SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period Ended November 30, 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
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
111 Chimney Rock Road
Bridgewater, New Jersey 08807
(Address of Principal Exec. Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (732) 748-4600
1532 South Washington Avenue
Piscataway, New Jersey 08854
(Former Address of Principal Exec. Offices) (Former Zip Code)
Registrant's Former Telephone Number, Including Area (732) 752-6700
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 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 __
2,300,173 Shares of Common Stock which were issued and outstanding as of January
13, 1998.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
WELDOTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($000'S OMITTED EXCEPT SHARE DATA)
Three Months Ended
November 30,
1997 1996
---- ----
NET SALES $ 1,739 $ 3,080
COST AND EXPENSES:
Cost of Sales 1,232 2,240
Selling, General & Administrative Expenses 981 1,273
Depreciation and Amortization 26 95
-- --
2,239 3,608
----- -----
LOSS FROM OPERATIONS (500) (528)
----- -----
OTHER INCOME/(EXPENSES):
Foreign Currency Translation Gain (Loss) 0 (12)
Other Income (Expense) (865) 118
Interest Expense (144) (120)
----- -----
(1,009) (14)
LOSS FROM OPERATIONS BEFORE
TAXES AND MINORITY INTEREST (1,509) (542)
INCOME TAX PROVISION 0 0
MINORITY INTEREST: SHARE OF (INCOME) LOSS (35) 27
---- --
NET LOSS $ (1,544) $ (515)
========== ========
NET LOSS PER COMMON SHARE: $ (.67) $ (.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.
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WELDOTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($000'S OMITTED EXCEPT SHARE DATA)
Nine Months Ended
November 30,
1997 1996
---- ----
NET SALES $ 6,205 $ 9,811
COST AND EXPENSES:
Cost of Sales 4,444 7,209
Selling, General & Administrative Expenses 3,153 4,066
Depreciation and Amortization 193 298
--- ---
7,790 11,573
----- ------
LOSS FROM OPERATIONS (1,585) (1,762)
------- -------
OTHER INCOME/(EXPENSES):
Foreign Currency Translation Gain (Loss) 45 23
Other Income (Expense) (2,231) 414
Interest Expense (416) (449)
----- -----
(2,602) (12)
LOSS FROM OPERATIONS BEFORE
TAXES AND MINORITY INTEREST (4,187) (1,774)
INCOME TAX PROVISION
MINORITY INTEREST: SHARE OF (INCOME) LOSS (19) 62
---- --
NET LOSS $(4,206) $(1,712)
======== ========
NET LOSS PER COMMON SHARE: (1.83) (.74)
====== =====
DIVIDEND PER SHARE NONE NONE
WEIGHTED AVERAGE OF
COMMON SHARES OUTSTANDING 2,300,173 2,300,173
See Notes to Condensed Consolidated Financial Statements.
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WELDOTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000'S OMITTED)
Nov. 30, Feb. 28,
1997 1997
---- ----
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 54 $ 19
Accounts Receivable (Net) 1,216 1,299
Inventories (Note B) 3,174 5,088
Prepaid Expenses and Other Current Assets 133 399
--- ---
TOTAL CURRENT ASSETS 4,577 6,805
----- -----
Property and Equipment at Cost 1,386 11,363
Less Accumulated Depreciation & Amortization (668) (9,676)
----- -------
Net Property and Equipment 718 1,687
Other Assets and Investments 384 539
--- ---
TOTAL ASSETS $ 5,679 $ 9,031
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash Overdraft $ 0 $ 211
Short Term Borrowings (Note C) 1,025 1,396
Short Term Borrowings: Related Party (Note C) 2,040 446
Accounts Payable 3,313 2,528
Other Current Liabilities 1,451 1,645
------ -----
TOTAL CURRENT LIABILITIES $ 7,829 $ 6,226
-------- -------
Long Term Debt: Related Party (Note C) 0 1,000
Deferred Compensation 1,230 1,165
Minority Interests in Subsidiary 497 478
Other Long Term Liabilities 241 67
Stockholders' Equity (4,118) 95
------- --
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,679 $ 9,301
======= =======
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.
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WELDOTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($000'S OMITTED)
Nine Months Ended
November 30,
1997 1996
---- ----
Net loss ............................................... $(4,206) $(1,712)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Depreciation and amortization ........................ 193 297
Foreign currency translation gain .................... (45) (23)
Bad debt provision ................................... 2 19
Deferred compensation expense ........................ 81 85
Minority interest in subsidiary net income (loss) .... 20 (62)
Gain on sale of property, plant and equipment ........ (43) (138)
Asset write-offs ..................................... 2,123 0
(Increase) decrease in assets:
Accounts receivable .................................. 257 500
Inventories .......................................... 605 980
Prepaid expenses and other current assets ............ 90 226
Other assets ......................................... (6) 19
Increase (decrease) in current liabilities ........... 791 (119)
Increase (decrease) in other long-term liabilities ... (16) (123)
------- -------
Total adjustments ...................................... 3,302 1,661
------- -------
Net cash provided by (used in) operating activities .... (154) (51)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........... (123) (180)
Proceeds from the sales of property, plant and
equipment............................................ 281 138
------- -------
Net cash used in investing activities ................ 158 42
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under short-term borrowings (353) 255
Proceeds from debt - Related Party ................... 594 200
Principal payments under capital lease obligations ... (17) (4)
Reduction of long term debt .......................... (27) (750)
Cash Overdraft ....................................... (211) 84
------- -------
Net cash used in financing activities .................. (14) 215
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ............................. 45 23
-- --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ... 35 (285)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......... 19 344
-- ---
CASH AND CASH EQUIVALENTS, END OF PERIOD ............... $ 54 $ 59
======= =======
See Notes to Condensed Consolidated Financial Statements.
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WELDOTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A: Basis of Preparation
The unaudited, condensed Consolidated Financial Statements as of November 30,
1997 and for the three and nine month periods ended November 30, 1997 and 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 generally accepted accounting
principles have been condensed or omitted. The reader is referred to the
consolidated financial statements and notes thereto included in the Company'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 November 30, 1997, and February 28, 1997, are as follows:
($000 Omitted)
Nov. 30, Feb. 28,
1997 1997
Finished Goods $ 1,654 $ 1,704
Work in Process 622 2,094
Raw Materials 898 1,290
--- -----
$ 3,174 $ 5,088
======== =======
Note C: Long-Term Debt and Short-Term Borrowings
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 $2,500,000, 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 $1,700,000 and minimum domestic tangible net worth of $1,050,000.
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.
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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 $1,000,000) 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 which was 8.25% at November
30, 1996 and 8.50% at November 30, 1997. 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 $1,500,000 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 November 30, 1997, the Company had used approximately $813,000 of the New
Credit Facility. Based upon the advance percentages of eligible receivables and
inventory, the Company had unused borrowing availability of approximately
$109,000 at November 30, 1997.
On August 31, 1994, the Company borrowed $500,000 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 ($2.00) 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 Company concluded the rolling of the Lyford note into a
new note in the amount of $1,000,000. 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 Restated Note was originally due and payable on or before
March 31, 1996 and bore interest at 12% per annum. The Restated Note was
subsequently extended until April 1, 1998, the interest rate was increased to
14%, and the face amount was changed to $1,421,657 to reflect additional
advances. The 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 Dollar ($1.00)
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.
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In January 1996 the Company entered into a $500,000 revolving loan agreement
with Exford Corp. "Exford", an affiliated company of Lyford. The Company
borrowed $350,000 under this agreement which borrowings bear interest at 14%,
and were due on January 31, 1997. The note was subsequently extended until
January 31, 1998. In connection with this revolving loan, the Company had
assigned to Exford its right, title and interest as tenant under the prior main
operating lease, together with any rents due and payable to the Company, which
lease has since terminated. Effective on September 17, 1997, Exford assigned its
interest in this loan to Lyford.
As a result of the continued deterioration in the financial position 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 November
30, 1997, the current balance due and owing to Lyford, including unpaid and
accrued interest is $1,944,000.
In February, 1997, the Company entered into a one-year promissory note in the
amount of $96,000 with Mentmore Holdings Corporation. The note bears interest at
2% above the prime rate with a default rate on the interest rate plus 5% for
late payment of interest or principal. The note expires on February 11, 1998.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Financial Condition
The Company's net working capital decreased from $579,000 at February 28, 1997
to $(3,252,000) at November 30, 1997. The current ratio decreased from 1.09 at
February 28,1997 to .58 at November 30, 1997. The changes in net working capital
during the first nine months of this year were primarily related to the
following:
Accounts receivable were relatively flat despite a 32% reduction in sales in the
third quarter of this year compared to the third quarter of last year, since
shipments were skewed to the end of the quarter and the aging deteriorated
slightly at the Company's Brazilian operation.
Inventories decreased due mainly to a write-off of $1,309,000 of primarily
slower moving inventory during the second quarter. Due to the Company's
relocation in October 1997, to a 35,000 Sq. ft. facility from its former 256,000
Sq. ft facility, management performed an assessment of inventory value versus
relocation and carrying costs, and elected to liquidate certain items which had
space requirements in excess of their net realizable value.
Prepaid expenses and other current assets decreased due to a reduction in
prepaid insurance.
Property, plant and equipment decreased as a result of the above mentioned
relocation and the write-off of leasehold improvements. In addition, excess
machinery and equipment were auctioned with the proceeds applied to the
outstanding working capital line with BACC.
Accounts payable increased due to extended payment terms with vendors.
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Short term borrowings declined as a result of the proceeds from the above
mentioned equipment auction.
Short term borrowings from a related party increased due to the reclassification
of $1,000,000 from long term to short term as well as an increase of $594,000 in
additional borrowings to fund operations as well as settle certain legal
obligations (See " Part II, Item 1, Legal Proceedings").
Other current liabilities decreased due to reduced accruals for insurance and
payroll related items, as well as reduced customer deposits.
The Company had negative working capital and net worth positions as of November
30, 1997. At November 30, 1997, the Company had used approximately $831,000 of
the New Credit Facility (see Note C to the Consolidated Financial Statements).
Based upon the advance percent of eligible receivables and inventory, the
Company had unused borrowing availability of approximately $109,000 at November
30, 1997. The availability of future borrowings depends upon the Company's level
of eligible receivables and inventory defined in the New Credit Facility.
The Company's primary and secondary sources of liquidity at November 30, 1996
were the notes from a related party and the Congress Credit Facility,
respectively. There can be no assurances that an extended economic recession
will not adversely impact the Company's future financial condition and
liquidity.
The effect of exchange rate changes on cash and cash equivalents for the nine
months ended November 30, 1997 and for the same period last year was $45,000 and
$23,000, respectively. This is attributable to Brazil's inflationary economy and
the "remeasurement method" used for foreign currency translation to be measured
into U.S. dollars as required by SFAS No. 52.
Results of Operations for the Three Month Period Ended
November 30, 1997 and 1996
-----------------------------------------------------------------
Sales for the third quarter were 44% lower than the same period last year, with
declines occurring in all segments of the business. The safety and automated
systems segment continued to reestablish its market presence, after having been
without inventory for an extended period of time a year ago, due to exorbitant
price increases and unfavorable foreign exchange rates with its former major
offshore supplier. That supplier situation has since been resolved with the
procurement of high quality material from domestic sources.
Cost of sales for the third quarter this year was 71% of sales compared to 73%
for the prior year. Greater shift toward reducing overhead costs caused the
decrease.
Selling, general and administrative expenses decreased by $292,000 in the third
quarter of fiscal 1998 compared to the same period last year due primarily to
staff reductions made toward the end of the third quarter of fiscal 1998, which
bore the cost of accrued severance as well as other employee related
expenditures. There was a write-off of $750,000 attributable to slow-moving
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inventory disposed of as part of the relocation to a smaller facility. A foreign
currency translation gain of $12,000 was recorded in the third quarter last year
compared to no gain or loss in the third quarter this year due the Brazilian
currency exchange rate.
Other income (expense) in the third quarter this year was an expense $115,000
compared to income of $118,000 last year due primarily to debt related charges.
Interest expense increased $24,000 due to higher average borrowings.
There were no provisions for income taxes in the third quarter of either year.
Results of Operations for the Nine Months Ended
November 30, 1997 and 1996
--------------------------------------------------------------
Sales for the nine months ended November 30, 1997 were $6,205,000 with a net
loss of $4,206,000 or $1.83 per share. This compares to sales of $9,811,000 with
a net loss of $1,740,000 of or .74 per share in the comparable period last year.
Sales for the first nine months of this year were 37% lower than the same period
last year, with declines occurring in all segments of the business.
Cost of sales for the first nine months of this year was 72% of sales versus 73%
of sales for the same period last year. The decrease reflects a reduction in
direct and overhead costs.
Selling, general and administrative expense decreased by $913,000 in the first
nine months of this year compared to the same period last year due to staff
reductions made in the third quarter of fiscal 1997, as well as lower operating
expenses.
Depreciation and amortization decreased as a result of the move to the new
facility and the sale of excess machinery and equipment.
The gain from foreign currency translation increased by $23,000 for the first
nine months of this year compared to the same period last year, due to more
favorable currency exchange rates.
Other income and expense in the third quarter this year declined to an expense
of $2,106,000 from a gain of $180,000 last year due primarily to write-offs of
assets, the relocation of the domestic operations to new facilities and in
connection with certain legal proceedings (see "Part II, Item 1, Legal
Proceedings"). Following the termination of its lease, the Company was required
to write-off the value of its unamortized leasehold improvements totaling
$662,000. Additional write-offs of inventory and fixed assets of $1,263,000, net
of auction proceeds, were recorded resulting from a combination of the
successful outsourcing program that created excess factory machinery, and
limited space availability at the new facility. Finally, an investment in
Brazilian real estate was written down to current market value, resulting in a
$152,000 charge for the quarter.
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Interest expense declined $33,000 due to reduced borrowings and lower interest
rates domestically, partially offset by increased interest expense at its
Brazilian subsidiary.
There was no provision for income taxes in the first nine months this year.
PART II
OTHER INFORMATION
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 tort claims for compensatory, punitive or other damages. The
Company presently believes that it has valid defenses to the tort claims that
have been asserted and that any compensatory damage claims are adequately
covered by insurance. In addition to such tort claims, the following material
legal actions have been asserted:
Martin Siegel vs. Weldotron Corporation
On November 23, 1994, the Company 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
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 $100,000.
The annual deferred compensation benefit is an unsecured obligation of the
Company.
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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 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 Superior Court for a confessed judgement 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 $772,000. The Company is in
discussions with Mr. Siegel concerning a potential settlement of its obligations
to Mr. Siegel. As of November 30, 1997, the Company had accrued $855,000 as the
present value of this obligation.
Seymour Siegel vs. Weldotron Corporation
Seymour Siegel, which 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 $50,000. 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 is in discussions with Seymour Siegel and his counsel in an effort to
settle these claims. As of November 30, 1997, the Company had accrued $375,000
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 and
exclusive distributorship agreement (the "Distributorship Agreement") which
originated in 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.
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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 $185,000
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 $126,000 as of November 30, 1997.
Weldotron made four payments, totaling approximately $59,000, 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 judgement 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 formerly occupied 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
utilized 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 had, for the
last two years, sought to sublease said facility and to move to smaller, more
efficient quarters. Because the facility was dated and because updating would
have required 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 the Company'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
13
<PAGE>
possession of the facility on August 15, 1997. The Company continued to occupy
the facility under an interim arrangement with Mackman, through October 15,
1997.
On October 15, 1997, the Company relocated to a smaller, more efficient facility
in the immediate area of the previous facility. As a result of the Court's
decision, the Company wrote off the value of unamortized leasehold improvements
for the prior facility during the second fiscal quarter of 1998, which amount to
$662,000.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior 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, 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 $2,500,000, 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 $1,700,000 and minimum domestic tangible net worth of $1,050,000.
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 $1,000,000) 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 which was 8.25% at November
30, 1996 and 8.50% at November 30, 1997. 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 $1,500,000 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.
14
<PAGE>
At November 30, 1997, the Company had used approximately $813,000 of the New
Credit Facility (see Note C to the Consolidated Financial Statements). Based on
the advance percentages of eligible receivables and inventory, the Company had
unused borrowing availability of approximately $109,000 at November 30, 1997.
The judgment obtained against the Company by Martin Siegel has resulted in a
technical default under the New Credit Facility. However, despite the existence
of this (or any other) technical default under the terms of the New Credit
Facility, BACC has not declared same in default or taken any action to exercise
its rights or remedies.
On August 31, 1994, the Company borrowed $500,000 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 ($2.00) 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 Company concluded the rolling of the Lyford note into a
new note in the amount of $1,000,000. 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 Restated Note was originally due and payable on or before
March 31, 1996 and bore interest at 12% per annum. The Restated Note was
subsequently extended until April 1, 1998, the interest rate was increased to
14%, and the face amount was changed to $1,421,657 to reflect additional
advances. 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 Dollar
($1.00) 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.
In January, 1996 the Company entered into a $500,000 revolving loan agreement
with Exford Corp. "Exford", an affiliated company of Lyford. The Company
borrowed $350,000 under this agreement which borrowings bear interest at 14%,
and were due on January 31, 1997. The note was subsequently extended until
January 31, 1998. In connection with this revolving loan, the Company had
assigned to Exford its right, title and interest as tenant under the prior main
operating lease, together with any rents due and payable to the Company, which
lease has since terminated. Effective on September 17, 1997, Exford assigned its
interest in this loan to Lyford.
As a result of the continued deterioration in the financial position 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 November
30, 1997, the current balance due and owing to Lyford, including unpaid and
accrued interest is $1,944,000.
15
<PAGE>
In February, 1997, the Company entered into a one-year promissory note in the
amount of $96,000 with Mentmore Holdings Corporation. The note bears interest at
2% above the prime rate with a default rate on the interest rate plus 5% for
late payment of interest or principal. The note expires on February 11, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On October 7, 1996, the Company announced that it would apply to the Securities
and Exchange Commission to voluntarily withdraw from listing and registration on
the American Stock Exchange and seek listing elsewhere. The Company's decision
resulted from the Amex's notification to the Company that it determined to
delist the Company because it no longer met the exchange's continued listing
requirements. While the Company initially appealed this decision, the Company
and the exchange agreed to settle matters by having the Company file an
application for delisting with the SEC. The Company agreed to withdraw its
appeal and the exchange agreed to withdraw its decision upon SEC approval of the
Company's application.
Item 6. Exhibits and Reports on Form 8-K.
None.
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/Lawrence H. Bowen
Lawrence H. Bowen
Chief Operating Officer
Date: January 26, 1998
16
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