income tax benefit/(expense) 31 (18) 81 (18)
------ ---- ----- ------
Net (loss)/income $(2,356) $4 $ (3,131) $ (883)
======== == ========= =======
Net (loss)/income per share
Basic $(0.09) $0.00 $(0.13) $(0.04)
======= ===== ======= =======
Diluted $(0.09) $0.00 $(0.13) $(0.04)
======= ===== ======= =======
Average number of shares outstanding
Basic 24,926 24,685 24,923 23,658
====== ====== ====== ======
Diluted 24,926 28,290 24,923 23,658
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements
4
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
Cash Flows from Operating Activities:
Net loss $ (3,131) $ (883)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of plant and equipment 588 663
Amortization of intangibles 24 102
Provision for inventory reserves 129 180
Loss on retirement of property plant and Equipment 2 -
Unrealized currency (gain)/loss (271) 180
Changes in assets and liabilities:
Accounts receivable 1,964 529
Inventories 837 (1,466)
Prepaid expenses and other current assets (276) 211
Accounts payable and accrued liabilities (1,106) (1821)
Other assets 113 39
------------ -----------
Net cash used in operating activities (1,127) (2,266)
------------ -----------
Cash Flows from Investing Activities:
Cash acquired ($327) in excess of Aviv acquisition
cost - (30)
PSI acquisition costs - (50)
Purchases of property, plant, and equipment (118) (225)
----------- ---------
Cash used in investing activities (118) (305)
----------- ---------
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements 519 3,053
Net repayment against accounts receivable borrowings (121) (133)
Proceeds from issuance of common stock net of issuance costs 4 73
Repayment long-term debt affiliate - (50)
Issuance of Series B Preferred Stock net of issuance
costs of $180 1,320 -
Net long-term debt borrowings - 62
Repayment of long-term debt/lease obligation (523) (204)
----------- ---------
Net cash provided by financing activities 1,199 2,801
----------- ---------
Effect of exchange rate changes on cash 60 (18)
------------ ----------
Net increase in cash 14 212
Cash at beginning of period 696 786
------------ ----------
Cash at end of period $ 710 $ 998
============ ==========
Cash payments for interest $ 793 $ 1021
============ ==========
Cash payments for income taxes $ 1 $ 5
============ ==========
See Notes to Condensed Consolidated Financial Statements
5
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(In thousands)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
----- ---- ---- ----
Net loss $ (2,356) $ 4 $ (3,131) $ (883)
Other comprehensive (loss)/income
Foreign currency translation
Adjustments 42 267 278 (83)
------ ----- ------- -----
Comprehensive (loss)/income $ (2,314) $ 271 $ (2,853) $ (966)
====== ===== ======= =====
See Notes to Condensed Consolidated Financial Statements.
RHEOMETRIC SCIENTIFIC, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of financial position and
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the entire year. This quarterly
report on Form 10-Q should be read in conjunction with the latest annual report
on Form 10-K for Rheometric Scientific, Inc. (referred to as "Rheometric" or the
"Company").
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), for fiscal years beginning
after June 15, 2000. Effective January 1, 2001, the Company adopted the
provisions of SFAS 133 as amended by SFAS 137 and SFAS 138. Under SFAS 133,
companies must recognize all derivative instruments on its balance sheet at fair
value. Changes in the value of derivative instruments, which are considered
hedges, are offset against the change in fair value of the hedged item through
operations, or recognized in other comprehensive income until the hedged item is
recognized in operations, depending on the nature of the hedge. SFAS 133
requires that unrealized gains and losses on derivatives not qualifying for
hedge accounting be recognized currently in operations. There were no unrealized
losses recorded in operations for the nine months ended September 30, 2002 and
2001, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets"("SFAS 142"). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS
6
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual value, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 144"). Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 were amortized through
the end of 2001. Beginning January 1, 2002, in accordance with SFAS 142, the
Company is no longer recording amortization expense related to goodwill.
The Company adopted the provisions of SFAS 141 immediately and adopted SFAS 142
effective January 1, 2002. In connection with the adoption of SFAS 142, the
Company performed a transitional goodwill impairment test as required to
determine that no goodwill impairment existed at January 1, 2002. The Company
completed its review and did not have to record a charge to operations as a
result of adopting these new standards. Additionally, management has evaluated
the Company's intangible assets and determined that the Company has no
indefinite useful life intangibles. Management has also evaluated the remaining
useful lives of the Company's intangible assets that will continue to be
amortized and have determined that no revision to the useful lives will be
required.
As of September 30, 2002, the Company has unamortized goodwill in the amount of
$5,539,000 and unamortized identifiable intangible assets consisting of patents
in the amount of $38,000. The goodwill is included in the assets of the Protein
Solutions group segment while the patents are included in the assets of the
Rheometric USA segment. Amortization expenses related to goodwill was zero in
2002 and $34,000 and $70,000 for the three and nine months ended September 30,
2001. Patent amortization was $7,000 and $24,000 for the three and nine months
ended September 30, 2002 compared to $0 and $32,000 in the same period last
year. Although goodwill will no longer be systematically amortized, periodic
reviews will need to be conducted to assess whether or not the carrying amount
of goodwill may be impaired. Such reviews could result in future write-downs of
goodwill which would be reflected as a charge against operating income.
Excluding amortization expense related to goodwill of $34,000 and $70,000 for
the three and nine months ended September 30, 2001, net income for the three
month period would have been $38,000 and net loss for the nine month period
would have been $813,000. Basic and diluted earnings per share for the three
month period would have remained unchanged at $0.00, while basic and diluted
loss per share would have changed from $0.04 to $0.03 for the nine months ended
September 30, 2001.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances occur measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment, or in a
7
distribution to owners) or is classified as held for sale. Assets to be
disclosed are reported at the lower of the carrying amount or fair value less
costs to sell. The Company has adopted SFAS 144 on January 1, 2002. The
provisions of this statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities, and, therefore, will depend on future
actions initiated by management. As a result, we cannot determine the potential
effects that adoption of SFAS 144 will have on our consolidated financial
statements with respect to future disposal decisions, if any.
2. Loss Per Share
The Company calculates net income/(loss) per share as required by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effect of stock options,
warrants, and convertible securities.
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------------------
(dollars in thousands except per share data) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
Net income (loss) available to common
Shareholders (2,356) 4 (3,131) (883)
----------------------------------------------------------------------------------------------------
Denominator for basic earnings (loss) per share:
Weighted average:
Common shares outstanding 24,926 24,685 24,923 23,658
Effect of dilutive securities:
Preferred Stock - 78 - -
Stock options - 415 - -
Warrants - 3,112 - -
----------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share 24,926 28,290 24,923 23,658
- --------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.09) $ 0.00 $ (0.13) $ (0.04)
- --------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (0.09) $ 0.00 $ (0.13) $ (0.04)
- --------------------------------------------------------------------------------------------------------
8
3. Long-Term Debt and Short-Term Borrowings
Long-term debt consisted of the following:
September 30, December 31,
------------ ------------
2002 2001
---- ----
Obligation under sale/leaseback payable through
February 2011, with interest imputed at a rate
of 13.9% for 2002 and 2001 $ 4,503,000 $ 4,571,000
Term loan payable through March 2003. Loan
bears interest at prime plus 1.5% (6.25% at
September 30, 2002 and December 31, 2001) 750,000 975,000
Obligations under capital leases payable
2002 through 2006 with interest imputed
at rates from 8.5% to 13.3% 165,000 255,000
Term loan payable through June 2005.
Loan bears interest at prime plus 1.5%
(6.25% at September 30, 2002 and
December 31, 2001) 213,000 269,000
------------ -----------
5,631,000 6,070,000
Less Current Maturities 1,275,000 751,000
------------ -----------
$4,356,000 $5,319,000
============ ===========
The Revolving Credit, Term Loan and Security Agreement (the "Loan Agreement"),
dated as of March 6, 2000, as amended, between the Company and PNC Bank,
National Association ("PNC Bank") provides for a total credit facility of
$14,500,000, of which $13,000,000 is a working capital revolving credit facility
with an initial three-year term expiring on March 6, 2003. The amount of
available credit is determined by the level of certain eligible receivables and
inventories. The line of credit bears interest at the prime rate, 4.75% at
September 30, 2002 and December 31, 2001.
The Loan Agreement also includes a term loan in the amount of $1,500,000 to be
repaid in 4 equal quarterly installments of $75,000, 23 monthly installments of
$25,000 and a final payment of $625,000 due at maturity on March 6, 2003. The
term loan bears interest at the prime rate plus 1.5 percent (6.25% at September
30, 2002 and December 31, 2001) which is due monthly. The outstanding balance of
the term loan obligation was $750,000 at September 30, 2002. On May 31, 2001, in
connection with the Aviv acquisition (see Note 6), the Company and PNC Bank
amended the Loan Agreement to provide for a second term loan in the amount of
$300,000. This second term loan is repayable in 48 monthly installments of
$6,250 and bears interest at the prime rate plus 1.5% (6.25% at September 30,
2002 and December 31, 2001). The outstanding balance of the second term loan was
$213,000 at September 30, 2002.
9
The Loan Agreement is subject to customary event of default and acceleration
provisions and is collateralized by substantially all of the Company's assets.
Additionally, the Loan Agreement contains a net worth covenant and a fixed
charge coverage ratio covenant. On March 29, 2002 PNC Bank amended the financial
covenants for 2002 including a condition requiring a cash infusion of at least
$1,000,000 in the form of equity by July 31, 2002.
On August 8, 2002 the Company entered into an agreement with Andlinger Capital
XXVI LLC ("Andlinger Capital"), the Company's principal stockholder, pursuant to
which Andlinger Capital would make an immediate preferred stock investment of
$1,500,000, with the right, subject to future Board determination of the need
for such capital, to invest up to an additional $500,000. Andlinger Capital
purchased 1,500 of the 2,000 authorized shares of the Company's newly created
Series B Preferred Stock. The Series B Preferred Stock does not carry a current
dividend, but is subject to redemption at the option of the Company, or upon the
sale of all or substantially all of the assets of the Company, upon the sale of
any major portion of the assets of the Company, upon the sale of a significant
subsidiary or division of the Company, upon a change in control of the Company,
upon the sale of common or preferred stock by the Company to the public, or upon
the acceleration of indebtedness for borrowed money in excess of $1,000,000. The
redemption price of the Series B Preferred Stock is the original Series B
Preferred Stock issue price multiplied by 101% plus an additional 1% for each
calendar month completed following the date of original issuance. On August 12,
2002, the sale of the 1,500 shares of Series B Preferred Stock to Andlinger
Capital was consummated, which satisfied the cash infusion requirement under the
Loan Agreement. On November 1, 2002, upon Board approval, Andlinger Capital made
the additional Series B Preferred Stock investment of $500,000. In connection
with that investment, Andlinger Capital agreed: to defer its right to have all
of the outstanding preferred stock owned by it redeemed in full by the Company
upon the closing of the sale of the Company's rheology instruments and services
business to Waters Technologies and instead to have the redemptions occur in
three equal installments, one at the closing, one at the six-month anniversary
of the closing and one at the twelve-month anniversary of the closing; and to
subordinate such deferred payments to amounts payable by the Company to the
Company's landlord under the Company's headquarters facility lease and to Axess
Corporation, in exchange for which the Company would issue to Andlinger Capital
a new warrant, with an expiration date of March 6, 2007, to purchase up to one
million shares of the Company's common stock having 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 on
substantially the same terms and conditions as the existing warrants to purchase
shares of the Company's common stock held by Andlinger Capital. We also agreed
with Andlinger Capital that in the event the Company requests Andlinger Capital,
and Andlinger Capital agrees, to defer the redemption of its shares of Series B
preferred stock for an additional year from one or more of the new redemption
dates set forth in the immediately preceding paragraph, for each such deferment
the Company shall issue to Andlinger Capital a new warrant to purchase up to
333,333 shares of the Company's common stock at a per share exercise price equal
to the average of the closing prices of the Company's common stock over the ten
trading days immediately preceding the new redemption date from which such
redemption is being deferred and having an expiration date of March 6, 2007, and
on substantially the same terms and conditions as the existing warrants to
purchase shares of the Company's common stock held by Andlinger Capital.
As of September 30, 2002, the Company is in violation of the fixed charge
coverage ratio covenant in the Loan Agreement. As a result, absent a waiver or
forbearance from PNC Bank, PNC Bank could exercise its rights to accelerate the
outstanding indebtedness under the Loan
10
Agreement, realize upon the collateral securing the debt (which comprises
substantially all of the Company's assets), or exercise its other remedies under
or relating to the Loan Agreement. The Company has requested, but has not yet
received a formal response from PNC Bank regarding a waiver or forbearance
agreement that would be subject to the closing of the sale of the Company's
rheology instruments and services business. Upon the closing of the proposed
sale, the Company will use the proceeds to retire in full all of the Company's
outstanding indebtedness under the Loan Agreement and the Loan Agreement will be
terminated. There can, however, be no assurance that the sale of the Company's
rheology instruments and services business will be consummated or that the
Company will be able to meet the covenant in future periods. In the absence of a
waiver, the Company has reclassified the remaining long term bank debt to short
term borrowings.
The Company at September 30, 2002, had total borrowings under the Loan Agreement
of $9,437,000 with remaining availability of approximately $588,000.
4. Long-Term Debt - Affiliate
Long-term debt - affiliate consisted of the following:
September 30, December 31,
2002 2001
---- ----
Subordinated promissory note due
February 28, 2006 with interest at 6% 750,000 $750,000
Less Current Maturities 750,000 150,000
----------- --------
$ - $600,000
=========== ========
On March 6, 2000, in conjunction with the transaction pursuant to which
Andlinger Capital acquired a majority equity interest in the Company, Axess
Corporation ("Axess"), the majority shareholder of the Company prior to the
Andlinger Capital transaction, cancelled its existing debt of $8,206,000 and the
accrued interest thereon in exchange for (x) the payment by the Company to Axess
of $3,500,000 in cash; (y) the issuance to Axess of a subordinated promissory
note in the principal amount of $1,000,000 and (z) the issuance to Axess, of a
warrant to purchase 1,000 shares of the Company's non-voting convertible
redeemable preferred stock (convertible into 1,000,000 shares of common stock)
to be issued, subject to stockholder approval, pursuant to an amendment to the
certificate of incorporation of the Company.
On September 28, 2001, Axess converted $200,000 of the principal balance of the
subordinated promissory note along with $63,000 of interest relating to the
period March 1, 2001 to March 1, 2002 into 65,762 shares of the Company's common
stock. As a result, the Company and Axess executed an amended and restated
subordinated promissory note for the remaining amount of $750,000 payable upon
the sale of one of the Company's product lines. In the absence of this sale,
payments of $50,000 per quarter plus accrued interest on the unpaid balance is
due beginning June 30, 2002. Interest at 6% per annum begins to accrue as of
April 1, 2002 and the entire unpaid principal and interest balance is due and
payable on February 28, 2006. On August 12, 2002, Axess extended the payment due
date for the June 30, 2002 payment. The principal
11
payment of $50,000 plus accrued interest from April 1, 2002 to August 31, 2002
became due and payable on August 31, 2002. As a result of the proposed sale of
the Company's rheology instruments and service business (See Note 8), a new
agreement was reached with Axess modifying the payment terms. The new agreement
provides for payment of $250,000 upon closing of the sale, $250,000 six months
later, and the final $250,000 twelve months from the date of the closing.
Interest accrues on the unpaid balance at the rate of 6% per annum. The revised
agreement does not waive Axess' rights in respect to the event of default that
exists under the prior promissory note. As a result we have reclassified the
$500,000 long-term balance to current liabilities on the balance sheet.
On July 2, 2001, State Farm acquired from Axess 6,422,933 shares of the
Company's common stock along with 800 shares of the Company's convertible
redeemable preferred stock. The total shares acquired by State Farm (including
as outstanding the 800,000 shares issuable upon conversion of the 800 shares of
convertible redeemable preferred stock, which have subsequently been converted)
represents approximately 29% of the outstanding common stock of the Company at
September 30, 2002.
5. Operating Segments/Foreign Operations and Geographic Information
The Company's three reportable segments had been Domestic, Europe, and Japan.
Beginning June 30, 2002 the Domestic segment was split between Rheometric USA
(RHEO US) and the Protein Solutions group, which is composed of Aviv and Protein
Solutions and constitutes our life sciences business (PSG or Life Science).
Summarized financial information concerning the Company's reportable segments is
shown below:
(In thousands) RHEO US PSG Europe Japan Total
- -------------------------- -------------------- -------------------- --------------------- --------------- ------------------
Trade Sales:
9/30/02 10,782 4,215 3,196 3,254 21,447
9/30/01 10,289 3,997 4,376 4,788 23,450
Intercompany Sales:
9/30/02 2,617 - 363 0 -
9/30/01 4,373 69 985 0 -
Operating Income/(Loss):
9/30/02 (816) (348) (1,011) (144) 2,319)
9/30/01 107 309 (500) 513 429
Total Assets:
9/30/02 12,581 8,312 3,413 2,946 27,252
12/31/01 13,876 8,318 3,455 3,980 29,629
Depreciation and Amortization (including Intangibles):
9/30/02 435 107 52 18 612
9/30/01 532 144 60 29 765
Aviv was acquired effective May 31, 2001, and is included in the Protein
Solutions Group (PSG) segment. The 2001 figures include the following numbers
related to Aviv for the short period (in
12
thousands): Sales of $1,035; Operating Income $10; Total Assets of $4,741; and
Depreciation and Amortization of $56. The 2002 amounts above include the
following Aviv numbers: Sales of $2,051; Operating loss of $251; Total Assets of
$4,842; and Depreciation of $52.
Sales between geographic areas are priced on a basis that yields an appropriate
rate of return based on assets employed, risk and other factors.
6. Aviv Acquisition
Effective May 31, 2001, through the Company's wholly-owned subsidiary, Tel
Acquisition Corp., a Delaware corporation, the Company acquired all of the
issued and outstanding capital stock of Aviv Instruments, Inc., a New Jersey
corporation and Aviv Associates, Inc., a New Jersey corporation, pursuant to a
Merger Agreement, dated as of May 31, 2001, pursuant to which the Aviv companies
merged with and into Tel Acquisition Corp. In exchange for all of the issued and
outstanding capital stock of the Aviv companies, the Company issued to the
stockholders of the Aviv companies 805,882 shares of its common stock. Upon
consummation of the merger, Tel Acquisition Corp. changed its name to Aviv
Instruments, Inc. In addition, the Company and Aviv Instruments made cash
payments aggregating approximately $1,221,000 to pay off existing indebtedness
of the Aviv companies, approximately $1,145,000 of which was owed to the
stockholders of the Aviv companies and their affiliates. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the net
assets were allocated based upon their fair values at the acquisition's
effective date of May 31, 2001. The Company's consolidated statements of
operations do not include the revenues and expenses of Aviv prior to the
acquisition date. The excess of the purchase price over the fair value of the
net assets acquired (goodwill) was approximately $3,020,000 and was amortized on
a 40-year straight-line basis through December 31, 2001. Commencing January 1,
2002, goodwill is no longer amortized, but is reviewed for impairment.
7. Restructuring
In the fourth quarter of 2001, a restructuring provision totaling $1,496,000 was
recorded for the restructuring of certain Domestic and European operations and
the write down on inventories related to specific products the Company will no
longer sell. Key initiatives of the restructuring program include: a)
outsourcing the European service function, b) centralizing the European sales
function at European headquarters, c) centralizing shared services including
order processing, cash collections, and cash application at European
headquarters, and d) streamlining certain domestic functions. The charges
consist of approximately $702,000 relating to the inventory write down, and
approximately $566,000 for the termination of 28 U.S. and European employees.
The $566,000 includes severance pay as per company policy, payroll taxes,
accrued vacation for those employees under contract and for the U.S. employees
the cost of medical benefits for the severance period. A provision of $228,000
was made for the closing and consolidation of certain European offices. This
includes $96,000 related to lease termination costs and any impairment on fixed
assets in those locations, $67,000 for the elimination of certain European legal
entities, and $65,000 for the cost of lease terminations on automobiles for the
European service people. All charges for inventory and fixed assets have been
recorded net of any expected salvage value. The following is the restructuring
reserve included in accrued liabilities at September 30, 2002:
13
- ---------------------------------------------------------------------------------------------------------------
December 31, Exchange September 30,
2001 Charges Loss 2002
- ---------------------------------------------------------------------------------------------------------------
TERMINATIONS 566,000 (566,000) - -
CLOSING EUROPEAN OFFICES 228,000 (164,000) 17,000 81,000
- ---------------------------------------------------------------------------------------------------------------
$ 794,000 (730,000) 17,000 $ 81,000
- ---------------------------------------------------------------------------------------------------------------
8. Asset Purchase Agreement and Certain Related Matters
On October 14, 2002, the Company entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with Waters Technologies Corporation ("Waters
Technologies"). Under the terms of the Asset Purchase Agreement, Waters
Technologies will acquire the Company's rheology instruments and services
business for $17 million in cash and the assumption of up to $6 million dollars
in accounts payable and other accrued expenses and certain other specified
obligations. The Company also expects to write off approximately $819,000 in
deferred revenue related to service contracts to be assumed by Waters
Technologies. The rheology instruments and services business consists of the
RHEO US segment, the European segment and the Japan segment. The Company will
retain the Protein Solutions Group segment which is the Company's life sciences
business. (See Note 5) This transaction which is subject to stockholder
approval, certain third party consents and customary closing conditions, is
targeted to close at or near the end of 2002. Proceeds from the sale will be
used in part to retire all of the Company's indebtedness under the Loan
Agreement, repay vendor obligations not assumed by Waters Technologies, make
certain payments required to terminate the Company's existing lease obligations
relating to its headquarters, repay in part certain obligations to Axess
Corporation, the Company's former controlling stockholder; to satisfy in part
certain obligations owed to Andlinger Capital with respect to amounts recently
provided as interim financing by Andlinger Capital, to pay certain other
obligations to Andlinger Capital described in the following paragraph and to pay
legal, accounting and other expenses of the sale transaction and fund the
initial working capital needs of the Company's life sciences business.
On October 30, 2002 the Company agreed with Andlinger Capital that for services
rendered over approximately the past 18 months, and to be rendered in the
future, in connection with the Company's attempts to sell its rheology
instruments and services business, the Company would pay to ANC Management
Corp., an affiliate of Andlinger Capital, an investment banking fee of $350,000,
subject to the closing of the sale of the Company's rheology instruments and
services business. The fee would be payable in three equal installments, one at
closing, one at the six-month anniversary of the closing and one at the
twelve-month anniversary of the closing. The Company also agreed that for
compensation in providing a variety of services to the Company, for which ANC
Management Corp. has received nominal or no consideration, the Company would pay
to ANC Management Corp. a fee of $100,000, subject to the closing of the sale of
the Company's rheology instruments and services business, payable in three equal
installments, one at closing, one at the six-month anniversary of the closing
and one at the twelve-month anniversary of the closing. The services covered by
the fee include, but are not limited to, the provision of services by the
Company's Chairman and Chief Executive Officer and its Vice President of
Business Development (who are each also directors);
14
providing substantial support in identifying, negotiating and closing certain
acquisitions, assistance in the Company's attempts to raise capital from outside
sources, and certain other services.
The Company filed current reports on Form 8-K on October 15, 2002 and November
1, 2002 with respect to its entry into the Asset Purchase Agreement, an
agreement relating to the termination of the Company's headquarters facility
lease, and certain transactions with Andlinger Capital and ANC Management Corp.,
including those described immediately above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition contains forward-looking statements that involve risks and
uncertainties that are referred to or described in more detail below under the
caption "Forward Looking Statements.". Our actual results could differ
materially from those anticipated in these forward-looking statements. This
quarterly report on Form 10-Q should be read in conjunction with the latest
annual report on Form 10-K filed by us, the quarterly reports on Form 10-Q filed
by us in respect of the first two quarters of fiscal 2002 and our current
reports on Form 8-K filed July 19, 2002, October 16, 2002 and November 1, 2002.
The terms "Rheometric," "our," "we" and "us," as used in this Management's
Discussion and Analysis of Results of Operations and Financial Condition refer
to Rheometric Scientific, Inc. and its wholly owned subsidiaries, except where
it is clear that the term refers only to the parent company.
On October 14, 2002, we entered into an Asset Purchase Agreement with Waters
Technologies Corporation pursuant to which we agreed to sell our rheology
instruments and services business to Waters Technologies for consideration of
$17 million in cash and the assumption of up to $6 million of accounts payable
and accrued expenses and certain other specified obligations. Our rheology
instruments and services business constitutes the major portion of our assets
and operations. Our rights to the "Rheometric Scientific" and "Rheometrics"
names are included in the sale. Under the agreement, we would retain the assets
and operations relating to our Protein Solutions Group. The proposed transaction
is subject to stockholder approval, certain material third party consents and
other customary closing conditions and is targeted to close at or near the end
of the current calendar year.
The rheology instruments and services industry has deteriorated significantly
over the past two years due to the global economic recession, excess industry
capacity, deflationary pricing, and the introduction of new lower cost, higher
performance technologies. These factors, among others, have led to intense
competition within the industry, which has adversely affected the financial
health of our core rheology instruments and services business. Although in 2000,
we reported our first profitable year since 1994, since then we have experienced
difficulty in generating a consistent level of revenue to support the cash
requirements of our business. Our net loss in 2001 was $2.4 million and our net
loss for the first nine months of 2002 was $3.1 million. On-budget performance
of our business units has been very inconsistent from month-to-month,
quarter-to-quarter, and year-to-year. The key contributing factors to this
inconsistency have been project delays and cancellations by our customers,
higher capital expenditure authorization levels and intense competition.
15
In the second quarter of 2001, the effects of a cutback in capital spending by
our global "Fortune 1000" customers began to have a significant and negative
impact on our business, which is continuing. Sales for the second quarter of
2001 were below budget by $2.2 million, which led us to take further cost
reduction actions in the third quarter of 2001. These steps included a salary
reduction for all salaried employees and a reduced 30-hour workweek for our
hourly employees for a limited period. Unfortunately, our core business sales
continued to deteriorate, particularly in Europe and the United States, for the
remainder of the year.
In the fourth quarter of 2001, we implemented a restructuring that included
layoffs in the United States and Europe, the outsourcing of our European service
function, the centralization of our European sales function at our European
headquarters in Munich, the centralization of shared services in Europe,
including order processing and cash collections, the streamlining of certain
domestic functions, and the write down of inventories related to specific
products we would no longer sell.
In the first quarter of 2002, our business fell slightly short of budget. In the
second quarter of 2002, sales of the rheology instruments and services business
fell $1.0 million short of budget with weakness in Europe the main factor and
the Life Science business fell almost $1.0 million short of budget. We
experienced a very significant fall-off in order intake due to customer
procurement delays and cancellations in both RHEO Europe and Life Science
businesses. In the third quarter rheology instruments and services business had
significant order shortfall to budget across all business units, while the Life
Science business met their order budget. Given these shortfalls, we took
additional cost containment actions to size the core business in accordance with
our revised sales forecast for the year. The cost reduction actions that were
taken included additional layoffs, a salary reduction to all US based employees
effective the middle of October 2002 and the elimination of our European
headquarters in favor of a sales office. We also engaged in certain transactions
described below with our principal stockholder to provide us with additional
cash necessary to provide liquidity and to meet the requirements of PNC Bank,
the lender under our Loan Agreement.
Revenues
Revenues for the Rheology Business for the three- and nine-month periods ended
September 30, 2002 totaled $4,379,000 and $17,232,000, respectively, compared to
$6,549,000 and $19,453,000 over the same periods in the prior year. Revenues for
the Life Science Business for the three- and nine-month periods ended September
30, 2002 totaled $1,312,000 and $4,215,000, respectively, compared to $1,860,000
and $3,997,000 over the same periods in the prior year.
Revenues for the three- and nine-month periods ended September 30, 2002
decreased $2,718,000 and $2,003,000 (or 32.3% and 8.5%), respectively, as
compared to the corresponding periods in 2001. These figures include an increase
of $78,000 and a decrease of $90,000 in sales for the three and nine months
ended September 30, 2002, respectively, due to the currency rates in effect
compared to the same periods last year.
The decrease in revenue for the three-month period ended September 30, 2002
represents decreases in all segments, RHEO US of $790,000, RHEO Japan of
$1,027,000, RHEO Europe of $353,000 and the Life Science business of $548,000,
16
The decrease in revenue for the nine-month period ended September 30, 2002
resulted from an decrease in RHEO Japan and RHEO Europe of $1,534,000 and
$1,180,000, respectively, offset by increases in RHEO US and Life Science of
$493,000 and $218,000, respectively. Included in Life Science are revenues for
Aviv for the nine month period ended September 30, 2002 of $2,051,000 compared
to prior year revenues of $1,035,000 which consisted of sales only for the four
months ended September 30, 2001.
Gross Profit
The Gross Profit percentages for the Rheology business for the three and nine
months ended September 30, 2002 were 29.1% and 42.1%, respectively, compared to
43.3% and 44.8% over the same periods in the prior year. The Gross Profit
percentages for the Life Science business for the three and nine months ended
September 30, 2002 were 31.5% and 29.3%, respectively, compared to 37.9% and
39.8% over the same periods in the prior year.
The total gross profit percentages for the three months ended September 30, 2002
were 29.6% compared to 42.1% over the same periods in the prior year. The gross
profit percentage decrease was the result of unfavorable product and geographic
mix and intensive pricing pressures in our Rheology business, a higher
percentage of Life Science sales compared to Rheology sales, which historically
have lower margins, along with lower volume in both the Rheology and Life
Science businesses that was not sufficient to offset our fixed cost as compared
to the prior year.
The total gross profit percentages for the nine months ended September 30, 2002
was 39.6%, compared to 44.0% over the same periods in the prior year. The gross
profit percentage decrease was the result of the most recent three month period,
in both the Rheology and Life Science Businesses.
Operating Expenses
The Operating Expenses for the Rheology business for the three and nine months
ended September 30, 2002 were $3,205,000 and $9,263,000, respectively, compared
to $2,777,000 and $8,609,000 over the same periods in the prior year. The
Operating Expenses for the Life Sciences business for the three and nine months
ended September 30, 2002 were $496,000 and $1,553,000, respectively, compared to
$517,000 and $1,271,000 over the same periods in the prior year,
Total operating expenses for the three and nine months ended September 30, 2002
increased by $407,000 and $936,000, respectively, compared to the corresponding
periods in the prior year. This nine month increase includes an increase in
expenses for Aviv of $433,000, over prior year expenses that consisted of only
four months of expense activity. For the three and nine month periods operating
expenses have been unfavorably affected by foreign currency translation of
$60,000 and $13,000 respectively. Excluding the currency effect and the expenses
related to the Aviv acquisition, operating expenses for the nine months ended
September 30, 2002 have increased by $490,000.
General and Administrative. General and Administrative expenses for the Rheology
business for the three and nine months ended September 30, 2002 were $735,000
and $2,170,000, respectively, compared to $528,000 and $1,604,000 over the same
periods in the prior year.
17
General and Administrative expenses for the Life Sciences business for the three
and nine months ended September 30, 2002 were $309,000 and $1,063,000,
respectively, compared to $288,000 and $681,000 over the same periods in the
prior year..
General and Administrative expenses for the three and nine months ended
September 30, 2002 increased by $228,000 and $948,000, respectively, compared to
the corresponding periods in the prior year.
The increase for the three months ended September 30, 2002 is primarily due to
increases in the rheology instruments and services business of; salaries of
$65,000, bank fees of $40,000, legal fees of $60,000, audit fees of $16,000,
director fees of $20,000, and higher net rent of 23,000. The Life Sciences
expenses increased by $20,000 for the comparable periods
The increase for the nine months includes an increase in expenses for Aviv for
the nine-month period ended September 30, 2002 of $404,000 over prior period
amounts that included only four months of expenses. The remaining increase for
the nine months ended September 30, 2002 is primarily due to increases in the
rheology instruments and services business; of salaries of $209,000, bank fees
of $84,000, travel and entertainment expenses of $48,000, legal fees of $45,000,
consulting fees of $36,000, audit fees of $25,000, an escrow refund of $53,000,
and higher net rent of $62,000.
Marketing and Selling. Marketing and Selling expenses for the rheology
instruments and services business for the three and nine months ended September
30, 2002 were $2,010,000 and $5,703,000, respectively, compared to $1,806,000
and $5,613,000 over the same periods in the prior year. Marketing and Selling
expenses for the Life Sciences business for the three and nine months ended
September 30, 2002 were $109,000 and $311,000, respectively, compared to
$117,000 and $440,000 over the same periods in the prior year.
Marketing and selling expenses for the three and nine months ended September 30,
2002 increased by $196,000 and decreased by $39,000, respectively, compared to
the corresponding periods in the prior year.
For the three months ended September 30, 2002, RHEO Europe and Life Sciences
marketing and selling expenses decreased by $11,000 and $8,000, respectively.
These decreases were offset by expense increases for RHEO US and RHEO Japan of
$181,000 and $34,000 respectively. The increases in RHEO US were composed
primarily of increases in salaries of $65,000, consulting expenses of $21,000,
advertising expenses of $42,000, charge backs from RHEO Europe and RHEO Japan of
$69,000, and miscellaneous expenses of $10,000, offset by a decrease in in-house
commissions of $20,000. The increases in RHEO Japan relate primarily to travel
of $20,000.
For the nine months ended September 30, 2002, RHEO Japan and the Life Sciences
marketing and selling expenses decreased by $188,000 and $129,000, respectively.
These decreases are composed primarily of decreases in salaries of $196,000,
show and seminar expenses of $40,000, recruiting expenses of $18,000, computer
expenses of $9,000, depreciation expense of $10,000 and rent expense of $8,000.
These decreases were offset by expense increases for RHEO US and RHEO Europe of
$255,000 and $23,000 respectively. These increases were composed primarily of
increases in
18
salaries of $27,000, consulting expenses of $47,000, advertising expenses of
$90,000, commission expenses of $80,000, and miscellaneous expenses of $30,000.
Engineering. Engineering expenses for the Rheology business for the three and
nine months ended September 30, 2002 were $460,000 and $1,390,000, respectively,
compared to $443,000 and $1,392,000 over the same periods in the prior year.
Engineering expenses for the Life Sciences business for the three and nine
months ended September 30, 2002 were $78,000 and $179,000, respectively,
compared to $112,000 and $150,000 over the same periods in the prior year.
Engineering expenses for the three and nine months ended September 30, 2002
decreased by $17,000 and increased by $27,000, respectively, compared to the
corresponding periods in the prior year.
The increase in the three-month period in the rheology instruments and services
business was $17,000, which relates mostly to increased prototype expense,
offset by the decrease in engineering expense in the Life Sciences business of
$34,000 as the result of a decrease in prototype expenses.
The increase in the nine-month period of $27,000 is the result of the inclusion
of the increase in Aviv expenses of $29,000 offset by a decrease in RHEO US
expenses of $2,000.
Interest Expense
Net interest expense for the three and nine months ended September 30, 2002
decreased $30,000 and $99,000, respectively, compared to the same periods in
2001. This decrease is due to lower interest rates in effect for the period and
is partially offset by carrying larger loan balances.
Foreign Currency
The foreign currency adjustment for the three and nine months ended September
30, 2002 was a loss of $47,000 for the three month period and a gain of $51,000
for the nine month period. This compares to a gain of $131,000 for the three
month period and a $251,000 loss for the nine month period in the prior year.
The year to date adjustment was primarily due to transaction gains of $180,000
resulting from the Euro and the Japanese yen against the U.S. Dollar. These were
offset by transaction losses of $129,000 resulting from the British Pound
against the U.S. Dollar.
Net Loss
Net loss for the three months ended September 30, 2002 was $2,356,000, compared
to net income of $4,000 for the same period in 2001. Sales decreased $2,718,000
in 2002 while cost of sales decreased by $864,000. Additionally operating
expenses increased $407,000 and foreign currency loss increased $178,000. These
increases were offset by a decrease in interest and tax expense of $30,000 and
$49,000, respectively, compared to the same period last year.
Net loss for the nine months ended September 30, 2002 was $3,131,000, compared
to a net loss of $883,000 for the same period in 2001. Sales decreased
$2,003,000 in 2002 while cost of sales decreased by $191,000. Additionally
operating expenses increased $936,000 which was offset
19
by a decrease in interest expense, tax expense and favorable currency
transactions of $99,000, $99,000 and $302,000, respectively, compared to the
same period last year.
Inherent in our business is the potential for inventory obsolescence for older
products as we develop new products. Our development efforts generally enhance
existing products or relate to new markets for existing technology. We do
however continuously monitor our exposure relating to excess and obsolete
inventory and establish reserves for any exposure.
Financing, Liquidity, and Capital Resources
From and after March 6, 2000, our principal source of liquidity has been
borrowings under our Loan Agreement with PNC Bank which was obtained in
connection with the transaction by which our principal stockholder, Andlinger
Capital XXVI LLC, acquired its interest in our company. The Loan Agreement
provides for a total credit facility of $14,500,000, of which $13,000,000 is a
working capital revolving credit facility with an initial three-year term
expiring on March 6, 2003. The amount of available credit is determined by the
level of certain eligible receivables and inventories. The line of credit bears
interest at the prime rate, 4.75% at September 30, 2002.
The Loan Agreement also includes a term loan in the amount of $1,500,000 to be
repaid in 4 equal quarterly installments of $75,000, 23 monthly installments of
$25,000 and a final payment of $625,000 due at maturity on March 6, 2003. The
term loan bears interest at the prime rate plus 1.5 percent (6.25% at September
30, 2002 and December 31, 2001) which is due monthly. The outstanding balance of
the term loan obligation was $750,000 at September 30, 2002. On May 31, 2001, in
connection with the Aviv acquisition (see Note 6), we and PNC Bank amended the
Loan Agreement to provide for a second term loan in the amount of $300,000. This
second term loan is repayable in 48 monthly installments of $6,250 and bears
interest at the prime rate plus 1.5% (6.25% at September 30, 2002 and December
31, 2001). The outstanding balance of the second term loan was $213,000 at
September 30, 2002. The Loan Agreement is subject to customary event of default
and acceleration provisions and is collateralized by substantially all of our
assets. Additionally, the Loan Agreement contains a net worth covenant and a
fixed charge coverage ratio covenant.
On March 29, 2002 PNC Bank amended the financial covenants for 2002 including a
condition requiring a cash infusion of at least $1,000,000 in the form of equity
by July 31, 2002. On August 8, 2002 we entered into an agreement with Andlinger
Capital pursuant to which Andlinger Capital would make an immediate preferred
stock investment of $1,500,000, with the right, subject to future Board
determination of the need for such capital, to invest up to an additional
$500,000. Andlinger Capital purchased 1,500 of the 2,000 authorized shares of
our newly created Series B Preferred Stock. The Series B Preferred Stock does
not carry a current dividend, but is subject to redemption at our option, or
upon the sale of all or substantially all of our assets, upon the sale of any
major portion of our assets, upon the sale of a significant subsidiary or
division of our company, upon a change in control of our company, upon the sale
of common or preferred stock by us to the public, or upon the acceleration of
indebtedness for borrowed money in excess of $1,000,000. The redemption price of
the Series B Preferred Stock is the original Series B Preferred Stock issue
price multiplied by 101% plus an additional 1% for
20
each calendar month completed following the date of original issuance. On August
12, 2002, the sale of the 1,500 shares of Series B Preferred Stock to Andlinger
Capital was consummated, which satisfied the cash infusion requirement under the
Loan Agreement.
As a result of the deteriorating business climate and a continuing shortfall in
sales, and in order to provide needed liquidity to support our operations, on
October 18, 2002, we requested Andlinger Capital to improve our liquidity by
making an additional preferred stock investment in our company. On November 1,
2002, Andlinger Capital made an additional Series B Preferred Stock investment
of $500,000, and agreed to defer the mandatory redemption required by the terms
of the Series B Preferred Stock, such that instead of us being required to
redeem all of the outstanding shares of Series B Preferred Stock at closing of
the sale of our rheology instruments and services business, one third will be
required to be redeemed at closing, one-third six months following the closing,
and one third twelve months after the closing, subject to certain terms and
conditions. As of September 30, 2002 we are in violation of the fixed charge
coverage ratio covenant in the Loan Agreement. As a result, absent a waiver or
forbearance from PNC Bank, PNC Bank could exercise its rights to accelerate the
outstanding indebtedness under the Loan Agreement, realize upon the collateral
securing the debt (which comprises substantially all of our assets), or exercise
its other remedies under or relating to the Loan Agreement. We have requested,
but have not yet received a formal response from PNC Bank regarding a waiver or
forbearance agreement that would be subject to the closing of the sale of our
rheology instruments and services business. Upon the closing of the proposed
sale, we will use the proceeds to retire in full all of our outstanding
indebtedness under the Loan Agreement and the Loan Agreement will be terminated.
If the sale does not take place by such date, PNC Bank may by virtue of such
financial covenant violation accelerate the maturity of the outstanding
indebtedness under the Loan Agreement. There can be no assurance that the sale
will be consummated. In the absence of a waiver, we have reclassified the
remaining long term bank debt to short-term borrowings.
At September 30, 2002, we had total borrowings under the Loan Agreement of
$9,437,000 with remaining availability of approximately $588,000. At November
10, 2002, our borrowings were approximately $9,600,000 and we had effectively
exhausted our remaining availability under the Loan Agreement. We anticipate
that we will be able to meet our cash needs through a late December 2002 or
early January 2003 closing of the sale of our rheology instruments and services
business from cash generated through operations, management of non-essential
vendor payables and purchase orders, employee staff reductions and furloughs. If
our sales in the remaining period prior to closing of the sale of our rheology
instruments and services business fall short of our current expectations, or if
our expenses exceed our expectations, or if other factors adversely affect our
business or financial condition, we may be forced to act more aggressively in
these areas or explore other ways to reduce expenses. There can be no assurance
that we will be successful in maintaining an adequate level of cash resources.
The sale of our rheology instruments and services business on a timely basis
pursuant to the Asset Purchase Agreement is integral to our liquidity. If the
sale is not consummated, the cash generated from our operations would not
provide us with the cash resources necessary to fund both our rheology
instruments and services business and our life sciences business in the current
very difficult business environment, other than perhaps on a short term basis.
If such sale is delayed, we may incur additional costs or expenses, and there
can be no assurance that we will have adequate cash resources to fund our
operations, other than perhaps on a short term basis.
21
Upon the closing of the sale of the rheology instruments and services business,
we anticipate that the cash proceeds of the sale will be adequate to pay off the
Loan Agreement and vendor obligations not assumed by Waters Technologies. In
addition, we will be required to make substantial payments at and following
closing to our landlord in connection with the lease termination agreement
relating to our facility in Piscataway, New Jersey, to repay in part certain
obligations to Axess Corporation, our former controlling stockholder, to satisfy
in part certain obligations owed to Andlinger Capital with respect to amounts
recently provided as interim financing by Andlinger Capital, to pay certain
other obligations to Andlinger Capital and to pay legal, accounting and other
expenses of the sale transaction. We anticipate that those payments to be made
at closing would be funded primarily out of the cash proceeds payable at closing
and that those payments to be made following the closing would be funded
primarily out of the cash proceeds payable at closing, the proceeds of an escrow
established to secure certain of our obligations under the Asset Purchase
Agreement, and cash generated from our operations after the closing. We may also
request that Andlinger Capital further defer the redemption of all or a portion
of its preferred stock. However, there can be no assurance that Andlinger
Capital would agree to such deferral, or that our anticipated cash resources
will ultimately be adequate to make these payments on a timely basis or at all.
Following the sale of our rheology instruments and services business, and the
payment in full of all outstanding indebtedness thereunder, our Loan Agreement
with PNC Bank will terminate. We anticipate that following the sale of our
rheology instruments and services business, our operations initially will be
cash neutral or generate a modest positive cash flow and that a bank credit
facility will not initially be necessary to support our life sciences business
at its current level of operations. However, we intend to seek bank or similar
financing on acceptable terms in order to obtain the added flexibility it will
provide to our operations. There can be no assurance that our operations will
generate an adequate level of cash flow or that we will be able to obtain such
financing or that it will be available on terms acceptable to us.
Cash Flows from Operations
Net cash used in operating activities in the nine months ended September 30,
2002 was $1,127,000 compared to $2,266,000 in the same period in 2001. For the
nine month period ended September 30, 2002 accounts receivable, inventories and
other assets decreased by $1,964,000, $837,000 and $113,000, respectively. These
inflows were offset by an increase in prepaid expenses and other current assets
of $276,000 and a decrease in accounts payable and accrued liabilities of
$1,106,000. The loss for the nine months ended September 30, 2002 was
$3,131,000. This was accompanied by non-cash depreciation and amortization
charges of $612,000, a provision for inventory reserves of $129,000, a loss on
retirement of assets of $2, and an unrealized currency gain of $271,000.
Cash Flows from Investing
We made capital expenditures of $118,000 during the nine months ended September
30, 2002 as compared to $305,000 in the same period in 2001.
22
Cash Flows from Financing
Net cash provided by financing activities for the nine months ended September
30, 2002 was $1,199,000 compared to $2,801,000 in the same period in 2001.
During the period, our borrowings under line of credit agreements increased
$519,000. We had proceeds from the issuance of common stock of $4,000, and
proceeds from the issuance of preferred stock net of issuance costs of
$1,320,000. Offsetting these inflows were the repayments of long term debt and
lease obligations totaling $523,000 and a decrease in our borrowings against
accounts receivables of $121,000.
Critical Accounting Policies and Estimates
We follow certain significant accounting policies when preparing our
consolidated financial statements. A complete summary of these policies is
included in Note 1 to our consolidated financial statements included in our most
recent Annual Report on Form 10-K.
Principles of Consolidation and Operations. Our consolidated financial
statements include the accounts of Rheometric Scientific, Inc. and our
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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.
Service revenue is recorded as services are performed. Maintenance agreement
revenue is recorded on a straight-line basis over the terms of the respective
agreements.
Forward-Looking Statements
This report includes "forward-looking statements". Statements in this report
regarding future events or conditions, including statements regarding industry
prospects and our expected financial position, business and financing plans, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations are disclosed in
this report and in our other public filings with the SEC, and include the risks
associated with dependence on the capital spending policies of our customers,
the consummation of the proposed sale of our rheology instruments and services
business, the availability of the funds to be held in escrow in connection with
such sale, our ability to adequately fund our company prior to and following the
proposed sale, and the profitability and expansion of our life sciences business
following the proposed sale, as well as factors that affect the materials test
systems industry generally. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. We
undertake no obligation to publicly update or
23
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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 however it does purchase forward currency contracts for the
purpose of hedging cash receipts from its foreign subsidiaries. The Company is
exposed to market risk related to changes in foreign exchange and interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90-day period
prior to the filing date of this report, the Company carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of their evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
24
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Securities Purchase Agreement, dated as of February 17, 2000, by and
between Rheometric Scientific, Inc., Andlinger Capital XXVI LLC and
Axess Corporation, incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on March 21, 2000.
2.2 Merger Agreement, dated as of November 20, 2000, among Sheridan D.
Snyder, Robert P. Collins, Jr., PSI Holding Corporation, Rheometric
Scientific, Inc., and PSI Acquisition Corp., incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
November 29, 2000.
2.3 Merger Agreement, dated as of May 31, 2001, among the individuals listed
on Schedule A thereto as Company Shareholders, Aviv Instruments, Inc.,
Aviv Associates, Inc., Rheometric Scientific, Inc. and Tel Acquisition
Corp., incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on June 4, 2001.
2.4 Securities Purchase Agreement, dated as of August 8, 2002, by and
between Rheometric Scientific, Inc. and Andlinger Capital XXVI LLC,
incorporated by reference to Exhibit 2.1 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002.
3.1 Certificate of Incorporation of Rheometric Scientific, Inc.,
incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 2000.
3.2 Bylaws of Rheometric Scientific, Inc., as amended, incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000.
4.1 Specimen Certificate representing Common Stock of Rheometric Scientific,
Inc., incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1, File No. 33-807 filed on October 10,
1985.
4.2 Warrant to Purchase 132,617 shares Common Stock of Rheometric
Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc., incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K filed
on March 11, 1996.
4.3 Warrant to Purchase 331,543 shares of Common Stock of Rheometric
Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc., incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
on March 11, 1996.
25
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 the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 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 Revolving Credit, Term Loan and Security Agreement, dated as of March 6,
2000, by and among PNC Bank, National Association, as agent and a
lender, and Rheometric Scientific, Inc. and certain subsidiaries
thereof, as borrowers, incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000.
10.4 First Amendment to the Revolving Credit, Term Loan and Security
Agreement, dated as of August 31, 2000, incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.5 Second Amendment to the Revolving Credit, Term Loan and Security
Agreement, dated as of March 16, 2001, incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.6 Third Amendment of the Revolving Credit, Term Loan and Security
Agreement, dated as of May 31, 2001, incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June
4, 2001.
10.7 Fourth Amendment of the Revolving Credit, Term Loan and Security
Agreement, dated as of March 29, 2002.
10.8 Fifth Amendment of the Revolving Credit, Term Loan and Security
Agreement, dated as of August 14, 2002.
10.9 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.
10.10 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.
10.11 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.
26
10.12 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.
10.13 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.
10.14 Landlord Agreement and Amendment of Lease, dated as of March 6, 2000, by
among RSI (NJ) QRS 12-13, Inc., Rheometric Scientific, Inc. and Axess
Corporation, incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-3/A filed on November 9, 2001.
10.15 Registration Rights Agreement, dated as of March 6, 2000, as amended and
restated as of September 28, 2001, by and among Rheometric Scientific
Inc., Andlinger Capital XXVI, Axess Corporation, State Farm Mutual
Automobile Insurance Company, Trustee Under the Revocable Trust of R.
Michael Hendricks, and Robert E. Davis, incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-3/A
filed on November 9, 2001.
10.16 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.
10.17 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.
10.18 Employment Agreement, dated as of August 27, 2001, by and between
Rheometric Scientific, Inc. and Paul Mangano, incorporated by reference
to Exhibit 10.16 to the Company's Registration Statement on Form S-3/A
filed on November 9, 2001.
10.19 Amended and Restated Subordinated Promissory Note, dated as of September
28, 2001, issued by Rheometric Scientific, Inc. to Axess Corporation,
incorporated by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-3/A filed on November 9, 2001.
21.1 Subsidiaries of Rheometric Scientific, Inc., incorporated by reference
to Exhibit 21.1 to the Company's Annual Report on Form 10-K filed on
April 1, 2002.
27
(b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K on July 19,
2002 relating to a potential additional equity investment by
Andlinger Capital.
(ii) The Company filed a Current Report on Form 8-K on October 16,
2002 relating to the Company's entry into an Asset Purchase
Agreement with Waters Technologies Corporation.
(iii) The Company filed a Current Report on Form 8-K on November
1, 2002 relating to an additional equity investment by Andlinger
Capital XXVI LLC and certain other matters.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RHEOMETRIC SCIENTIFIC, INC.
(Registrant)
November 14, 2002 By /s/ Joseph Musanti
------------------------------------
Joseph Musanti, Vice President,
Finance, Chief Financial Officer
and Authorized Officer
29
RHEOMETRIC SCIENTIFIC, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Robert M. Castello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rheometric Scientific,
Inc.;
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: November 14, 2002
/s/ Robert M. Castello
- ------------------------
Robert M. Castello
Chief Executive Officer
30
CERTIFICATION
- -------------
I, Joseph Musanti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rheometric Scientific,
Inc.;
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: November 14, 2002
/s/ Joseph Musanti
- -----------------------
Joseph Musanti
Chief Financial Officer
31