SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended February 28, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period From __________ to __________
Commission File Number: 1-8381
WELDOTRON CORPORATION
(Exact Name of Company as Specified in its Charter)
22-160728
New Jersey (IRS Employer Identification (State or other
jurisdiction of incorporation No.)
or organization)
08807
111 Chimney Rock Road, Bridgewater, NJ (Zip Code)
(Address of principal executive offices)
(732) 748-4600
Company's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Class:
Common Stock, $.05 Par Value
Name of Exchange on Which Registered:
OTC-BB
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III to this Form 10-K or any
amendment to this Form 10-K. [X]
Approximate aggregate market value of voting stock held by non-affiliates of the
Company as of July 31, 1998
Common Stock . . . . . . . . . . . . . . . . $157,000
As of July 31, 1998, there were outstanding 2,300,173 shares of the Company's
Common Stock, $.05 Par Value.
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WELDOTRON CORPORATION
Index to Annual Report on
FORM 10-K
Twelve Months Ended February 28, 1998
(Dollar Amounts in Thousands, Except Per Share Data)
PART I PAGE
Item 1. Business...................................................3
Item 2. Properties.................................................6
Item 3. Legal Proceedings..........................................8
Item 4. Submission of Matters to a Vote of Security Holders.......11
PART II
Item 5. Market for Company's Common Stock and Related Stockholder
Matters...................................................11
Item 6. Selected Financial Data...................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13
Item 8. Financial Statements and Supplementary Data...............18
Item 9. Changes In and Disagreements with Accountants.............39
PART III
Item 10. Directors and Executive Officers of the Company...........40
Item 11. Executive Compensation....................................40
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................42
Item 13. Certain Relationships and Related Transactions............44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................45
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PART I
Item 1. BUSINESS
Weldotron Corporation (which, together with its subsidiaries, is herein called
the "Company"), a New Jersey corporation organized in 1958, is engaged in two
principal areas of activity --packaging and industrial automation and safety
controls. The two principal business units are the Packaging Systems Group and
the Safety and Automation Systems Group located in Bridgewater, New Jersey. In
addition, the Company has a 60% owned subsidiary in Brazil engaged in the
packaging systems business. The Packaging Systems Group designs, manufactures
and markets a comprehensive line of packaging machinery and systems for a broad
range of industrial and consumer applications. The Safety and Automation Systems
Group manufactures and markets electronic systems for personnel safety and
controls for monitoring high speed automatic production machinery.
The following table sets forth the aggregate net sales derived from the two
product groups in dollars and as a percentage of consolidated net sales for the
fiscal years ended February, 1998, 1997 and 1996.
(Dollars in Thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 28, 1998 February 28, 1997 February 29, 1996
----------------- ----------------- -----------------
Packaging $6,886 87% $12,130 91% $15,997 87%
Systems
Safety & 1,009 13% 1,156 9% 2,318 13%
Automation
Systems
Total 7,895 100% $13,286 100% $18,315 100%
For additional details relating to industry segments, see the Notes to the
Consolidated Financial Statements included in this Report.
Packaging Systems Group
The Packaging Systems Group designs, manufactures and markets a comprehensive
line of packaging machinery and systems for a broad range of industrial and
consumer applications. These systems employ either shrink or stretch packaging
techniques.
Industrial Packaging Systems: The Company's industrial packaging machines and
systems employ a technique called "shrink" packaging which utilizes specially
formulated thermoplastic films that are oriented in the original manufacturing
process to shrink with the application of heat. In actual operation, the product
is enveloped in shrink film, the film is sealed, and the completely over wrapped
product is passed through a hot air shrink tunnel where the heated air causes
the film to shrink tightly around the product.
The Company's Industrial Packaging Systems Group manufactures a diverse line of
shrink packaging systems designed to provide substantial user benefits such as
lower packaging costs, increased productivity, and improved product appearance
and integrity. Several standard models are offered from manual L-sealers and
shrink tunnels up through fully automated form/fill/seal wrapping systems that
include feeders, collators and speed modulated conveyors.
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Industrial Packaging's line includes manually operated shrink packaging
machines. These machines incorporate features not generally found in competitive
low-end units such as electronic timing, microprocessor controls,
self-compensating temperature controls, and low operating costs and maintenance
requirements.
Industrial Packaging's medium speed equipment program includes a series of
automatic L-sealers. This series features a "vertical rising" seal head that
maximizes machine operating speed and produces stronger seals than pivoting type
seal bars found on many competitive machines. Other features include single
level operation for smooth product transfer, adjustable film forming plow for
quick product changeover, and heavy-duty unibody steel construction for
longevity.
The Company's high-speed automatic equipment is of the type known as horizontal
form, fill and seal. It functions by forming film into a tube, feeding the
products to be wrapped at spaced intervals into the tube, and then sealing and
cutting the tube between successive products. The result is a film-wrapped
package which is then passed through a high-speed shrink tunnel for the final
stage of shrinking. The principal applications for these systems have been the
packaging of computer software and memory disks, magnetic tapes, cassettes,
books, hardware, toys, gift items and the like wherein large quantities of items
must be packaged and shipped in relatively short time intervals.
The Company also offers an economically priced, in-line form-fill shrink
packaging system that targets a medium speed niche market for larger industrial
products. The Company has expanded this product range to include an edge seal
version to target the tape, cassette, compact disk and entertainment products
industries.
The Company's high-speed automatic shrink packaging systems also provide what
the Company believes to be a practical, cost-effective method for tamper-evident
packaging for food and non-food products.
Safety and Automation Systems Group
The Safety and Automation Systems Group designs, sources and markets a line of
solid state industrial electronic control systems for personnel safety and
quality control monitoring of automatic production machinery. Certain models are
assembled in Bridgewater, New Jersey while others are manufactured and assembled
elsewhere in accordance with the Company's specifications. The electronic
controls protect operators from injury, prevent tool damage, and detect
production malfunctions. Areas of concentration within this market are
electronics, automotive and appliances. Secondary markets consist of packaging,
plastics, special machines, and robotics area guarding. Safe-T-Lite is the trade
name of the Company's product line of infrared presence sensing devices designed
to comply with current standards for machine guarding.
PMD - Programmable Monitoring Device - is the Company's latest entry into the
die protection market. The unit incorporates advances in microprocessor
technology and is designed to prevent costly damage due to improper parts
ejection, die overload, misfeed, and other malfunctions of automatic press
operations. The PMD has 6 Channel capability, each with the ability to program
one of five functions.
Pro-Set is a resolver based multi-functional press automation controller. It
combines the features of 16-channel programmable limitswitch with an advanced
12-station programmable die protection system and a brake monitor which complies
with OSHA 1910.217 (b 14). It features 200-job set-up memory capability.
Manufacturing
The Company currently conducts North American manufacturing operations in a
leased, one-story plant consisting of 36,000 square feet located in Bridgewater,
New Jersey.
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Manufacturing of packaging systems is conducted on a batch production basis
using progressive assembly methods. The Company fabricates the parts used in its
finished products from raw materials and components and produces most of its
sub-assemblies, except for certain parts and sub-assemblies supplied by selected
domestic and foreign suppliers. These parts, components and sub-assemblies are
carried in inventory in anticipation of projected sales and are then assembled
into finished products according to production schedules. In general,
manufacturing of standard machines is commenced in anticipation of orders rather
than to meet existing backlog. The manufacturing processes for the Company's
products take several months, depending upon their size, complexity and
quantity. However, it has generally been the Company's experience that except
for customized equipment (which is made to order), most orders received are for
items that are in the process of being manufactured or are in inventory.
The raw materials used by the Company include steel, copper, brass, aluminum and
various plastics. Some components, including motors, transformers, fittings,
electrical and electronic components, drives, and general-purpose hardware, are
purchased by the Company. Many of the purchased components are built to the
Company's specifications. The Company believes that it is not dependent upon any
single supplier for any raw material or component.
The Company's products are designed to operate efficiently over long periods,
and rigorous inspection procedures are performed to insure that its
manufacturing processes result in products meeting these and other requirements.
The Company's products are serviced at its customers' premises by distributors,
dealers or the Company's technicians.
The Company generally provides its customers with express limited written
warranties covering its industrial packaging equipment for a period of one year
and four years on safety and automation systems.
The Company also has a manufacturing plant in Nova Odessa, Brazil.
Marketing and Sales
The Company sells its packaging equipment in North America to industrial
companies through packaging machinery distributors and dealers. For the fiscal
year ended February 28, 1998, approximately 25% of the Company's sales were made
directly to the end user and approximately 75% were made through other
distribution channels. Direct sales are more prevalent in stretch packaging
systems than in shrink systems. The Company's largest customer is W.R. Grace and
Co., which buys packaging equipment from the Company for resale. For the fiscal
years ended February 28, 1998, February 28, 1997, and February 29, 1996,
respectively, sales to W.R. Grace and Co. accounted for approximately 9%, 7%,
and 8%, respectively, of the consolidated net sales of the Company.
The Company participates in domestic and foreign trade shows and maintains an
in-house marketing services staff that handles product publicity, advertising,
and promotion. Advertising is generally placed in trade journals.
The Company's backlog of unshipped customer orders was approximately $860 and
$1,405 at February 28, 1998 and February 28, 1997, respectively.
Foreign sales, which aggregated approximately 7% of net consolidated sales for
the fiscal year ended February 28, 1998, are carried out directly and by certain
appointed distributors.
The Company's Brazilian subsidiary, Weldotron do Brasil, Ltd. (WdB) ("Weldotron
do Brasil"), is included in the consolidated results of the Company. It is 60%
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owned by the Company, with the remaining 40% being Brazilian owned. WdB has been
a subsidiary of the Company since 1973. WdB is one of several suppliers to the
Brazilian shrink packaging equipment market. Competition from imported equipment
is intense.
Weldotron do Brasil manufactures industrial packaging systems for sale in Brazil
and certain South American export markets. WdB owns a 21,000 square foot
production facility in Nova Odessa, Brazil, which it constructed and occupied
during fiscal 1990.
For the past several fiscal years, the Company has experienced fluctuations in
reported financial results due to Brazilian currency translation gains and
losses. The Company is not capable of determining future translation gains or
losses and is uncertain of their effects on reported results in future periods.
Competition
The Company faces intense competition in all of its product lines. The Company
competes primarily on the basis of quality, service, technology and price.
The Company's principal competitors in shrink packaging are Great Lakes
Corporation and Shanklin Corporation. Great Lakes Corporation and Shanklin
Corporation are larger in size to the Company. Although definitive statistics
are not available, the Company believes that its share of the automatic shrink
packaging equipment market in the United States has been deteriorating due to
the Company's financial difficulties.
The Company holds and has filed applications for United States and foreign
patents relating to many of its products. The Company also has certain
registered trademarks. The Company has licensed some of its technology to other
manufacturers.
Employees
At February 28, 1998, the Company had approximately 48 domestic employees,
including 24 engaged in manufacturing, 2 in engineering and design, 5 in
technical service and support, 4 in sales and marketing, and 13 in general and
administrative functions. Comparatively, last year the Company had approximately
88 domestic employees, which included 55 engaged in manufacturing, 4 in
engineering and design, 4 in technical service and support, 13 in sales and
marketing and 12 in general and administrative functions. Because of the reduced
level of business, the Company made staff reductions in the first and second
quarters of fiscal 1998. The Company's manufacturing employees predominantly
work a single shift. Approximately 20 of the Company's manufacturing employees
are represented by Local 427 of the International Union of Electrical, Radio and
Machine Workers AFL-CIO.
A labor contract covering the Company's manufacturing employees was successfully
concluded in March 1998 for the period March 1998 through March 1999. The
Company generally considers its labor relations to be satisfactory.
The Company's Brazilian subsidiary employs about 58 people.
ITEM 2. PROPERTIES
The continuing operations of the Company and its subsidiaries occupy the plants
and offices described on the following pages:
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WELDOTRON CORPORATION AND SUBSIDIARIES
PROPERTIES
Aggregate Estimated Owned
Floor Percent or Lease
Location Area Utilized Principal Use Segment Leased Term Notes
(Sq. Ft.) Date
- --------------------------------------------------------------------------------
Bridgewater, 36,000 100% Manufacturing,PackagingLeased 2000
New Jersey Warehousing, Systems,
General and Communications
Corporate and
Office Controls
Sao Paulo, 3,000 100% General PackagingLeased 1998
Brazil Office Systems
Nova 21,000 100% Manufacturing,PackagingOwned N/A (1)
Odessa, Warehousing, Systems
Brazil General
Office
Notes:
(1) Property is subject to a mortgage securing indebtedness of approximately
$150.
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ITEM 3. 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 covered by
insurance. However, the Company has elected to retain a significant portion of
litigation exposure through the use of deductibles under its insurance policies.
See Note 7 to the Consolidated Financial Statements included herein. In addition
to claims arising in the ordinary course of business, 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 Corporation. 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, without 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 payment of his
deferred compensation benefits upon the Company in May of 1997. In June,
pursuant to 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. The Company entered into
discussions with Mr. Siegel concerning a potential settlement of its obligations
to Mr. Siegel. Mr. Siegel has now brought an action against the Company and
others seeking to enforce an alleged verbal settlement of his claim against the
Company for a payment of $85. As of February 28, 1998, the Company had accrued
$875 as the present value of this obligation.
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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 given the Company 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 has discussed
with Seymour Siegel and his counsel a potential settlement of these claims.
Recently, the Company broke off discussions with Mr. Siegel's counsel. As of
February 28, 1998, the Company had accrued $383 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 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, 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, 1998; and (3) the Company agreed to make certain cosmetic changes
to the appearance of its new domestically sourced products.
Weldotron made four payments totaling approximately $59, under the terms of the
settlement with Riken, then suspended all further payments. Riken then notified
the Company that it would seek to pursue the enforcement of the settlement terms
against the Company and obtained a judgement in the amount of the remaining
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settlement payments. In July 1998, the Company reached a full and final
settlement with Riken for $70, which has been paid.
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 judgement in favor of Mackman for
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. Mackman continues to assert monetary claims against the Company for unpaid
rent, attorneys' fees and the cost of certain repairs to the former facility.
Trial is scheduled for October of 1998.
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 1994, which amounted
to $662.
Reju vs. Weldotron
Varghese Reju, the Company's former Chief Financial Officer, was dismissed as
part of an overall downsizing and reduction of overhead in October of 1995. The
Company offered and Mr. Reju received a severance based upon his years of
service with the Company. Mr. Reju then brought an action asserting he was
entitled to benefits under a written Severance Agreement entered into between
Mr. Reju and the Company in 1993. Under the terms of the written Severance
Agreement, Mr. Reju would be entitled to receive two times his base salary
(approximately $165) in the event he was terminated as a result of a "change of
control" as defined in the Agreement. In its defense of this action, the Company
asserts that the "change of control," as contemplated in Mr. Reju's Severance
Agreement, never occurred, and even if it did, there was no connection between
any such "change of control" and Mr. Reju's termination some eighteen months
later. Management believes that the lawsuit is without merit and intends to
vigorously defend the action; however, the outcome cannot be determined. This
matter is scheduled to go to trial in September 1998.
Mentmore Holdings Corporation vs. Weldotron Corporation
Mentmore Holdings Corporation ("Mentmore" or "Mentmore Holdings"), an affiliate
of Lyford and Exford Corporations, provides management advisory services to the
Company pursuant to an agreement dated as of June 14, 1994. See discussion in
Section 13-"Certain Relationships and Related Transactions." The Company is in
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default of certain payments due Mentmore under the terms of said agreement.
Mentmore initiated an action against the Company in the Superior Court of New
Jersey, Law Division, Somerset County, New Jersey. In February 1998, Mentmore
obtained a judgment against the Company in the amount of $914, which has been
accrued at year-end. Mentmore has not pursued execution upon said judgment and
continues to provide services to the Company under the agreement.
Richard C. Hoffman, P. C. vs. Weldotron Corporation.
Richard C. Hoffman, P.C., a professional corporation, provides legal services
to the Company. Richard C. Hoffman, a Director of the Company and its
Secretary, is the president and sole shareholder of Richard C. Hoffman, P.C.
The Company is delinquent in payment for fees and cost for services provided
by Richard C. Hoffman, P.C. Richard C. Hoffman, P.C. initiated an action
against the Company in the Superior Court of New Jersey, Court of Somerset
County, New Jersey. On March 11, 1998 Richard C. Hoffman, P.C. obtained a
judgment against the Company in the amount of $424, which has been accrued at
year end. Richard C. Hoffman, P.C. has not pursued execution upon said
judgment and continues to provide services to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATEDSTOCKHOLDER
MATTERS
The Company's Common Stock was traded on the American Stock Exchange (Symbol
WLD) until November 8, 1996, at which time the Company, at its request, was
delisted from such exchange. It is now traded on the "pink sheets." High and low
prices for each quarter during Fiscal Year 1998 and Fiscal Year 1997 and
information relating to dividends are:
For the year ended For the year ended
February 28, February 28,
1998 1997
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $.1875 $.1875 $1.5000 $1.0000
2nd Quarter .0937 .0937 1.0000 .6875
3rd Quarter .0937 .0937 .3125 .3125
4th Quarter .0937 .0937 .6250 .0625
No dividends have been paid to date and the Company does not anticipate the
payment of future dividends. The Company's loan agreements also place
restrictions on the amounts of dividends that can be paid.
There were approximately 536 stockholders of record at February 28, 1998. The
Company believes that a significant number of beneficial owners of stock hold
their shares in "street" names.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the last five fiscal years
are set forth on the following page:
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WELDOTRON CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(amounts in thousands except share data)
For Fiscal Years Ended,
February February February February February
28, 1997 29, 1996 28, 1995 28, 1994 28, 1998
-------- -------- -------- -------- --------
Net Sales $ 7,895 $13,286 $18,315 $19,670 $21,462
Gross Profit 1,437 3,460 5,901 7,234 6,265
Loss From Operations (4,528) (2,233) (2,754) (3,202) (2,361)
Other Income (Expenses) (1,259) (274) 99 (110) 101
Loss from Continuing
Operations (5,639) (2,347) (3,134) (3,418) (2,223)
Gain (Loss) From
Discontinued
Operations -- -- -- (16) 12
Net Loss (5,639) (2,347) (3,134) (3,434) (2,211)
Net (Loss) Earnings
Per Share, Basic &
Diluted:
Continuing Operations (2.45) (1.02) (1.36) (1.49) (1.05)
Discontinued Operations -- -- -- .00 .01
Net Loss Per Share (2.45) (1.02) (1.36) (1.49) (1.04)
Total Assets 4,426 9,031 12,217 15,286 17,047
Working Capital (Deficit) (6,050) (586) 3,989 5,933 7,621
Long-Term Debt 150 1,000 1,750 1,250 777
Stockholders' Equity
(Deficiency) (5,543) 95 2,442 5,576 9,010
See Item 6 for Management's Discussion and Analysis of Financial Condition and
Liquidity and Results of Operations.
No cash dividends have been distributed during the periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
accompanying Consolidated Financial Statements, including the Notes thereto, and
the information presented under Item 6, "Selected Consolidated Financial Data".
All information is based on the Company's fiscal year-end of February 28. All
dollar amounts are in thousands except as noted.
FINANCIAL CONDITION AND LIQUIDITY
The Company is highly leveraged and, as a result, funds available for working
capital, capital expenditures and general corporate purposes, are very limited.
The primary and secondary sources of financing for the Company during fiscal
1998 were notes from certain 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. Management does not believe that the Company will be able to repay
borrowings under the New Credit Facility at maturity without additional
financing. The Company has not received a commitment for additional financing.
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 February 28, 1998, the Company had used approximately $1,076 of borrowing
availability under Business Alliance Capital New Credit Facility (See note 6 to
the consolidated financial statements). Based on the advance percentages of
eligible receivables and inventory, the Company had unused borrowing
availability of approximately $17 at February 28, 1998. The Company is currently
in technical default under the New Credit Facility, but BACC has not chosen to
declare a default and continues to work with the Company.
On August 31, 1994, the Company borrowed $500 from Lyford Corporation
("Lyford"), an affiliated company that owned 19.56% of the issued and
outstanding common stock of the Company as of July 31, 1998. The Company
executed and delivered to Lyford a promissory note, a security agreement and a
13
<PAGE>
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 Company 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
Restated Note was originally due and payable on or before March 31, 1996 and
bore interest at 12% per annum. The Note was subsequently extended three times
- -- first until April 1, 1997, then until April 1, 1998 and finally until April
1, 1999 and the interest rate was increased to 16%. 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. 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 February 28, 1998, the
principal balance and unpaid accrued interest due and owing to Lyford amounted
to $1,452 and $381, respectively.
In January 1996, the Company entered into a $500 revolving loan agreement with
Exford Corp. an affiliate of Lyford. The Company has outstanding borrowings of
$350 under this agreement, which borrowings bear interest at 14%, and were
originally due on January 31, 1997. The note was subsequently extended twice,
first until January 1, 1998 and then until January 1, 1999. In connection with
this revolving loan, the Company has assigned to Exford its right, title and
interest as tenant under the lease for its prior facility, together with any
rents due and payable to the Company. On September 1, 1997, Lyford purchased the
Exford loan, and advanced additional sums to the Company to fund ongoing
operations. As of February 28, 1998 the principal balance and unpaid accrued
interest due and owing to Lyford under the revolving loan agreement amounted to
$552 and $93, respectively.
In February 1997, the Company entered into a one-year promissory note in the
amount of $96 with Mentmore Holdings, an affiliate of Lyford. The note bears
interest at two percentage points above the prime rate, with a default rate
equal to the interest rate otherwise payable plus five percent for late payment
of interest or principal. The note originally expired on February 11, 1998 and
has been extended for 1 year until February 11, 1999.
The Company's net working capital and current ratio decreased from fiscal 1997.
Net working capital decreased from a negative $586 to a negative $6,050 and the
current ratio decreased from .92 to .36. The major changes in the net working
capital from year to year were the following: Accounts receivable decreased from
$1,299 in fiscal 1997 to $746 in fiscal 1998 due to a 40% decline in
consolidated sales from last year. Inventories decreased from $5,088 to $2,329
in fiscal 1998 due to efforts to keep inventory levels in line with reduced
sales, particularly in the domestic side of the business and the write off of
obsolete inventory.
Prepaid expenses and other current assets decreased from $399 in fiscal 1997 to
$334 in fiscal 1998 due primarily to reductions in prepaid insurance resulting
from premium savings and prepaid payroll taxes.
Cash overdraft decreased from $211 in fiscal 1997 to $11 in fiscal 1998.
14
<PAGE>
Short-term borrowings decreased from $1,396 in fiscal 1997 to $1,132 in fiscal
1998 due primarily to the pay down from the sale of equipment and reductions in
inventory.
Short-term borrowing--Related Party increased from $446 to $2,101, due to
additional financing from Lyford to cover operating losses and liquidity needs.
Accounts payable and other current liabilities increased from $5,338 to $6,224
due principally to slower payments to vendors and an increase in payables to
related parties.
The Company invested $69 in property plant and equipment in fiscal 1998 compared
to $137 in fiscal 1997. These capital expenditures were primarily for tooling
and engineering support services. Capital expenditures excluding capital leases
were $0 for 1998 compared to $92 in fiscal 1997. The Company expects capital
expenditures to be nominal in fiscal 1999.
The Company's sixty per cent owned Brazilian subsidiary, Weldotron do Brasil,
was financially self-sufficient in fiscal 1998 and is expected to be so again in
fiscal 1999. Weldotron do Brasil operates in a highly inflationary economy. As a
hedge against inflation, in prior years, Weldotron do Brasil had invested excess
cash in three residential apartments as investment property. One apartment was
sold in fiscal 1995, with the proceeds distributed as dividends in a 60% and 40%
relationship between the Company and the minority interest. At the end of fiscal
1996, title to one of the remaining two apartments was transferred to the
Company. The Company has entered into a contract for the sale of the apartment,
with a closing expected prior to calendar year-end.
The major component affecting operating cash flow adversely in fiscal 1997 and
1998 was operating losses. However, these adverse changes were somewhat offset
by decreases in inventory levels due to non-cash inventory valuation reserves
last year and tighter controls and improved asset management this year. The main
source of new capital has been related party borrowings.
The effect of exchange rate changes on cash and cash equivalents for the year
ended February 28, 1998 and the prior year was a gain of $74 and a loss of
$(148), respectively. This is attributable to Weldotron do Brasil's highly
inflationary economy and the "Remeasurement method" used for foreign currency
translation to be measured into U.S. dollars as required by SFAS No. 52.
Due to the decline in market share and recurring losses over the past several
years, the Company downsized its organization considerably during fiscal 1996,
1997 and 1998. The Company continues to aggressively outsource product formerly
manufactured in-house, thereby further reducing investments in inventory as well
as lowering overall costs of manufacturing. Certain cost reduction programs have
been implemented and others are in process in the areas of business insurance,
employee benefits, utilities and professional fees. The Company is involved in
various legal actions, (see Item 7, Legal Proceedings). The Company is not in a
position to settle such pending claims in full at this time.
The Company incurred net losses in recent years, and as of February 28, 1998 had
an accumulated deficit of $5,543. Whereas the Company's financial statements for
the year ended February 28, 1998 have been prepared on a going concern basis, no
assurance can be given that the Company will be successful in achieving
profitability or positive cash flow. The Company's independent auditors have
issued a going concern opinion as of February 28, 1998. In an effort, to return
to profitability the Company has continued to reduce staff, lower overall costs
of manufacturing and reduce selling, general and administrative expenses during
Fiscal 1999. The Company is investigating new products to increase sales. The
Company is dependent on related party financing until it returns to
profitability. No assurances can be given as to the Company's ability to obtain
financing or to the future results of operation.
15
<PAGE>
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared To 1997
Net Sales from continuing operations in fiscal 1998 were $7,895, a decrease of
40% from $13,286 in fiscal 1997. Domestic packaging sales declined from $12,130
to $6,886, or 43%. Sales in the Safety and Automation Group declined from $1,156
to $1,009 or 13%. The Brazilian subsidiary experienced a decline in sales from
$3,267 in fiscal 1997 to $2,849 in fiscal 1998, or 9%. The packaging market is
fragmented and highly competitive and the Company has lacked the resources to
aggressively compete in its markets. In addition, the Company began another
major restructuring in fiscal 1998. This included relocation in October 1997
from a 256,000 sq. ft. facility to a 36,000 sq. ft. facility in Bridgewater, New
Jersey. The cost of the relocation including the write down of obsolete
inventory was approximately $1,475. In addition a loss of $773 was incurred as
the abandonment of leasehold improvements. The relocation disrupted the
Company's operations and its standing in the market place, which further
negatively impacted sales.
Gross Margin decreased from 26.0 % of net sales in fiscal 1997 to 18% in fiscal
1998 and from $3,460 to $1,437. As the Company's sales declined, the Company's
fixed costs increased as a percent of sales. The Company's relocation to a
smaller facility has significantly reduced its rent, insurance, utilities and
other overhead cost by approximately $100 per month. The overhead did however,
negatively impact costs of fiscal 1998 resulting in lower margins. Relocation
costs outweighed the immediate cost savings from the relocation, which was not
completed until the latter part of fiscal 1998.
The Company's selling, general and administrative expenses decreased in fiscal
1998 by 19% to $3,889 compared to $4,801 during fiscal 1997. The decrease in
domestic expenses was in salaries and wages, travel and entertainment, and
reduced fringe benefit expenses. The decrease at Weldotron do Brasil was evenly
distributed between marketing and general administrative expenses.
The Loss from Continuing Operations increased to $5,639 in fiscal 1998 from
$2,347 in fiscal 1997. The increase resulted from restructuring and inventory
charges of $1,475 this year in connection with the relocation to a new facility
and the overall decline in sales.
Deferred compensation expense in fiscal 1998 decreased slightly to $109 from
$113 in fiscal 1997.
Other income and expenses in fiscal 1998 included a foreign currency translation
gain of $74 compared to a loss of $148 last year with respect to the Company's
Brazilian subsidiary. These translation gains represent inflationary gains for
these years on the net assets of the Brazilian subsidiary, which has
historically operated in a highly inflationary economy. Accordingly, the results
from the Brazilian operations may be significantly affected by such
fluctuations. Interest expense and royalty income were virtually unchanged from
1997 to 1998. The Company expects to receive future royalties on patents through
2002, which are not expected to be material. Commission income generated
entirely by the Brazilian subsidiary decreased from $414 in fiscal 1997 to $0 in
fiscal 1998 due to lower earnings.
The Net Loss increased to $5,639 from $2,347 last year. The increase resulted
from the factors outlined above as well as restructuring and inventory charges
in fiscal 1998 in connection with the relocation to a new facility.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared To 1996
Net Sales from continuing operations in fiscal 1997 were $13,286, a decrease of
27.5% from $18,315 in fiscal 1996. Domestic packaging sales declined from
$11,050 to $8,863 or 19.8%. Sales in the Safety and Automation Group declined
from $2,318 to $1,156 or 50.1%. The Brazilian subsidiary experienced a decline
in sales from $4,947 in fiscal 1996 to $3,267 in fiscal 1997, or 34.0%.
Domestically, the Company experienced an improvement in industrial packaging
equipment sales of 3.7% versus the prior year due to the shipment of several
16
<PAGE>
custom roofing shingle bundling machines. During fiscal 1997, the Company
refocused its marketing efforts toward such higher cash contributing industrial
packaging products, which had a negative impact on food packaging equipment
sales, and packaging sales overall. To compensate for the marginal cash
generated from the food packaging side of the business, the Company reduced
excess marketing expenses associated with that segment in fiscal 1997. The
Safety and Automation Group continued to feel the effects of being without
inventory due to exorbitant price increases and unfavorable foreign exchange
rates with its former major offshore supplier during fiscal 1996.
Gross Margin decreased from 32.2% of net sales in fiscal 1996 to 26.0% in fiscal
1997 and from $5,901 to $3,460 in dollars. Despite improvements achieved in
material costs, as a percentage of sales, labor costs were higher, most notably
at the Company's Brazilian subsidiary. In terms of dollar contribution, the
Brazilian subsidiary's gross margin decreased $1,046 due to higher labor and
related overhead content on reduced sales, while the Packaging System Group's
and the Safety and Automation Group's gross margins declined $728 and $667,
respectively.
The Company's selling, general and administrative expenses decreased in
fiscal 1997 by $1,857 to $4,801 compared to 1996. Domestic operations had a
decrease of $1,530, while the Brazilian location had a decrease of $327. The
decrease in domestic expenses was in a) salaries and wages of $715, b) travel
and entertainment of $196, c) reduced fringe benefit expenses of $180 due to
salary reduction, d) dealer commissions primarily associated with the food
packaging segment of $170, and e) reduced general business insurance of
$105. The decrease at Weldotron do Brasil was evenly distributed between
marketing and general administrative expenses.
The Loss from Operations decreased to $2,347 in fiscal 1997 from $3,134 in
fiscal 1996. The decrease resulted from the absence of major restructuring and
inventory charges in fiscal 1998, as well as reduced selling, general and
administrative expenses. In fiscal 1997, the Company recorded a reserve of $91
to write down inventory to net realizable value. This compares to a total charge
of $1,085 in fiscal 1996.
Deferred compensation expense in fiscal 1997 decreased slightly to $113 from
$124 in fiscal 1996.
Other income and expenses in fiscal 1997 included a foreign currency translation
loss of $148 compared to a gain of $345 in fiscal 1996 with respect to the
Company's Brazilian subsidiary. These translation gains represent inflationary
gains for these years on the net assets of the Brazilian subsidiary. Weldotron
do Brasil operates in a highly inflationary economy. Accordingly, the results
from the Brazilian operations may be significantly affected by such
fluctuations. The general price index for 1997 was 9% compared to 15% for 1996.
The official selling rates of exchange to the U.S. dollar were $1 equals
R$1.0394 in 1997 compared to $1 equals R$0.9726 in 1996. The current and
historical levels of inflation in Brazil and the changing exchange rates cannot
be expected to affect future periods to the same extent, or even in the same
direction as were the current and prior years affected. Interest expense
increased by $8 due to increased borrowings at our Brazilian subsidiary. Royalty
income was $60 compared to $42 in fiscal 1996. The Company expects to receive
future royalties on patents through 2002. Commission income generated entirely
by the Company's Brazilian subsidiary decreased from $489 in fiscal 1996 to $414
in fiscal 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 129 "Disclosure of Information About Capital Structure" requires an
entity to provide certain disclosures within its financial statements about the
pertinent rights and privileges of the various securities outstanding for fiscal
years beginning after December 16, 1997. The Company believes SFAS No. 129 will
have little, if any, effect on the information already disclosed in the
Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to report
comprehensive income and its components for fiscal years beginning after
17
<PAGE>
December 15, 1997. The Company believes SFAS No. 130 will have little, if any,
effect on the information already disclosed in the Company's financial
statements.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. The Company believes SFAS No. 131 will have little, if any,
effect on the information already disclosed in the Company's financial
statements.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," requires an entity to expense all
software development costs incurred in the preliminary project stage, training
costs and data conversion for fiscal years beginning after December 15, 1998.
The Company believes that this statement will not have a material effect on the
Company's accounting for computer software acquisitions.
Statement of Position 98-5 "Accounting for Start-up Costs," requires that an
entity expense all start-up and related costs, as incurred, for all fiscal years
beginning after December 15, 1997. The Company believes that this statement will
not have a material effect on its accounting for start-up costs.
YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs do not consider the impact of the upcoming change in
the century. Currently, the Company is evaluating its Year 2000 computer issues.
Based on preliminary evaluations, the Company estimates the costs that will be
incurred to update its computer systems will be immaterial. The company believes
that solutions will be implemented timely.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in forward-looking statements as
a result of various factors including, but not limited to: (i) general economic
conditions in the markets in which the Company operates, (ii) cancellation of
specific programs due to general budgetary constraints or poor customer demand,
(iii) development of competing technology and scientific know-how similar or
superior to that of the Company, (iv) success in hiring and retaining key
management and technical personnel, (v) the Company's significant liquidity
concerns, (vi) legal proceedings pending and judgments rendered against the
Company, and (vii) the decline in the Company's overall business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes thereto and auditors' report
thereon, are included herein.
Selected quarterly financial data and other supplementary financial information
are not required.
WELDOTRON CORPORATION
Consolidated Financial Statements and Supplemental Schedule
as of and for the Years Ended February 28, 1998, 1997 and 1996 and
Report of Independent Certified Public Accountants
Note - The Auditor's Report on the Financial Statements for the year ended
February 29, 1996 is not included herein.
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of Weldotron Corporation
Bridgewater, New Jersey
We have audited the accompanying consolidated balance sheets of Weldotron
Corporation and subsidiaries as of February 28, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Weldotron
Corporation and subsidiaries as of February 28, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and at February 28, 1998 has significant deficiencies in working capital and net
assets. Furthermore, the Company is delinquent paying several of its
liabilities. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
July 31, 1998
19
<PAGE>
Weldotron Corporation and Subsidiaries
Consolidated Balance Sheets
February 28, 1998 and February 29, 1997
(Amounts in thousands, except share data)
1998 1997
---- ----
Assets
CURRENT ASSETS
Cash and cash equivalents $ 9 $ 19
Accounts receivable (less allowance
for doubtful accounts:
1998 $151; 1997, $184 746 1,299
Inventories 2,329 5,088
Prepaid expenses and other current assets 334 399
--------- ---------
Total current assets 3,418 6,805
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 660 660
Fixtures and equipment 701 8,781
Leasehold improvements -- 1,758
Automotive equipment 28 164
-- ---
Total property, plant & equipment 1,389 11,363
Less accumulated depreciation and amortization 664 9,676
----------- ---------
Property, plant & equipment, net 725 1,687
----------- ---------
DEFERRED COSTS AND OTHER ASSETS 283 539
----------- ----------
TOTAL ASSETS $ 4,426 $ 9,031
========= ========
Liabilities and Stockholders' Equity CURRENT LIABILITIES:
Cash overdraft $ 11 $ 211
Short-term borrowings 1,132 1,396
Short-term borrowings - related party 2,101 446
Accounts payable 2,249 1,721
Payables to related parties 1,471 807
Accrued payroll, vacation and payroll taxes 460 539
Accrued severance and other compensation 1,258 1,165
Other current liabilities 786 1,106
------- ---------
Total current liabilities 9,468 7,391
--------- --------
LONG-TERM DEBT - Related Party 150 1,000
---------- ---------
TOTAL LONG-TERM DEBT 150 1,000
--------- ---------
MINORITY INTEREST IN SUBSIDIARY 328 478
----------- ----------
OTHER LONG-TERM LIABILITIES 23 67
-----------------------
20
<PAGE>
1998 1997
---- ----
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $.05 per Share;
authorized 1,000,000 shares in
1997 and 1996; issued none
Common stock, par value $.05 per share;
authorized 10,000,000 shares; issued
2,352,720 shares 118 118
Additional paid-in capital 9,798 9,798
Deficit (15,336) (9,698)
Common stock in treasury, at cost - 52,547 shares
In 1997 and 1996 (123) (123)
---- ---- ---- ----
Total stockholders' equity (Deficiency) (5,543) 95
------ --
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 4,426 $ 9,031
========== ========
See Notes to Consolidated Financial Statements.
21
<PAGE>
Weldotron Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended February 28, 1998,
February 28, 1997 and February 29, 1996
(Dollar amounts in thousands, except per share amounts.)
1998 1997 1996
---- ---- ----
NET SALES $ 7,895 $13,286 $18,315
------- -------- -------
COST & EXPENSES
Cost of sales 6,458 9,826 12,414
Selling, general and administrative 3,889 4,801 6,658
Depreciation and amortization 192 388 488
Deferred compensation expenses 109 113 124
Restructuring and other inventory charges -- 91 1,085
Related party charges 300 300 300
Relocation expense 1,475 - -
----- ----- -----
12,423 15,519 21,069
------- --------- --------
LOSS FROM OPERATIONS (4,528) (2,233) (2,754)
------- --------- --------
OTHER INCOME (EXPENSES)
Foreign currency translation gain (loss) 74 (148) 345
Interest Expense (633) (621) (613)
Royalty Income 58 60 42
Other (expense) income 15 21 (164)
Commission income -- 414 489
Loss on sale and abandonment
of fixed assets (773) -- --
------- --------- --------
(1,259) (274) 99
------- --------- --------
LOSS FROM OPERATIONS
BEFORE MINORITY INTEREST IN
SUBSIDIARY AND INCOME TAXES (5,787) (2,507) (2,655)
INCOME TAX (PROVISION) -- (37) (270)
MINORITY INTEREST IN FOREIGN
SUBSIDIARY'S (INCOME) LOSS 148 197 (209)
------- --------- --------
NET LOSS $ (5,639) $ (2,347) $(3,134)
------- --------- --------
NET LOSS PER COMMON SHARE
Basic & Diluted $ (2.45) $ (1.02) $ (1.36)
========== ========== =========
See Notes to Consolidated Financial Statements.
22
<PAGE>
Weldotron Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Years Ended February 28, 1998,
February 28, 1997 and February 29, 1996
(Dollar amounts in thousands.)
Common Additional (Deficit) Common Stock Total
Stock Paid-In Retained In Treasury,
Capital Earnings At Cost
BALANCE FEBRUARY
28, 1995 $118 $9,798 $(4,217) $(123) $5,576
Net Loss - - (3,134) - (3,134)
------ ------ ------- ----- -------
BALANCE FEBRUARY
29, 1996 118 9,798 (7,351) (123) 2,442
Net Loss - - (2,347) - (2,347)
------ ------ ------- ----- -------
BALANCE FEBRUARY
28, 1997 118 9,798 (9,698) (123) 95
Net Loss - - (5,639) - (5,639)
------ ------ ------- ----- -------
BALANCE FEBRUARY
28, 1998 $118 $9,798 $(15,336) $(123) $(5,543)
==== ====== ========= ====== ========
See notes to consolidated financial statements.
23
<PAGE>
Weldotron Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended February 28, 1998,
February 28, 1997 and February 29, 1996
Dollar amounts in thousands.)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,639) $(2,347) $(3,134)
-------- -------- --------
Adjustments to reconcile net loss to net
cash flows provided by (used in)
operating activities
Depreciation and amortization 192 388 488
Foreign currency translation (gain) loss (74) 148 (345)
Bad debt provision (recoveries) 52 (75) (46)
Non-cash inventory reductions (182) 91 1,085
Deferred compensation expense 93 113 122
Minority interest in subsidiary net
income (loss) (148) (197) 209
(Gain) Loss on sale of property,
plant and equipment 773 (148) (13)
Changes in operating assets and liabilities
(Increase) decrease in assets:
Accounts receivable 501 833 379
Inventories 2,759 1,651 1,100
Prepaid expenses and other current
assets 65 120 (126)
Other assets 256 (17) 19
Increase (decrease) in current
liabilities 444 (1,305) 538
Increase (decrease) in Related Party
liabilities 485 389 334
Increase (decrease) in other
long-term liabilities (44) (150) (158)
--- ---- ----
Total adjustments 4,466 1,841 3,586
----- ------ -----
Net cash provided by (used in)
operating activities (467) (506) 452
==== ==== ===
24
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES: 1998 1997 1996
---- ---- ----
Purchases of property, plant and
equipment (69) (137) (231)
Proceeds from the sales of property,
plant and equipment 247 148 132
--- --- ---
Net cash provided by (used in)
investing activities 178 11 (99)
--- -- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under
short-term borrowings (264) (179) (1,347)
Proceeds from debt - related party 664 296 650
Principal payments under capital lease
obligations -- (10) (33)
Cash overdraft (200) 211 --
Dividends paid by subsidiary to
minority shareholder -- -- (23)
Net cash (used in) provided by
financing activities 200 318 (753)
--- --- ----
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 79 (148) 306
-- ---- ---
NET DECREASE IN CASH AND CASH EQUIVALENTS (10) (325) (94)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 19 344 438
-- --- ---
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9 $ 19 $ 344
======== ======== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash (paid) received during the year for:
Interest paid $ (144) $ (403) $ (631)
Taxes (84) (178) (169)
Interest received -0- 45 23
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred when
the Company entered into leases for new
equipment $ - $ 45 $ -
Distribution of investment in real estate
to minority interest - - 252
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of the
Company and its subsidiaries include the accounts of all subsidiaries. Financial
information relating to the Company's 60% owned subsidiary in Brazil reflects
the 12 month periods ended February 28, 1998, 1997 and 1996. All material
intercompany transactions and balances have been eliminated.
The Company designs, manufactures and markets a comprehensive line of packaging
machinery and systems for a broad range of industrial and consumer applications
as well as innovative food packaging and weighing systems for supermarkets and
fresh food processors. Its Safety & Automation Systems Group manufactures and
markets electronic systems for personnel safety and controls for monitoring high
speed automatic production machinery.
Sales are primarily made throughout North America, with only 7% of the parent
Company's sales taking place internationally. The Company's 60% owned Brazilian
subsidiary sells throughout Brazil and certain South American export markets.
Revenue Recognition - Sales and earnings are recognized primarily upon shipment
of products or when title passes.
Inventories - Substantially all inventories are valued at the lower of cost,
determined by the use of the first-in, first-out method (FIFO) or market.
A standard cost system is used to value the inventory whereby overhead is
allocated to work-in-process and finished goods based upon a direct labor
component. Portions of product cost variances are allocated to the inventory
value under the FIFO method.
Accounts Receivable - Accounts receivable are net of an allowance for doubtful
accounts. The provision (recoveries) for doubtful accounts and write-off for
uncollectible accounts were $52, ($75) and ($46); $201, $49, and $21 for the
fiscal years ended February 1998, 1997, and 1996, respectively.
Property, Plant and Equipment - Property, Plant and Equipment are stated at
cost. The Company provides for depreciation and amortization for financial
statement purposes on the straight-line or accelerated method over the estimated
useful lives of the various depreciable or amortizable assets. In 1998, the
Company relocated to a smaller facility and wrote off $773 as abandoned assets.
The Company's Brazilian subsidiary purchased three residential apartments in Sao
Paolo, Brazil, as investment property. One apartment was sold in fiscal 1995,
with the proceeds distributed as dividends in a 60% and 40% relationship between
the Company and the minority interest. At the end of fiscal 1996, title to one
of the remaining two apartments was transferred to the Company. This asset was
written down to $210 and is included in Other Assets. The Company has enlisted
the services of a broker for the sale of this apartment to raise additional
cash. The Company has entered into a contract for the sale of the apartment,
with a closing expected prior to December 31, 1998. The third apartment is still
recorded on the Company's Brazilian subsidiary.
Income Taxes - Weldotron Corporation and its U.S. subsidiaries file a
consolidated federal income tax return. Accumulated undistributed earnings of
the Company's foreign subsidiary were approximately $132 at February 28, 1998.
The Company has not recognized a deferred tax liability for the undistributed
earnings of the subsidiary as it is their intention to permanently reinvest such
earnings. Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded to reflect the
tax consequences on future years' differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end.
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Valuation allowances are established for those income tax benefits whose
recoverability is uncertain.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and
on deposit in banks and certificates of deposit with an original maturity period
not in excess of three months. Cash and cash equivalents of $9, and $19 were
designated for payments under various bank agreements as of February 28, 1998
and February 28, 1997, respectively.
Deferred Costs - Costs incurred to secure financing are capitalized and are
amortized on a straight-line method over the life of the related borrowings.
Costs incurred in connection with royalty license agreements are amortized over
the life of the associated patent or the duration of the agreement, whichever is
shorter.
Foreign Currency Translation - The U.S. dollar is the functional currency for
the Brazilian foreign subsidiary operating in a highly inflationary economy, for
which both translation adjustments and gains and losses on foreign currency
transactions are included in earnings.
Net Loss Per Common Share - Net loss per common share for each of the years
ended February 28, 1998, and 1997 and February 29, 1996 were computed by
dividing net loss by the weighted average number of shares outstanding of
2,300,173 each year. Assumed exercise of stock options, warrants and stock
rights has not been included in the earnings per common share calculation as the
effect is anti-dilutive.
SFAS No. 128, "Earnings Per Share," requires a presentation of basic EPS and
diluted EPS for fiscal years ending after December 15, 1997. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Similar to fully diluted EPS, diluted EPS assumes conversion of convertible debt
and the issuance of common stock for all other potentially dilutive equivalent
shares outstanding, unless the effect of issuance would have an anti-dilutive
effect. The adoption of SFAS No, 128 had no effect on the Company.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain prior year reclassifications have been made to
conform to 1998 classifications.
Long-lived assets - Long-lived assets, such as goodwill, intangible assets and
property and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. This policy is in accordance with the Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets and Long-lived Assets to Be Disposed of," which was adopted in the
1997 fiscal year.
Stock based compensation - The Company accounts for its stock option awards
under the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire stock. The Company makes pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied as required by Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation."
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Fair Value of Financial Instruments - The Company's financial instruments are
comprised of cash, accounts receivable, accounts payable and long term debt
which are carried in the balance sheet at amounts which approximate fair value.
Recent Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to report
comprehensive income and its components for fiscal years beginning after
December 15, 1997. The Company believes SFAS No. 130 will have little, if any,
effect on the information already disclosed in the Company's financial
statements.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. The Company believes SFAS No. 131 will have little, if any,
effect on the information already disclosed in the Company's financial
statements.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," requires an entity to expense all
software development costs incurred in the preliminary project stage, training
costs and data conversion for fiscal years beginning after December 15, 1998.
The Company believes that this statement will not have a material effect on the
Company's accounting for computer software acquisitions.
Statement of Position 98-5 "Accounting for Start-up Costs," requires that an
entity expense all start-up and related costs, as incurred, for all fiscal years
beginning after December 15, 1997. The Company believes that this statement will
not have a material effect on its accounting for start-up costs.
2. MANAGEMENT PLANS AND INTENTIONS
The Company's financial statements for the year ended February 28, 1998 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company incurred substantial net losses in recent years and as of
February 28, 1998 had a working capital deficiency of $6,050 and an accumulated
deficit of $5,543. Management actions were implemented throughout fiscal 1996,
1997 and 1998 in an attempt to restore the Company to financial stability. Among
these actions were the divestiture of non-core business, substantial reductions
of operating expenses, the reestablishment of a major distributorship, the
outsourcing of certain manufacturing operations at more favorable costs, the
implementation of alternative marketing strategies, and the reemphasis upon high
cash contributing product lines. To date these efforts have been largely
unsuccessful. Despite all of these efforts the Company continues to lose money.
In an effort, to return to profitability the Company has continued to reduce
staff, lower overall costs of manufacturing and reduce selling, general and
administrative expenses during Fiscal 1999. The Company is investigating new
products to increase sales. The Company is dependent on related party financing
until it returns to profitability. No assurances can be given as to the
Company's ability to obtain financing or to the future results of operations.
3. RESTRUCTURING AND OTHER INVENTORY CHARGES
In fiscal 1997 and 1996 the Company recorded reserves of $91 and $1,085,
respectively, to write down inventory to net realizable value. In October, 1997,
the Company relocated to a smaller facility in Bridgewater, New Jersey. As part
of the relocation, $773 of leasehold improvements was written off.
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4. ROYALTY AGREEMENTS
In 1992, the Company licensed one of its patents to several other manufacturers.
The Company received royalty revenue related to licensing agreements of $ 58,
$60, and $42 for fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996 respectively. The Company has filed two design patents on its
custom roofing shingle bundling machine.
Charges incurred to obtain patents are capitalized.
5. INVENTORIES
Inventories consist of the following at February 28, 1998 and 1997:
1998 1997
---- ----
Finished goods $ 531 $1,704
Work in process 647 2,094
Raw material 1,151 1,290
------- ------
$ 2,329 $5,088
======== ======
6. DEBT
Debt consists of the following at February 28, 1998 and 1997:
1998 1997
---- ----
Revolving line of credit (Including Weldotron do Brasil) $ 1,132 $ 1,396
Notes payable -- Related Party 2,251 1,446
----- -----
3,383 2,842
Less current portion 3,233 1,842
----- -----
Long-term portion $ 150 $1,000
======== ======
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. Management does not believe that the Company will be able to repay
borrowings under the New Credit Facility at maturity without additional
financing. The Company has not received a commitment for additional financing.
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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. The Company is currently in technical default under the New Credit
Facility, but BACC has not chosen to declare a default and continues to work
with the Company.
At February 28, 1998, the Company had used approximately $1,076 of borrowings
available under Business Alliance Capital New Credit Facility. Based on the
advance percentages of eligible receivables and inventory, the Company had
unused borrowing availability of approximately $17 at February 28, 1998.
On August 31, 1994, the Company borrowed $500 from Lyford Corporation
("Lyford"), an affiliated company that owned 19.56% of the issued and
outstanding common stock of the Company as of July 31, 1998. 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 Company 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
Restated Note was originally due and payable on or before March 31, 1996 and
bore interest at 12% per annum. The Note was subsequently extended three times
- -- first until April 1, 1997, then until April 1, 1998 and finally until April
1, 1999 and the interest rate was increased to 16%. 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. 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 in Note 7, Lyford has
advanced additional sums to the Company to protect its collateral position and
to fund ongoing operations. As of February 28, 1998, the principal balance and
unpaid accrued interest due and owing to Lyford amounted to $1,452 and $381,
respectively.
In January, 1996 the Company entered into a $500 revolving loan agreement with
Exford Corp. an affiliate of Lyford. The Company has outstanding borrowings of
$350 under this agreement, as of February 28, 1998, which borrowings bear
interest at 14%, and were originally due on January 31, 1997. The note was
subsequently extended twice, first until January 1, 1998 and then until January
1, 1999. In connection with this revolving loan, the Company has assigned to
Exford its right, title and interest as tenant under the lease for its prior
facility, together with any rents due and payable to the Company. On September
1, 1997, Lyford purchased the Exford loan. As of February 28, 1998 the principal
balance and unpaid accrued interest due and owing to Lyford under the revolving
loan agreement amounted to $552 and $93, respectively.
In February 1997, the Company entered into a one-year promissory note in the
amount of $96 with Mentmore Holdings, an affiliate of Lyford. The note bears
interest at two percentage points above the prime rate, with a default rate
equal to the interest rate otherwise payable plus five percent for late payment
of interest or principal. The note originally expired on February 11, 1998 and
has been extended for 1 year until February 11, 1999.
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Company Payables to Related Parties include director fees ($83), interest
accrued on related notes ($474), and management advisory fees due to Mentmore
($914). The short-term borrowings due to related parties ($2,101) consist of the
loans due to Lyford and Mentmore.
Debt is carried in the balance sheet at amounts which approximate fair value.
7. COMMITMENTS AND CONTINGENCIES
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 covered by
insurance. However, the Company has elected to retain a significant portion of
litigation exposure through the use of deductibles under its insurance policies.
In addition to claims arising in the ordinary course of business, 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 Corporation. 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, without 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 payment of his
deferred compensation benefits upon the Company in May of 1997. In June,
pursuant to 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.
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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 entered into
discussions with Mr. Siegel concerning a potential settlement of its obligations
to Mr. Siegel. Mr. Siegel has now brought an action against the Company and
others seeking to enforce an alleged verbal settlement of his claim against the
Company for a payment of $85. As of February 28, 1998, the Company had accrued
$875 as the present value of this obligation.
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 given the Company 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 has discussed
with Seymour Siegel and his counsel a potential settlement of these claims.
Recently the Company broke off discussions with Mr. Siegel's counsel. As of
February 28, 1998, the Company had accrued $383 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 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, 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
32
<PAGE>
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, 1998; and (3) the Company agreed to make certain cosmetic changes
to the appearance of its new domestically sourced products.
Weldotron made four payments totaling approximately $59, under the terms of the
settlement with Riken, then suspended all further payments. Riken then notified
the Company that it would seek to pursue the enforcement of the settlement terms
against the Company and obtained a judgement in the amount of the remaining
settlement payments. In July 1998, the Company reached a full and final
settlement with Riken for $70, which has been paid.
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 judgement in favor of Mackman for
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. Mackman continues to assert monetary claims against the Company for unpaid
rent, attorneys' fees and the cost of certain repairs to the former facility.
Trial is scheduled for October of 1998.
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 amounted
to $662.
Reju vs. Weldotron
Varghese Reju, the Company's former Chief Financial Officer, was dismissed as
part of an overall downsizing and reduction of overhead in October of 1995. The
Company offered and Mr. Reju received a severance based upon his years of
service with the Company. Mr. Reju then brought an action asserting he was
entitled to benefits under a written Severance Agreement entered into between
Mr. Reju and the Company in 1993. Under the terms of the written Severance
Agreement, Mr. Reju would be entitled to receive two times his base salary
(approximately $165) in the event he was terminated as a result of a "change of
control" as defined in the Agreement. In its defense of this action, the Company
asserts that the "change of control," as contemplated in Mr. Reju's Severance
Agreement, never occurred, and even if it did, there was no connection between
any such "change of control" and Mr. Reju's termination some eighteen months
later. Management believes that the lawsuit is without merit and intends to
vigorously defend the action; however, the outcome cannot be determined. This
matter is scheduled to go to trial in September 1998.
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Mentmore Holdings Corporation vs. Weldotron Corporation
Mentmore Holdings Corporation ("Mentmore" or "Mentmore Holdings"), an affiliate
of Lyford and Exford Corporations, provides management advisory services to the
Company pursuant to an agreement dated as of June 14, 1994. See discussion in
Section 13-"Certain Relationships and Related Transactions." The Company is in
default of certain payments due Mentmore under the terms of said agreement.
Mentmore initiated an action against the Company in the Superior Court of New
Jersey, Law Division, Somerset County, New Jersey. In February 1998, Mentmore
obtained a judgment against the Company in the amount of $914 which has been
accrued at year-end. Mentmore has not pursued execution upon said judgment and
continues to provide services to the Company under the agreement.
Richard C. Hoffman, P. C. vs. Weldotron Corporation.
Richard C. Hoffman, P.C., a professional corporation, provides legal services
to the Company. Richard C. Hoffman, a Director of the Company and its
Secretary, is the president and sole shareholder of Richard C. Hoffman, P.C.
The Company is delinquent in payment for fees and cost for services provided
by Richard C. Hoffman, P.C. Richard C. Hoffman, P.C. initiated an action
against the Company in the Superior Court of New Jersey, Court of Somerset
County, New Jersey. On March 18, 1998 Richard C. Hoffman, P.C. obtained a
judgment against the Company in the amount of $424 which has been accrued at
year end. Richard C. Hoffman, P.C. has not pursued execution upon said
judgment and continues to provide services to the Company.
Self Insurance - The Company is party to personal injury and property damage
litigation arising out of incidents involving the use of its products. The
Company obtains insurance for product and general liability. However, the
Company has elected to retain a significant portion of expected losses through
the use of deductibles. Provisions for losses are recorded based upon the
Company's estimates of the aggregate liability for claims incurred. Estimates of
such accrued liabilities are based on an evaluation of the merits of individual
claims and historical claims experience; thus, the Company's ultimate liability
may exceed or be less than the amount accrued. Amounts accrued are paid over
varying periods, which generally do not exceed five years. The methods of making
such estimates and establishing the resulting accrued liability are reviewed
continually, and any adjustments resulting therefrom are reflected in current
earnings. As of February 28, 1998 and 1997 the Company has accrued in other
current liabilities $188 and $466 respectively to cover anticipated loses.
Leases - The Company rents office and manufacturing facilities under lease
arrangements classified as operating leases that expire during 2000. The Company
is responsible for the payment of real estate taxes, water and sewer rates and
charges and janitorial and general maintenance charges upon the facilities.
Rent expense for continuing operations, net of sublease income, was
approximately $254, $291, and $266 for the years ended February 28, 1998,
February 28, 1997 and February 29, 1996, respectively. Sublease income was $0,
$7, and $30 for the years ended February 28, 1998, 1997 and February 29, 1996
respectively. Aggregate net minimum lease payments for the remainder of leases
are as follows:
Fiscal Year Operating
Ended February Leases
-------------- ------
1999 $ 168
2000 126
Employment Agreements - The Company has no employment or severance agreements
with officers that provide severance pay if certain changes in control or
employment status take place.
34
<PAGE>
8. INCOME TAXES
The domestic and foreign components of pretax income (loss) are as follows:
Feb. 28, Feb. 28, Feb. 29,
1998 1997 1996
---- ---- ----
Domestic $(5,417) $ (2,049) $ (3,447)
Foreign - Before
minority interest (370) (458) 792
---- ---- ---
Total $(5,787) $ (2,507) $ (2,655)
======= ======== ========
The Company's effective income tax rate varied from the statutory U. S.
Federal income tax rate because of the following:
1998 1997 1996
---- ---- ----
Computed (benefit) provision at
statutory rate $(1,968) $(852) $(903)
Increase (decrease) resulted from:
Change in valuation allowance 2,168 820 1,010
Other (200) 69 163
----- -- ---
$ -- $ 37 $ 270
======== ====== =====
At February 28, 1998, $16,013 federal tax loss carry forwards are available to
offset future domestic taxable income. These loses expire in the years 2007
through 2013.
The net deferred tax asset at February 28, 1998 and 1997 is comprised of the
following:
1998 1997
---- ----
Deferred tax assets:
Inventory capitalization $69 $ 127
Net operating losses 6,302 3,925
Deferred compensation 504 467
Reserves 845 1,208
Bad debt allowance 39 48
--------- ---------
Total assets 7,759 5,775
Deferred tax liability:
Fixed assets (59) (27)
Deferred assets (56) (52)
LIFO reserve recapture (220) (440)
--------- --------
Total liabilities (335) (519)
--------- --------
Net deferred tax asset 7,424 5,256
Valuation allowance (7,424) (5,256)
-------- -------
Deferred tax asset $ -- $ --
=========== =========
A valuation allowance has been recognized to fully offset the related deferred
tax asset due to the uncertainly of realizing the benefit of the loss
carryforwards.
35
<PAGE>
9. STOCK OPTIONS AND WARRANTS
The Company has an Incentive and Non-Qualified Stock Option Plan that permits
the granting of options to purchase 100,000 shares of common stock. Under the
plan, the option price, as to the incentive options, cannot be less than the
fair market value of the stock as of the date of grant and at least 110% of fair
market value for certain management employees. The purchase price under each
non-qualified stock option is determined by a Committee of the Board of
Directors. Options were granted until May 1993 and are exercisable within ten
years of the date of grant.
In June 1988, the stockholders approved the 1988 Stock Option Plan. The Plan
permits the granting of options to purchase 100,000 shares of common stock at
100% of the fair market value at the time the option is granted. Options, which
may be granted to March 1998, are exercisable only during the continuance of
employment, subject to certain limitations.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations for its stock
option grants. Generally, compensation expense is not recognized for stock
option grants.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company discloses the
pro forma impact of recording compensation expense utilizing the Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable.
Since no options were granted in 1998, 1997 or 1996, the accounting provisions
of SFAS No. 123 did not have an effect on the Company's pro forma net income and
earnings per share and thus have not been presented.
Changes under the stock option plans for the fiscal years ended February 1998,
1997, 1996 and 1995, are as follows:
Shares
Option Price Per Share
------ ---------------
Outstanding, February 28, 1995 99,000 2.50 - 4.50
Granted --
Canceled (54,000)
-------
Outstanding, February 29, 1996 45,000 2.50 - 4.50
Canceled (20,000)
-------
Outstanding, February 28, 1997 25,000 2.50
Canceled (24,000)
-------
Outstanding, February 28, 1998 1,000 2.50
=====
In connection with financing provided by Lyford Corporation (see note 7), the
Company granted Lyford on August 5, 1994, a Common Stock Purchase Warrant to
purchase up to 200,000 shares of common stock at $2.00 per share and on May 5,
1995 a warrant to purchase up to 1 million shares of the Company's common stock
at an exercise price of $1.00 per share. The warrants expire in August 2004 and
April 2005, respectively. The market price of the Company's stock at the date of
the grants was $2 in August 1994 and $.875 in May 1995.
36
<PAGE>
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan. The Company contributes at a minimum
75% of each participating employee's annual contribution limited to 4% of the
employee's annual compensation. Additionally, the Company's matching
contribution increases on a sliding scale based on pretax profits as a
percentage of net worth. The additional contribution is based on the audited
results of the Company's fiscal year immediately preceding the beginning of the
plan year. Savings Plan expense was approximately $11, $25, and $63 for the
fiscal years ended February 1998, 1997 and 1996, respectively.
The Company participates in a multi-employer pension plan that provides defined
benefits to substantially all union employees. Amounts charged to pension costs
and contributed to the Plan were $28, $58, and $62 for the fiscal years ended
February 1998, 1997 and 1996, respectively.
11. RELATED PARTIES
The Company entered into an initial one-year management advisory services
agreement in June 1994 with Mentmore Holdings, an affiliate of Lyford and Exford
Corporations, two related companies. (See also note #7.) The agreement was
automatically extended for successive one-year periods thereafter, and is
subject to termination upon written notice by either party not less than 90 days
prior to the expiration of any extended term. The agreement provides for an
annual fee of $300. All unpaid monthly installments of the fee shall bear
interest at the lesser rate of 12% per annum, or the maximum rate allowed by law
until such time as such installments are paid. Management fees and expenses were
$300 for each of the years ended February 28, 1998, 1997, and 1996, under the
agreement. (See also Note 7)
12. INDUSTRY SEGMENTS
The Company operates primarily in two business segments: Packaging Systems
and Controls. The Packaging Systems segment designs, manufactures and
markets a variety of industrial and food packaging systems. The Controls
segment manufactures electronic controls systems.
Sales to one customer, primarily from the Packaging Systems Group, were
approximately $466, $1,243, and $1,417 or 9%, 7%, and 8% of net sales for the
fiscal years ended February 1998, 1997, and 1996 respectively.
37
<PAGE>
Summary financial information by industry segment is as follows:
Industrial Segments 1998 1997 1996
---- ---- ----
Net Sales:
Packaging Systems $ 6,886 $12,130 $ 15,997
Safety and Automation Systems 1,009 1,156 2,318
-------- -------- --------
$ 7,895 $13,286 $ 18,315
======== ======== ========
Operating (loss) Income:
Packaging Systems $(5,485) $(2,690) $ (3,061)
Safety and Automation Systems 99 113 578
-------- -------- --------
$(5,386) $(2,577) $ (2,483)
--------- -------- --------
Unallocated corporate expense (401) (419) (497)
Other income (expense) -- 489 325
-------- -------- --------
$(5,787) $(2,507) $ (2,655)
======== ======== =========
Identifiable assets:
Packaging Systems $ 4,421 $ 8,420 $ 11,140
Safety and Automation Systems -- 554 681
Corporate 5 57 396
-------- -------- --------
$ 4,426 $ 9,031 $ 12,217
======= ======= ========
Capital expenditures:
Packaging Systems $ 69 $ 137 $ 231
Safety and Automation Systems -- -- --
Corporate -- -- --
-------- ------- --------
$ 69 $ 137 $ 231
======= ======= ========
Depreciation and amortization:
Packaging Systems $ 192 $ 367 $ 461
Controls -- -- --
Corporate -- 21 27
-------- ------- --------
$ 192 $ 388 $ 488
======= ======= ========
Sales and identifiable assets by geographic region are as follows:
1998 1997 1996
---- ---- ----
Net Sales:
United States $ 5,046 $10,019 $13,368
Brazil 2,849 3,267 4,947
-------- ------- -------
$ 7,895 $13,286 $18,315
========= ======= =======
Operating Income (loss):
United States $ (5,417) $(2,049) $ (3,447)
Brazil (370) (458) 792
$ (5,787) $(2,507) $ (2,655)
========= ======== =========
Identifiable assets:
United States $ 2,529 $ 6,632 $ 9,262
Brazil 1,897 2,399 2,955
--------- ------- --------
$ 4,426 $ 9,031 $12,217
========= ======== =======
38
<PAGE>
13. SHAREHOLDERS' RIGHTS PLAN
On February 25, 1988, the Board of Directors declared a dividend of one common
share purchase right (the "Rights") on each outstanding share of common stock of
the Company (the "Common Stock"). The Rights attached to the Common Stock and
entitle the holder to buy one share of Common Stock at an exercise price of
$30.00 per share until March 30, 1998, unless they are redeemed earlier. The
exercise price and the number of shares issuable upon exercise of the Rights are
subject to adjustment to prevent dilution. The Rights have no voting or dividend
rights and 2,500,000 shares of Common Stock are reserved for issuance upon
exercise of the Rights.
The Rights can be redeemed by the Company's Board of Directors for $.05 per
Right at any time until ten days after 20% of the Company's Common Stock has
been acquired or the Rights expire.
The Rights only become exercisable, or transferable apart from the common stock,
ten business days after a person or group (the "Acquiring Person") acquires
beneficial ownership of 30% or more of the Common Stock; or commences or
announces an offer for 30% or more of the Common Stock. Thereafter, upon the
occurrence of certain events (for example, if the Company is a party to a merger
or other business combination transaction or the Company is a surviving entity
in a reverse merger), each Right not owned by the Acquiring Person would become
exercisable for the number of shares of the Acquiring Person (or of the Company
in the case of a reverse merger) which, at that time, would have a market value
of twice the exercise price of the Right.
14. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No.
105, consist of certain trade receivables.
The Company's customer base includes a customer that represents a significant
portion of the Company's sales and accounts receivables. Although the Company is
directly affected by the well being of this significant customer, management
does not believe significant credit risks exist at February 28, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 20, 1997, the Board of Directors of Weldotron Corporation approved
BDO Seidman, LLP as its certifying accountant for the year ending February 28,
1997. On February 27, 1997 management informed the former accountant, Deloitte
and Touche LLP, that it had been dismissed. Except as stated immediately below,
there were no adverse opinion, disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles regarding
the report of Deloitte and Touche LLP on the Company's financial statements for
the fiscal year ended February 29, 1996. The report of Deloitte and Touche LLP
on the Company's financial statements for the fiscal year ended February 29,
1996 was modified with respect to uncertainty regarding the Company's ability to
continue as a going concern based on recurring losses from operations
experienced at the time. There were no reportable disagreements with the former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure leading to their dismissal.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- -------------------------------------------------------------------------------
Names Principal Occupation, Employment, etc. Age
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Richard L. Kramer Chairman of the Board of the Corporation (Since 48
June, 1994), Mr. Kramer is also Chairman and a
director of Mentmore Holdings, Texfi Industries,
Inc., a textile and apparel manufacturing firm, CPT
Holdings, Inc., a manufacturer of specialty steel
profiles, Orion Acquisition Corp. II, an investment
company, MC Equities, Inc., an insurance holding
company, Precise Technology, Inc., a full-service,
custom injection molder of precision plastic
products, Stellex Industries, Inc., a manufacturer
of microwave devices and aerospace components, and
Republic Properties Corporation. Mr. Kramer is a
director of J & L Structural, Inc., Precise Holding
Corporation, Trinity Investment Corp. and
Sunderland Industrial Holdings Corporation.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
William L. Remley Vice Chairman of the Board, President and CEO of 47
the Corporation (Since June 1994). Mr. Remley is
also Vice Chairman, Chief Executive Officer and a
director of Stellex Industries, Inc., a
manufacturer of microwave devices and aerospace
components, President, Chief Executive Officer and
a director of Mentmore Holdings Corporation,
Vice-Chairman, Chief Executive Officer and a
director of Texfi Industries Inc., President and a
director of CPT Holdings Inc., Orion Acquisition
Corp. II and MC Equities Inc. and Vice Chairman,
Treasurer and a director of Precise Holding
Corporation, Trinity Investment Corp. and
Sunderland Industrial Holdings Corporation.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Richard C. Hoffman Secretary and General Counsel of the Corporation. 50
Currently practices law as Richard C. Hoffman P.C.
in Connecticut
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fred H. Rohn Director, General Partner, North American Venture 72
Capital Funds (Since 1989).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Bryon P. Fusini Director, Vice President, Investments at Smith 44
Barney, Inc. a stock brokerage and financial
services concern (since prior to 1989).
- -------------------------------------------------------------------------------
Marvin D. Kantor, Director of the Company since July 1992, resigned as a
Director effective May 1, 1997 for personal reasons. Effective August 1, 1997,
John D. Mazzuto, a Director of the Company since April of 1994, resigned as a
Director for personal reasons.
The remaining members of the Board of Directors have determined not to fill
the vacancies left by the resignations of Messrs. Kantor and Mazzuto.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, as to the Chairman of the Board and Chief Executive
Officer, information concerning compensation paid for services to the Company in
all capacities during the fiscal years ended February 28, 1998 and 1997 and
February 29, 1996.
40
<PAGE>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------
Name and Other Annual All Other
Principal Position FY Salary Bonus Compensation Compensation
(1) (2) (1)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Richard L. Kramer 1998 -0- -0- -0-
Chairman of the Board 1997 -0- -0- -0- 6,000
1996 -0- -0- -0- 6,000
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
William L. Remley 1998 -0- -0- -0-
President and 1997 -0- -0- -0- 6,000
Chief Executive 1996 -0- -0- -0- 6,000
Officer
- -------------------------------------------------------------------------
1) Directors' Fees which total $6,000 annually.
2) Richard L. Kramer and William L. Remley are executive officers and
directors of Mentmore Holdings Corporation, which provides management
services to the Company. See Item 13, "Certain Relationships and Related
Transactions."
No options were granted nor exercised by any of the named executive officers or
directors during the fiscal year. The Company has not granted any stock
appreciation rights.
41
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Holdings of Management
The following table sets forth as of July 31, 1998, information concerning the
ownership of shares of Common Stock by each Director or nominee of the
Corporation individually, by each officer named in the Summary Compensation
Table above and by all executive officers and Directors of the Corporation as a
group, and the percentage ownership of such outstanding Common Stock based on
information furnished by such individuals. Except for share beneficially owned
by spouses or other family members, such officers and Directors have sole voting
power and sole investment power with respect to such shares.
- -------------------------------------------------------------------------------
Name of Director or Amount and Nature of Beneficial Percentage
Nominee or Identity of Group Ownership of Common Stock of Class
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Bryon P. Fusini 0 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Richard C. Hoffman 0 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Richard L. Kramer 0 (1) 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fred H. Rohn 0 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
William L. Remley 0 (1) 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
All executive officers and 100 *%
Directors as a group (7 persons)
- --------------------------------------------------------------------------------
*Less than one percent.
(1) Mr. Kramer and Mr. Remley are executive officers and directors of Lyford
Corporation, record owner of 450,000 shares of Common Stock and warrants
to purchase an additional 1,200,000 shares of common stock, as to which
stock and warrants they both disclaim beneficial ownership.
42
<PAGE>
Principal Holders of Voting Securities
The following table indicates the only persons known by the Board of Directors
to be the beneficial owners of more than five percent of Common Stock as of July
31, 1998.
- -------------------------------------------------------------------------------
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Percentage
Ownership of Common of Class
Stock
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Lyford Corporation (1) 1,650,000 47.14%
1430 Broadway, 13th Floor
New York, New York 10018
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Michael N. Kreiger (2) 219,000 9.50%
205 Church Street, 3rd Floor
New Haven, CT 06510
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
143,200 6.23%
Walter J. Schloss Associates (3)
Walter J. Schloss & Edwin W. Schloss
52 Vanderbilt Avenue New York, NY 10017
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Martin Siegel (4) 140,000 6.09%
26 Egan Place
Englewood Cliffs, NJ 07632
- -------------------------------------------------------------------------------
1) Partially based upon information contained in the named Shareholder's
Schedule 13D dated October 22, 1993, as amended by Amendment No. 1 dated
February 17, 1994, filed pursuant to the Securities Exchange Act of 1934.
Consists of 450,000 shares of common stock and warrants to purchase
1,200,000 shares of common stock. The capital stock of Lyford is indirectly
held by trusts established for the benefit of certain relatives of Richard
L. Kramer and William L. Remley, executive officers and directors of the
Company.
2) Based upon information contained in named Shareholder's Schedule 13D dated
May 23, 1996, as amended by Amendment No. 1 dated July 31, 1996 and
Amendment No. 2 dated January 14, 1997, filed pursuant to the Securities
Exchange Act of 1934.
3) Based upon information contained in named Shareholder's Schedule 13D dated
October, 1990, as amended by Amendment No. 3 dated July 30, 199, filed
pursuant to the Securities Exchange Act of 1934, which Schedule 13D as
amended also stated the named Shareholders had sole voting power with
respect to 143,200 shares as follows: Walter J. Schloss Associates -
127,200 shares; Walter J. Schloss - 10,000 shares and Edwin W. Schloss -
6,000 shares and sole dispositive power with respect to 143,200 shares
hereinabove set forth.
4) Based upon information contained in named Shareholder's Schedule 13D dated
April 19, 1979, as amended by Amendment No. 4 dated February 17, 1994,
filed pursuant to the Securities Exchange Act of 1934.
43
<PAGE>
Compliance with Section 16 (a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive Officers and Directors and persons who own more than ten percent of a
registered class of the Company's equity securities ("Reporting Persons") to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and any securities exchange on which the Company's equity
securities are then listed. The Reporting Persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain Reporting Persons that no forms were
required for those persons, the Company believes that during the fiscal year
ended February 28, 1998, all filing requirements applicable to its Reporting
Persons were complied with on a timely basis.
PART IV
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 31, 1994, the Company borrowed $500 from Lyford Corporation
("Lyford"), an affiliated company that owned 19.56% of the issued and
outstanding Common stock of the Company as of July 31, 1998. 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 Company concluded the rolling of this 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 bears interest at 12% per annum. The Restated Note was subsequently
extended three times -- first until April 1, 1997, then until April 1, 1998 and
finally until April1, 1999 and the interest rate was increased to 16%. 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. The Lyford loan is
collateralized by a junior lien on substantially all of the assets of the
Company. Mr. Kramer and Mr. Remley, directors and executive officers of the
Company, are also directors and executive officers of Lyford. The capital stock
of Lyford is indirectly held by trusts established for the benefit of certain
relatives of Messrs. Kramer and Remley.
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 July 31, 1998, the
balance due and owing to Lyford, including unpaid and accrued interest, was
$1,684.
In January 1996 the Company entered into a $500 revolving loan agreement with
Exford Corp., an affiliate of Lyford. The Company had outstanding borrowings of
$350 under this agreement which borrowings bear interest at 14%, and were
originally due on January 31, 1997. The note was subsequently extended twice,
44
<PAGE>
first until January 1, 1998 and then until January 1, 1999. 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. On September 1, 1997, Lyford purchased the Exford
loan.
In February 1997 the Company entered into a one-year promissory note in the
amount of $96 with Mentmore. The note bears interest at two percentage points
above the prime rate, with a default rate equal to the interest rate otherwise
payable plus five percent for late payment of interest or principal. The note
originally expired on February 11, 1998 and has been extended for one year until
February 11, 1999.
The Company entered into an initial one-year management advisory services
agreement in June of 1994 with Mentmore Holdings, an affiliate of Lyford and
Exford Corporations, two related companies. The agreement was automatically
extended for successive one-year periods thereafter, and is subject to
termination upon written notice by either party not less than 90 days prior to
the expiration of any extended term. The agreement provides for an annual fee of
$300. All unpaid monthly installments of the fee shall bear interest at the
lesser rate of 12% per annum, or the maximum rate allowed by law until such time
as such installments are paid. Management fees and expenses were $300 for each
of the years ended February 28, 1998, 1997 and February 29, 1996, respectively.
(See also Note 7 to the Consolidated Financial Statements included herein).
Messrs. Kramer and Remley are directors and executive officers of Mentmore.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company are
filed as part of this Report in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at February 28, 1998 and 1997.
Consolidated Statements of Operations for the years ended February 28,
1998 and 1997 and February 29, 1996.
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1998 and 1997 and February 29, 1996.
Consolidated Statements of Cash Flows for the years ended February 28
1998, and 1997 and February 29, 1996.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits
See accompanying Index to Exhibits. Company will furnish to any
stockholder, upon written request, any exhibit listed in the
accompanying Index to Exhibits upon payment by such stockholder of
Company's reasonable expenses in furnishing any such exhibit.
45
<PAGE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by Company during the
last quarter of the period covered by this Report.
None
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WELDOTRON CORPORATION
(Company)
By: /s/Richard L. Kramer
Richard L. Kramer,
Chairman of the Board
Date: October 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated. Each such person, in the capacity
indicated below, constitutes and appoints Richard C. Hoffman, as his
attorney-in-fact, to sign any and all amendments to this report.
/s/Richard L. Kramer Chairman of the Board October 5, 1998
Richard L. Kramer
/s/William L. Remley Vice Chairman and CEO October 5, 1998
William L. Remley
/s/Fred H. Rohn Director October 5, 1998
Fred H. Rohn
/s/Bryon P. Fusini Director October 5, 1998
Bryon P. Fusini
/s/Richard C. Hoffman Corp. Secretary, Director October 5, 1998
Richard C. Hoffman
/s/P. Roger Byer Chief Financial Officer October 5, 1998
P. Roger Byer (principal financial and
accounting officer)
47
<PAGE>
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