SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarterly Period Ended May 31, 1997
[ ] 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 1-8381
WELDOTRON CORPORATION
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-1602728
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
1532 South Washington Avenue
Piscataway, New Jersey 08854
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(Address of Principal Exec. Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (908) 752-6700
--------------
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
2,300,173 Shares of Common Stock were outstanding as of July 10, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WELDOTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S OMITTED EXCEPT SHARE DATA)
Three Months Ended May 31,
1997 1996
---- ----
(Unaudited) (Unaudited)
NET SALES $ 2,550 $ 3,961
COST AND EXPENSES:
Cost of sales 1,722 2,882
Selling, general & administrative expenses 1,160 1,457
Depreciation and amortization 104 100
---- ----
2,986 4,439
LOSS FROM OPERATIONS (436) (478)
OTHER INCOME/(EXPENSES):
Foreign currency translation gain -- 25
Other income (expense) (10) 116
Interest expense (145) (154)
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(155) (13)
LOSS FROM OPERATIONS BEFORE
TAXES AND MINORITY INTEREST (591) (491)
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INCOME TAX PROVISION (17) --
------- ---------
MINORITY INTEREST: SHARE OF (INCOME) LOSS (36) (5)
NET LOSS $ (644) $ (496)
======= ========
NET LOSS PER COMMON SHARE: $ (.28) $ (.22)
======= ========
DIVIDEND PER SHARE NONE NONE
WEIGHTED AVERAGE OF
COMMON SHARES OUTSTANDING 2,300,173 2,300,173
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
WELDOTRON CORPORATION AND SUBSIDIARIES
($000'S OMITTED)
May 31, Feb. 28,
1997 1997
---- ----
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 115 $ 19
Accounts receivable (Net) 960 1,299
Inventories (Note B) 4,977 5,088
Prepaid expenses and other current assets 467 399
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TOTAL CURRENT ASSETS 6,519 6,805
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Property and equipment at cost 11,266 11,363
Less accumulated depreciation & amort. (9,780) (9,676)
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Net property and equipment 1,486 1,687
Other assets and investments 585 539
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TOTAL ASSETS $ 8,590 $ 9,031
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ 104 $ 211
Short term borrowings (Note C) 1,939 1,396
Short term borrowings: related party (Note C) 1,446 446
Accounts payable 2,581 2,528
Other current liabilities 1,187 1,645
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TOTAL CURRENT LIABILITIES $ 7,257 $ 6,226
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Long term debt: related party (Note C) -- 1,000
Deferred compensation 1,175 1,165
Minority interests in subsidiary 514 478
Other long term liabilities 193 67
Stockholders' equity (deficit) (549) 95
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,590 $ 9,031
======= =======
The Balance sheet at February 28, 1997, has been taken from the audited
financial statements at that date, condensed and reclassified.
See Notes to condensed consolidated financial statements.
<PAGE>
WELDOTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S OMITTED)
Three Months Ended May 31,
1997 1996
-------- --------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (644) $ (496)
Adjustments to reconcile net loss to net cash
flows provided by (used in) operating activities:
Depreciation and amortization 104 100
Foreign currency translation gain -- (24)
Bad debt provision 2 6
Deferred compensation expense 27 28
Minority interest in subsidiary net income 36 5
Gain on sale of property, plant and equipment -- (11)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 367 319
Inventories 111 488
Prepaid expenses and other current assets (98) (27)
Other assets (46) (2)
Decrease in current liabilities (407) (488)
Increase in other long-term liabilities 110 37
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Total adjustments 206 431
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Net cash used in operating activities (438) (65)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2) (44)
Proceeds from the sales of property, plant and equipment 99 11
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Net cash provided by (used in) investing activities 97 (33)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayments) under short-term borrowings 500 (84)
Proceeds from short-term debt - Related Party 50 --
Cash overdraft (107) --
Principal payments under capital lease obligations (6) (1)
----------- -----------
Net cash provided by (used in) financing activities 437 (85)
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS -- 24
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 96 (159)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19 344
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 115 $ 185
======== =========
See notes to condensed consolidated financial statements.
<PAGE>
WELDOTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($000'S OMITTED EXCEPT SHARE DATA)
Note A: Basis of Preparation
The unaudited, condensed Consolidated Financial Statements as of May 31, 1997,
and for the three month period ended May 31, 1996, included herein, have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01. The
information reflects all adjustments which are of a normal recurring nature and
which are, in the opinion of management, necessary to a fair statement of the
results for the period. Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with the
generally accepted accounting principles have been condensed or omitted. The
reader is referred to the consolidated financial statements and notes thereto
included in the Registrant's annual report on Form 10-K for the year ended
February 28, 1997.
Results of operations for the interim period are not necessarily indicative of
the operating results for the full year.
Note B: Inventories
Inventories at May 31, 1997, and February 28, 1997, are as follows:
May 31, Feb. 29,
1997 1997
Finished Goods $ 1,744 $ 1,704
Work in Process 1,910 2,094
Raw Materials 1,323 1,290
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$ 4,977 $ 5,088
======== =======
Note C: Long-Term Debt and Short-Term Borrowings
The primary and secondary sources of financing for the Company during the year
were notes from Related Parties and a secured revolving line of credit with
Business Alliance Capital Corporation (the New Credit Facility), respectively.
In June 1991, the Company entered into a credit facility (the "Credit Facility")
with Congress Financial Corporation, ("Congress") which was amended on June 10,
1996. It provided a revolving line of credit and term loan of $2,500 an interest
rate of 3.75% over the Core States floating base rate, a maturity date of June
25, 1997, and financial covenants as follows: minimum domestic working capital
of $1,700 and minimum domestic tangible net worth of $1,050.
The Credit Facility was collateralized by substantially all of the assets of the
Company and its domestic subsidiaries. Borrowings under the Credit Facility were
limited to certain percentages of eligible inventory and accounts receivable
including stipulations as to the ratio of advances collateralized by receivables
compared to advances collateralized by inventory.
The Company was in default of its minimum working capital and tangible net worth
covenants of the Credit Facility as of August 31, 1996 and November 30, 1996.
Subsequently, Congress Financial Corporation notified the Company of its
intention to terminate the Credit Facility due to the default as well as the
reduced size of the outstanding loan (below $1,000) and provided the Company a
period of time in which to seek alternative sources of financing. On December
10, 1996, the Company successfully entered into a new credit facility (the "New
Credit Facility") with Business Alliance Capital Corporation, ("BACC") to
provide a revolving line of credit for working capital purposes. The interest
rate is 3.0% over the Core States floating base rate. The New Credit Facility
further requires that the Company pay fees on the average outstanding loan of
0.33% per month, for administration and upon early termination of the New Credit
Facility. The maximum line of credit is $1,500 and the maturity date is December
10, 1998.
The New Credit Facility is collateralized by substantially all of the assets of
the Company and its domestic subsidiaries. Borrowings under the New Credit
Facility are limited to certain percentages of eligible inventory and accounts
receivable as well as a stipulation as to the maximum advance level on
inventory.
At May 31, 1997, the Company had used approximately $1,301 of the Business
Alliance Capital New Credit Facility (See note 7 to the consolidated financial
statements). Based on the advance percentages of eligible receivables and
inventory, the Company had unused borrowing availability of approximately $54 at
May 31, 1997.
On August 31, 1994, the Registrant borrowed $500 Dollars from Lyford Corporation
("Lyford"), an affiliated company that owns 19.56% of the issued and outstanding
common stock of the Company. The Company executed and delivered to Lyford a
promissory note, a security agreement and a Common Stock Purchase Warrant
granting to Lyford the right to purchase up to 200,000 shares of the Company's
common stock at an initial exercise price of two dollars per share, the closing
price for the Company's common stock on the date the warrant was granted. The
warrant expires on August 4, 2004.
On March 1, 1995, the Registrant concluded the rolling of this note into a new
note in the amount of $1,000. The new obligation is evidenced by a certain
Amended, Extended and Restated Promissory Note dated as of March 1, 1995 (the
"Restated Note"). In consideration for the new loan, the Company executed and
delivered to Lyford the Restated Note and an additional Common Stock Purchase
Warrant. The new note was originally due and payable on or before March 31, 1996
and bears interest at 12% per annum. The note was subsequently extended twice
- -first until April 1, 1997, then until April 1, 1998 and the interest rate was
increased to 14%. The new loan is secured by a junior lien on all of the
Company's assets. The new warrant grants to Lyford the right to purchase up to
1,000,000 shares of the Company's common stock at an initial exercise price of
One ($1.00) Dollar per share. The market price of the Company's common stock was
$.875 on the date of the warrant grant. The new warrant expires by its terms on
April 12, 2005. The Company's management considers the note to be at fair value
and has not assigned any value to the warrants. The loan transaction closed
pursuant to documents dated as of March 1, 1995 and, in the case of the new
Warrant, April 13, 1995. These loan documents were contingent on the Company's
obtaining the consent of its senior lender, which consent was obtained on May 5,
1995. The Lyford loan is collateralized by a junior lien on substantially all of
the assets of the Company.
As a result of the continuing deterioration in the financial performance of the
Company and the negative impact of the events described under Part II, "Item 1,
Legal Proceedings", Lyford has advanced additional sums to the Company to
protect its collateral position and to fund ongoing operations. As of August 31,
1997, the current balance due and owing to Lyford, including unpaid and accrued
interest is $1,684.
In January, 1996 the Registrant entered into a $500 revolving loan agreement
with Exford Corp. "Exford", an affiliated company of Lyford. The Registrant
borrowed $350 under this agreement which borrowings bear interest at 14%, and
was originally due on January 31, 1997. The note was subsequently extended until
January 31, 1998. In connection with this revolving loan, the Company has
assigned to Exford its right, title and interest as tenant under the main
operating lease, together with any rents due and payable to the Company.
In February, 1997 the Registrant entered into a one year promissory note in the
amount of $96 with Mentmore Holdings. The note bears interest at two percentage
points above the prime rate, with a default rate of the interest rate plus five
percent for late payment of interest or principal. The note expires on February
11, 1998.
<PAGE>
ITEM 2:
WELDOTRON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
($000'S OMITTED EXCEPT SHARE DATA)
Financial Condition
The Registrant's net working capital decreased from $579 at February 28, 1997 to
$(738) at May 31, 1997. The current ratio decreased from 1.09 at February
28,1997 to .90 at May 31, 1997. The changes in net working capital during the
first quarter of this year were primarily related to the following:
Accounts receivable decreased due to 27% lower sales in the first quarter of
this year compared to the immediately preceding fourth quarter of last year.
Inventories decreased due to continued efforts to keep inventory levels in line
with reduced sales.
Prepaid expense and other current asset increases at our Brazilian subsidiary
offset domestic declines experienced from prepaid insurance amortization.
Accounts payable increased slightly due primarily to extended payment terms on
related party obligations.
Short-term borrowings increased due primarily to our Brazilian subsidiary's
increased borrowings of $421.
Short-term borrowings from a related party increased at May 31, 1997 due to the
reclassification of $1,000 from long-term to short-term.
Other current liabilities decreased due to a $679 reduction experienced at our
Brazilian subsidiary, which was financed in part by increased short-term
borrowings.
The Registrant's working capital and net worth were reduced to negative
positions at the end of May 31, 1997.
At May 31, 1997 the Registrant had used approximately $1,301 of the Business
Alliance Capital Credit Facility (See Note C to the consolidated financial
statements). Based on the advance percentages of eligible receivables and
inventories the Registrant had unused borrowing availability of approximately
$54 at May 31, 1997.
The availability of future borrowings depends upon the Company's level of
eligible receivables and inventories contained in the Credit Facility.
The Registrant's primary and secondary sources of liquidity at May 31, 1997 the
notes from a related party and the Business Alliance Capital Credit Facility,
respectively. There can be no assurances that an extended economic recession
will not adversely impact the Registrant's future financial condition and
liquidity.
The effect of exchange rate changes on cash and cash equivalents for the first
quarter ended May 31, 1997 and for the same period last year was $0 and $24
respectively. This is attributable to the Brazilian subsidiary and the
"remeasurement method" used for foreign currency translation to be measured into
U.S. dollars as required by SFAS No. 52.
<PAGE>
Results of Operations for the Period Ended
May 31, 1997 and 1996
($000'S OMITTED EXCEPT SHARE DATA)
For the first quarter ended May 31, 1997 sales were $2,550 with a net loss of
$644 or $.28 per share. This compares to sales of $3,961 with a net loss of $496
or $.22 per share in the first quarter last year.
Loss From Operations
First Quarter
Sales for the first quarter were approximately 35.6% lower than the same period
last year. The sales decrease was entirely in the domestic packaging segment, as
the safety and automated system segment's sales were flat and the Brazilian
subsidiary's sales showed a 7.4% increase. Domestic industrial packaging sales
experienced a 57.2% or $827 decline from last year; domestic food packaging
sales experienced an 85.1% or $394 decline from last year; and domestic parts
and service had a 31.7% or $261 decline from last year. Brazilian sales
increased $71 from last year.
While the Company has achieved successes this quarter through higher sales at
its Brazilian subsidiary and stabilized sales in its safety and automated
systems segment, following that segment's extended period of sales declines, it
continues to rebuild its domestic packaging business. The Company plans to focus
its efforts in the months to come in satisfying parts and service demands in a
more timely manner, thereby generating increasing demand for packaging equipment
from repeat sales to satisfied customers.
Cost of sales for the first quarter this year was 67.5% of sales compared to
72.8% for the same quarter last year. The decrease in cost of sales is due to a
shift in sales mix toward higher margin Brazilian sales, which represented 41%
of consolidated sales in the first quarter of this year versus 24% last year.
Selling, general and administrative expenses decreased by $297 in the first
quarter of this year compared to the same quarter last year, due primarily to
domestic staff reductions of previously excessive marketing support personnel
and operating expense reductions at our Brazilian subsidiary.
The gain from foreign currency translation decreased by $25 for the first
quarter of this year compared to the same period last year, due to slower
movement this year in the Brazilian currency exchange rate.
Other income last year of $116 shifted to other expense of $10 in the first
quarter of this year, due to the sharp reduction in commission income at our
Brazilian subsidiary this year.
Interest expense declined $9 due to reductions experienced by our Brazilian
subsidiary, which offset domestic interest expense increases.
The provision for income taxes was $17 in the first quarter this year versus $0
in the first quarter last year. The provision this year is due solely to the
taxable income generated by our Brazilian subsidiary of $108 for the quarter.
<PAGE>
PART II. OTHER INFORMATION ($000'S OMITTED EXCEPT SHARE DATA)
Item 1. Legal Proceedings
The Company is involved in various legal actions arising in the ordinary course
of business and several claims have been asserted against the Company. Some of
the actions involve claims for compensatory, punitive or other damages. The
Company presently believes that any compensatory, punitive, and other damage
claims are adequately covered by insurance.
Martin Siegel vs. Weldotron Corporation
On November 23, 1994, the Registrant was served with a lawsuit filed by Martin
Siegel in the Superior Court of New Jersey, naming the Company as the defendant.
The other defendants named were: William L. Remley and Richard C. Hoffman,
officers and directors of the Company; Richard Kramer, John D. Mazzuto, Bryon
Fusini and Fred H. Rohn, directors of the Company; Lyford Corp., a major
shareholder of the Company and Mentmore Holdings Corp. Until earlier that year,
Mr. Siegel served as Chairman of the Board and Chief Executive Officer of the
Company. On or about November 2, 1994, the Company terminated Mr. Siegel's
employment agreement for cause. Mr. Siegel alleged, among other things, that the
Company breached its obligations to him under his employment agreement by
forcing his resignation as Chairman of the Board and Chief Executive Officer,
ceasing his regular salary and failing to fund a grantor trust designed to
secure Mr. Siegel's deferred compensation benefits. The defendants were also
served with an Order to Show Cause, seeking to secure an immediate funding of
the grantor trust and summary disposition of his claims.
On January 3, 1995, the court denied Mr. Siegel's request for a preliminary
injunction mandating the immediate funding of the grantor trust and for the
matter to proceed summarily. Periodic payments of Mr. Siegel's annual deferred
compensation benefits were deposited into an escrow account pending a final
determination of this matter.
On April 13, 1995, the Company reached a full and final settlement with Martin
Siegel. Under the terms of the settlement, which was approved by the Court: (1)
all claims and counterclaims by, between and among Mr. Siegel, the Company and
the other parties to the litigation were dismissed, with prejudice, (2) Mr.
Siegel and the Company exchanged mutual releases, (3) Mr. Siegel's Employment
Agreement with the Company dated March 1, 1988, as amended, was terminated, and
(4) Mr. Siegel was awarded a lifetime annual deferred compensation benefit of
$100. The annual deferred compensation benefit is an unsecured obligation of the
Company.
The Company made regular monthly payments to Mr. Siegel under the revised
deferred compensation benefit arrangement until April of 1997 when such payments
were suspended. Mr. Siegel served written notice of default in the payment of
his deferred compensation benefits upon the Company in May of 1997. In June, as
was Mr. Siegel's right under the terms of the deferred compensation agreement
entered into as part of the settlement of the prior litigation, Mr. Siegel made
application to the New Jersey Court for a confessed judgment against the Company
in the amount of the present value of the remaining payments due him under the
deferred compensation agreement.
On June 24, 1997, the Superior Court of Bergen County, New Jersey awarded a
judgment in Mr. Siegel's favor in the amount of $772. The Company is in
discussions with Mr. Siegel concerning a potential settlement of its obligations
to Mr. Siegel. As of May 31, 1997, the Company had accrued $817 as the present
value of this obligation.
<PAGE>
Seymour Siegel vs. Weldotron Corporation
Seymour Siegel, who is the brother of Martin Siegel, was formerly an executive
officer and director of the Company who retired from the Company as an officer
in 1993 and as a director in 1994. Under the terms of Seymour Siegel's
Employment Agreement with the Company, upon his retirement he was to receive
annual deferred compensation benefits of $50. These annual deferred compensation
benefits are unsecured obligations of the Company. Such benefits were paid in
monthly installments to Seymour Siegel until April, 1997, at which time they
were suspended by the Company. Seymour Siegel has put the Company on notice of
default and has threatened to retain counsel to pursue his rights unless said
payments are resumed. To pursue his claims against the Company, Seymour Siegel
would be required to initiate litigation against the Company. The Company
intends to meet with Seymour Siegel and his counsel in an effort to settle these
claims. As of May 31, 1997, the Company has accrued $359 as the present value of
this obligation.
Riken Optech Corp. vs. Weldotron Corporation
Riken Optech Corp. ("Riken") is a Japanese manufacturer of solid state
industrial electronic control systems which formerly provided products for
resale by the Safety and Automation Systems Group of the Company under an
exclusive distributorship agreement (the "Distributorship Agreement") which
originated in the late 1970's.
In 1995, as a result of unfavorable exchange rates between the Japanese Yen and
the U.S. Dollar, Riken unilaterally increased the prices at which its products
would be sold to the Company to a prohibitive level. The Company pursued
discussions with Riken to license production of the Riken products and
simultaneously initiated separate efforts to design, fabricate and source
comparable products domestically. Discussions ensued between the Company and
Riken during which time the Company suspended further payments upon certain open
invoices with Riken. In December of 1995, Riken allegedly terminated the
Company's exclusive Distributorship Agreement with the Company. Negotiations
were terminated and the Company exclusively pursued its domestic product design
and fabrication efforts. Thereafter, the Company, through its Safety and
Automation Group, successfully introduced and began marketing its domestically
sourced line of industrial electronic control systems.
In early 1996, the Company commenced an action in New Jersey State Court against
Riken and a former employee of its Safety and Automation Group who had left to
join a competitor, asserting various claims in relation to Riken's termination
of the exclusive Distributorship Agreement, predatory pricing practices, and
tortious interference with existing contractual relationships.
In late 1996, Riken commenced a separate action against the Company in the
United States District Court for the Southern District of New York, seeking
payment in respect of the outstanding unpaid invoices and asserting various
claims in relation to the Company's new domestically sourced industrial
electronic control system products.
In January of 1997, the Company, Riken, and the former Company employee reached
a settlement of the claims raised in the New Jersey State and New York Federal
Court actions. Under the terms of the settlement: (1) All claims and
counterclaims were released and the two court actions were dismissed with
prejudice; (2) the Company agreed to pay Riken the sum of approximately $185 in
installments over a 14-month period, which the Company had accrued as of
February 28, 1997; and (3) Weldotron agreed to make certain cosmetic changes to
the appearance of its new domestically sourced products. This obligation
amounted to $126 as of May 31, 1997.
Weldotron made four payments, totaling approximately $59, under the terms of the
settlement with Riken, then suspended all further payments. Riken has notified
Weldotron that it will seek to pursue the enforcement of the settlement terms
against the Company and will seek to obtain a judgment in the amount of the
remaining settlement payments. The Company anticipates having further
discussions with Riken in an effort to compromise the remaining payment
obligations of the Company.
Mackman Realty Corp. vs. Weldotron Corporation
The Company currently occupies a 256,000 square foot manufacturing, warehousing,
and corporate facility in Piscataway, New Jersey under a long-term lease whose
original term was set to expire in May of 2005. Because the Company only
utilizes approximately 35% of said facility and because the rent payable under
said lease was substantially below current prevailing market rents for similar
facilities in the proximate geographic marketplace, the Company has, for the
last two years, sought to sublease said facility and to move to smaller, more
efficient quarters. Because the existing facility is dated and because updating
would require a significant expenditure of funds to make the facility attractive
to potential users, the Company chose to defer certain maintenance items until a
suitable subtenant could be identified.
In January of 1997, the Landlord of this facility, Mackman Realty Corp.
("Mackman") sought to declare a default under the Lease and to terminate the
Lease by reason of Weldotron's alleged failure to meet its repair and
maintenance obligations under said Lease. Mackman commenced an action for
summary possession in New Jersey Court. The Company then filed a motion to
transfer the case to another court as there were substantial issues of fact and
interpretation and the need for discovery and expert testimony. The Company's
motion was granted and the parties commenced discovery efforts. Despite repeated
attempts at settlement, negotiations broke down and a trial was held before the
Court in July. The Court issued its order on July 11, 1997 declaring the
Company's lease terminated and granting judgment in favor of Mackman for
possession of the facility on August 15, 1997. The Company continues to occupy
the facility, under an interim arrangement with Mackman, through October 15,
1997.
The Company has located a smaller, more efficient facility in the immediate area
of the existing facility into which it intends to move by said October 15, 1997
date. Negotiations for a lease for the new facility are proceeding. As a result
of the Court's decision, the Company will be required to write-off the value of
unamortized leasehold improvements for the existing facility during the second
fiscal quarter of 1998, which are estimated at $662.
Item 2. Changes in Securities
The primary and secondary sources of financing for the Company during the year
were notes from Related Parties and a secured revolving line of credit with
Business Alliance Capital Corporation (the New Credit Facility), respectively.
In June 1991, the Company entered into a credit facility (the "Credit Facility")
with Congress Financial Corporation, ("Congress") which was amended on June 10,
1996. It provided a revolving line of credit and term loan of $2,500 an interest
rate of 3.75% over the Core States floating base rate, a maturity date of June
25, 1997, and financial covenants as follows: minimum domestic working capital
of $1,700 and minimum domestic tangible net worth of $1,050.
The Credit Facility was collateralized by substantially all of the assets of the
Company and its domestic subsidiaries. Borrowings under the Credit Facility were
limited to certain percentages of eligible inventory and accounts receivable
including stipulations as to the ratio of advances collateralized by receivables
compared to advances collateralized by inventory.
The Company was in default of its minimum working capital and tangible net worth
covenants of the Credit Facility as of August 31, 1996 and November 30, 1996.
Subsequently, Congress Financial Corporation notified the Company of its
intention to terminate the Credit Facility due to the default as well as the
reduced size of the outstanding loan (below $1,000) and provided the Company a
period of time in which to seek alternative sources of financing. On December
10, 1996, the Company successfully entered into a new credit facility (the "New
Credit Facility") with Business Alliance Capital Corporation, ("BACC") to
provide a revolving line of credit for working capital purposes. The interest
rate is 3.0% over the Core States floating base rate. The New Credit Facility
further requires that the Company pay fees on the average outstanding loan of
0.33% per month, for administration and upon early termination of the New Credit
Facility. The maximum line of credit is $1,500 and the maturity date is December
10, 1998.
The New Credit Facility is collateralized by substantially all of the assets of
the Company and its domestic subsidiaries. Borrowings under the New Credit
Facility are limited to certain percentages of eligible inventory and accounts
receivable as well as a stipulation as to the maximum advance level on
inventory.
At May 31, 1997, the Company had used approximately $1,301 of the Business
Alliance Capital New Credit Facility (See note 7 to the consolidated financial
statements). Based on the advance percentages of eligible receivables and
inventory, the Company had unused borrowing availability of approximately $54 at
May 31, 1997.
On August 31, 1994, the Registrant borrowed $500 Dollars from Lyford Corporation
("Lyford"), an affiliated company that owns 19.56% of the issued and outstanding
common stock of the Company. The Company executed and delivered to Lyford a
promissory note, a security agreement and a Common Stock Purchase Warrant
granting to Lyford the right to purchase up to 200,000 shares of the Company's
common stock at an initial exercise price of two dollars per share, the closing
price for the Company's common stock on the date the warrant was granted. The
warrant expires on August 4, 2004.
On March 1, 1995, the Registrant concluded the rolling of this note into a new
note in the amount of $1,000. The new obligation is evidenced by a certain
Amended, Extended and Restated Promissory Note dated as of March 1, 1995 (the
"Restated Note"). In consideration for the new loan, the Company executed and
delivered to Lyford the Restated Note and an additional Common Stock Purchase
Warrant. The new note was originally due and payable on or before March 31, 1996
and bears interest at 12% per annum. The note was subsequently extended twice
- -first until April 1, 1997, then until April 1, 1998 and the interest rate was
increased to 14%. The new loan is secured by a junior lien on all of the
Company's assets. The new warrant grants to Lyford the right to purchase up to
1,000,000 shares of the Company's common stock at an initial exercise price of
One ($1.00) Dollar per share. The market price of the Company's common stock was
$.875 on the date of the warrant grant. The new warrant expires by its terms on
April 12, 2005. The Company's management considers the note to be at fair value
and has not assigned any value to the warrants. The loan transaction closed
pursuant to documents dated as of March 1, 1995 and, in the case of the new
Warrant, April 13, 1995. These loan documents were contingent on the Company's
obtaining the consent of its senior lender, which consent was obtained on May 5,
1995. The Lyford loan is collateralized by a junior lien on substantially all of
the assets of the Company.
As a result of the continuing deterioration in the financial performance of the
Company and the negative impact of the events described under "Item 3, Legal
Proceedings", Lyford has advanced additional sums to the Company to protect its
collateral position and to fund ongoing operations. As of August 31, 1997, the
current balance due and owing to Lyford, including unpaid and accrued interest
is $1,684.
In January, 1996 the Registrant entered into a $500 revolving loan agreement
with Exford Corp. "Exford", an affiliated company of Lyford. The Registrant
borrowed $350 under this agreement which borrowings bear interest at 14%, and
was originally due on January 31, 1997. The note was subsequently extended until
January 31, 1998. In connection with this revolving loan, the Company has
assigned to Exford its right, title and interest as tenant under the main
operating lease, together with any rents due and payable to the Company.
In February, 1997 the Registrant entered into a one year promissory note in the
amount of $96 with Mentmore Holdings. The note bears interest at two percentage
points above the prime rate, with a default rate of the interest rate plus five
percent for late payment of interest or principal. The note expires on February
11, 1998.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
S I G N A T U R E
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.
WELDOTRON CORPORATION
Registrant
By: /s/Michael McKee
Michael McKee
Vice President of Finance
Date: September 22, 1997
<PAGE>
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