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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended: December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______ to _______
Commission file number: 0-8115
PH GROUP INC.
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(Name of Small Business Issuer in Its Charter)
OHIO 31-0737351
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2241 CityGate Drive, Columbus, Ohio 43219
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(Address of Principal Executive Offices) (Zip Code)
(614) 416-7250
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Issuer's Telephone Number, Including Area Code:
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
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The issuer's revenues for its most recent fiscal year were $9,815,619.
The aggregate market value of Common Shares held by non-affiliates of the
Registrant on June 1, 2000 was $860,294.
The number of Common Shares outstanding on June 1, 2000 was 1,720,588.
The following document has been incorporated by reference into this Form
10-KSB:
Document Part of Form 10-KSB
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Registrant's Proxy Statement for its Part III
2000 Annual Meeting of Shareholders to
be held on September 11, 2000
Transitional Small Business Disclosure Format (check one)
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
a. Business Development.
PH Group Inc. is an Ohio corporation (the "Company" or the "Registrant") that
resulted from the merger of a number of small companies over the past 20 years,
the oldest of which was incorporated as the Millersport Bank Company in 1906.
The Company sold its banking operations in 1981.
The PH Hydraulics division of the Company arose out of an acquisition in 1987 by
PH Hydraulics & Automation, Inc., a former subsidiary of the Company, of the
right to manufacture and market a line of industrial hydraulic presses which the
Company markets under the PH Hydraulics(TM) label.
The Trueblood division of the Company arose out of an acquisition in 1990 of the
right to manufacture and market a line of plastic injection molding machines
which the Company markets under the Trueblood(TM) label. The Trueblood
operations were conducted by subsidiaries of PH Hydraulics & Automation, Inc.
As of October 31, 1996, PH Hydraulics & Automation, Inc., the sole subsidiary of
the Company, was merged into the Company.
On April 30, 1997, the Company purchased the operating assets of St. Lawrence
Press, a division of St. Lawrence, Inc., for a price of approximately $1.3
million. The purchase agreement contains a contingent earnout component where
the purchase price is subject to future increases based on 5% of gross sales in
excess of an annual specified level ($2.5 million in the first two years and $3
million in the last two years) for eligible products in each of the four years
following the purchase date. The maximum earn out for any one year is $200,000
and the minimum is $50,000. A $124,775 liability has been included on the
financial statements (see Note 8) for the present value of the minimum annual
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contingent earnout payments with a corresponding increase in the cost of the
purchase price.
The acquisition was funded with cash, the assumption of liabilities, notes
payable, and restricted common stock which is subject to a repurchase agreement.
St. Lawrence presses are generally larger hydraulic presses that range up to
5,000 tons.
On April 1, 1999 the Company purchased substantially all of the assets of
Vertech Systems, LLC, a Delaware limited liability company with operations in
Houston, Texas. The Company purchased, among other things, all of the Seller's
licenses and permits, deposits, inventory, equipment, accounts receivable and
purchase orders including all work in progress. Under the Agreement, Seller
licensed to the Company certain intangible assets, relating to the Business
including all of Seller's trademarks, trade names, trade secrets, corporate
names, designs, patents and other intellectual property related to the Business.
As consideration for the sale and purchase of the assets and the license
of the intangible assets, the Company delivered a promissory note in the
principal amount of $650,000, assumed certain contractual obligations of the
Seller including certain trade payables not exceeding $100,000 in the aggregate,
issued 75,000 shares of common stock of PH Group Inc. to the members of the
Seller (25,000 shares being restricted for two years with a put price of $1 per
share), and a royalty provision based on future sales of Vertech products of up
to 10% of sales, reduced by certain expenses incurred by the Company such as
warranty.
The Company incurred net losses of approximately $1,545,000 and $491,000 in 1999
and 1998, respectively. In addition, current liabilities exceed current assets
by approximately $2,055,000 at December 31, 1999 and the Company has a
shareholders' deficit of $46,036 at December 31, 1999. Should losses continue to
occur, the Company will continue to have difficulty satisfying liabilities as
they come due and, accordingly, may not be able to continue as a going concern.
Management continues to seek additional equity investors and amendments to its
existing bank agreements to provide the Company long-term debt financing.
Currently, the Company's two line of credit agreements with two banks expired on
February 29, 2000 and the banks have granted the Company a 90-day extension. As
of June 14, 2000 the Company continues to negotiate an extension of the line of
credit. In view of these matters, realization of a portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet its
financing requirements and the success of its future operations. Additionally,
the Company seeks to improve its margins in its manufacturing process and has
implemented various cost savings plans to reduce operating losses. Accordingly,
management believes the actions being taken to improve the Company's operating
and financial requirements will enable the Company to return to profitable
operations, realize its assets and satisfy its liabilities in the normal course
of business.
b. Business of Issuer
Business and Principal Products
The Company operates principally in one business segment, the production of high
quality equipment used in the machine tool industry. Based upon its market
research, it is management's belief that the Company has the widest range of
standard and special design hydraulic presses manufactured in the United States.
Hydraulic presses are used in a number of metalforming applications, primarily
in the automotive, aircraft, appliance, and prototype industries. Typical
metalforming applications are assembly, forming, trimming, embossing, and
compression molding. The Company estimates that the market for hydraulic presses
is in excess of $150 million per year. The Company's hydraulic presses range
from 1 to 5,000 tons and are marketed under the names of PH Hydraulics and St.
Lawrence Press. The Company's injection molding product line is used by the
automotive, electrical, medical, and consumer products industries. The process
involves inserting a non-plastic part in a mold and injecting plastic around the
part. The Company estimates that the market for its injection molding machines
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is in excess of $200 million. The injection molding machines have a tonnage
range from 15 to 450 tons and are marketed under the Trueblood label.
The Company sells its products primarily through independent sales
representatives. The product lines are separately managed internally by company
sales personnel who also administer the Company sales and marketing activities.
The following table shows the Company's sales by category within the machine
tool industry for the years 1999, 1998, and 1997.
<TABLE>
<CAPTION>
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1999 1998 1997
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Dollars Percent Dollars Percent Dollars Percent
<S> <C> <C> <C> <C> <C> <C>
Machine Tools 9,351,612 95.3 13,036,460 97.3 13,493,256 98.1
Repair Parts 287,564 2.9 262,062 2.0 214,992 1.6
Repair Service 176,443 1.8 95,835 .7 43,757 .3
Total 9,815,619 100 13,394,357 100 13,752,005 100
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</TABLE>
Sources and Availability of Raw Materials
As a matter of policy, the Company uses standard industrial components in the
manufacture of its products. This policy is perceived as a strong marketing
advantage. Since steel is the largest material component of the Company's
product, its availability impacts the Company's ability to meet promised
delivery dates. The Company does not, however, depend heavily on certified or
specialty steels. Hydraulic cylinders and manifolds are key purchase components
which vary in availability and lead times. All of the components used by the
Company in the manufacture of its products are available domestically from a
wide range of suppliers. The Company has experienced no difficulty in obtaining
components from suppliers and anticipates no future difficulty.
Backlog
Backlog at December 31, 1999 was approximately $6,849,000, all of which is
expected to be completed in 2000. Backlog at December 31, 1998 was approximately
$5,254,000 all of which shipped in 1999.
Competition
The Company's two hydraulic press lines face different competition based on the
size of the press. The Company believes that, because of its wide product range
and customer base, it is in a unique position to gain market share for both
product lines. The Company's smaller hydraulic presses, sold under the PH
Hydraulics name, ranging from 1 to 300 tons, have competition from four to six
small companies. These presses, especially less than 50 tons, are sold on the
basis of price and delivery time. The larger presses, sold under the St.
Lawrence Press name have competition from significantly larger companies. The
competitive factors for sales of the larger hydraulic presses are technical and
engineering design, delivery, as well as price. Management
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believes that, because of the unique combination of two well-regarded product
lines, it will gain market share. Both product lines have excellent reputations
for performance, quality and engineering design.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has not had a material effect upon the capital expenditures,
earnings or competitive position of the Company. The Company believes that the
nature of its operations has little, if any, environmental impact. The Company,
therefore, anticipates no material capital expenditures for environmental
control facilities for its current fiscal year or for the foreseeable future.
Employees
As of December 31, 1999, the Company had 60 employees, all of whom were full
time.
Significant Customers
In 1999, one of the Company's customers accounted for 14% of sales and 6% of the
accounts receivable balance. No other customer accounted for more than 10% of
sales. In 1998, one of the Company's customers accounted for 15% of sales and
24% of the accounts receivable balance.
Capital Expenditures and Research and Development
Capital expenditures totaled approximately $349 thousand and $265 thousand for
the years ended December 31, 1999 and 1998, respectively. Capital expenditures
consist of equipment to manufacture parts, material handling equipment,
computers and office furniture and fixtures.
Research and development costs of $108 thousand were expensed during 1999. In
1998 research and development costs were $39 thousand.
Year 2000 Matters
Issues related to the year 2000 systems issues are addressed in Part II, Item 7,
"Management Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere in this document.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases a manufacturing and office facility at 2241 CityGate Drive,
Columbus, Ohio, containing approximately 40,750 square feet. The lease term is
September 1, 1999 through August 31, 2014. The rent payments escalate from an
annual amount of $275,292 in years one through five, to $291,810 for years six
through ten, to $310,194 in years eleven through fifteen.
The Company owns land in Franklin County, Ohio recorded on the Company's books
at $20,570. In December 1998 the Company sold approximately 470 acres of
undeveloped land in Perry County, Ohio that had been recorded on the Company's
books at $149,600 to the U. S. Department of Agriculture for a consideration of
approximately $480 per acre.
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The Company leased manufacturing and office space at 12500 South Wayne Road,
Romulus, Michigan, containing approximately 20,000 square feet. The original
lease term is May 1, 1997 through April 30, 2002 at a monthly rental of $14,850.
A portion of the space was subleased for $2,400 per month. The Company had the
right to cancel its lease in April 1999, which was exercised. The Wayne County
Airport Authority has issued an order of condemnation on the property due to
airport expansion. The Company vacated the property in early 1999. In June 2000,
the Company negotiated a settlement with representatives of Wayne County,
Michigan relating to the closing of the Company's former Michigan facility. The
Company will receive approximately $150,000 (net of expenses) in 2000.
The Company believes that all of the buildings owned or leased by it are well
maintained, in good operating condition, and are suitable for their present
uses.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party, nor is any of its property subject to, any
material pending legal proceedings, other than ordinary, routine litigation
incidental to the business, nor are any such proceedings known by the Company to
be contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
a. Market Information
The Company's Common Shares are traded over the counter. The price of the
Company's Common Shares is found on the Electronic Bulletin Board. The range of
high and low bids for the Registrant's Common Shares for each quarter during its
past two fiscal years is as follows:
Year Quarter High(a) Low(a)
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1999 4th $0.88 $0.38
3rd 1.25 0.38
2nd 1.63 1.25
1st 2.38 1.25
1998 4th 2.63 0.50
3rd 3.88 1.50
2nd 4.25 3.00
1st 4.13 2.38
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(a) Adjusted for a 5-for-4 stock split distributed on January 2, 1998.
The above quotations reflect inter-dealer prices, without retail mark up, mark
down or commission and may not represent actual transactions.
On December 1, 1998, the Company sold options to purchase 5,000 common shares to
each of Alida L. Breen, a director of the Company, and Kenneth J. Warren, the
Secretary of the Company. Each option was sold at a price of $1.50 per share.
Each option is exercisable at a price of $.80 per share and has a term of ten
years. The Company
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sold the options in reliance upon the exemptions from registration provided by
Sections 4 (2) and 4 (6) under the Securities Act of 1933 based upon the limited
number of purchasers and the status of each individual as an officer or director
of the Company.
In conjunction with the Vertech Systems, LLC asset acquisition, the Company
agreed to issue 75,000 shares of common stock. These securities have not been
registered under the Securities Act of 1933, as amended, or any state securities
laws and may not be offered or sold except in compliance therewith. Twenty five
thousand (25,000) of these shares are subject to a repurchase agreement. The
Company has guaranteed the value of these shares by providing the holders with a
put option of $1.00 per share following the holder's minimum 2 year holding
period of the shares. These 25,000 shares were not yet issued at December 31,
1999.
b. Holders
As of December 31, 1999, there were approximately 834 record holders of the
Company's Common Shares.
c. Dividends
The Company did not pay cash dividends in 1999 or 1998. Bank lending agreements
contain restrictions against cash dividend payments unless certain financial
covenants are met. The Company's Common Shares were split 5-for-4 on January 2,
1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-KSB which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In
addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of the Company which are not statements
of historical fact constitute forward-looking statements within the meaning of
the Act. Examples of forward-looking statements include, but are not limited to
(a) projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items; (b) statements of plans and objectives of the Company or its management
or Board of Directors, including those relating to products or services; (c)
statements of future economic performance; and (d) statements of assumption
underlying such statements. Words such as "believes", "anticipates", "expects",
"targeted", and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to (a) the strength of the U.S. economy
in general; (b) the ability to improve processes and business practices to keep
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pace with economic, competitive and technological environments, including
successfully addressing Year 2000 issues; (c) the ability to increase market
share and control expenses; (d) acquisitions and the ability to successfully
integrate their operations; (e) the ability to raise additional capital through
stock issuances and (f) the success of the Company at managing the risks
involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
1999 Compared with 1998
The Company incurred net losses of approximately $1,545,000 and $491,000 in 1999
and 1998, respectively. In addition, current liabilities exceed current assets
by approximately $2,055,000 at December 31, 1999 and the Company has a
shareholders' deficit of $46,036 at December 31, 1999. Should losses continue to
occur, the Company will continue to have difficulty satisfying liabilities as
they come due and, accordingly, may not be able to continue as a going concern.
Management continues to seek additional equity investors and amendments to its
existing bank agreements to provide the Company long-term debt financing.
Currently, the Company's two line of credit agreements with two banks expired on
February 29, 2000 and the banks have granted the Company a 90-day extension. As
of June 14, 2000 the Company continues to negotiate an extension of the line of
credit. In view of these matters, realization of a portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet its
financing requirements and the success of its future operations. Additionally,
the Company seeks to improve its margins in its manufacturing process and has
implemented various cost savings plans to reduce operating losses. Accordingly,
management believes the actions being taken to improve the Company's operating
and financial requirements will enable the Company to return to profitable
operations, realize its assets and satisfy its liabilities in the normal course
of business.
Net Sales
PH Group Inc. generates revenues from three sources: hydraulic press equipment
sales, plastic injection molding equipment sales and the sale of parts and
service. Sales in the last four months of the year were negatively impacted by
the relocation to the new manufacturing facility. Sales for the year 1999
totaled $9.8 million, a 26.7% decrease from the same period in 1998. Hydraulic
press sales for 1999 decreased by 28.4% to $7.3 million. Plastic injection
molding sales decreased 27.7% for the year to $2.1 million. Parts and service
revenues increased 29.6% to $464 thousand. The Company entered 1999 with a $5.3
million backlog of orders. The year 1999 ended with a backlog of orders of $6.8
million that will ship in 2000.
New orders for hydraulic presses increased 3.8% in 1999, to $9.7million. Orders
for plastic injection molding machines declined 72.2% to $2.3 million. Parts and
service orders increased by 45.2% to $484 thousand during 1999.
Gross Margin
Gross Margin as a percent of sales declined slightly in 1999 to 24.9% compared
to 25.0% the previous year. Large hydraulic presses were adversely impacted by
the need to hire outside material handlers (riggers) due to size and weight
restrictions of the old manufacturing facility. These manufacturing constraints
have been eliminated with the Company's move to its new CityGate Industrial Park
facility complete with a 30-ton overhead crane. Plastic injection molding gross
margins were reduced in 1999 as machine sales from a PH acquisition, Vertech,
were essentially prototypes that carried significant excess costs. The Company
also incurred $109 thousand in R&D costs for Vertech during 1999. In addition, a
special warranty charge of $100 thousand was taken in 1999 due principally to
the more expensive St. Lawrence hydraulic press equipment. Material cost of
shipments was 52.7% of sales in both 1999 and 1998 reporting periods.
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Labor as a percent of sales increased to 10.1% versus 9.3% in 1998. Labor
dollars expended decreased in 1999 by $247 thousand as staffing was reduced in
reaction to declines in product shipments. Headcount reduction savings were
partially offset by increased wage rates paid to keep key shop employees.
Selling, General and Administrative
Selling, General and Administrative ("SG & A") expenses for the year 1999
decreased $335 thousand or 8.4% over the comparable 1998 costs. Additionally,
one-time moving expenses of $134 thousand were recognized during 1999. Excluding
the moving expenses, SG &A expenses would have been reduced $469 thousand, or
11.7%.
As a percent of sales, SG&A represents 37.4% in 1999 compared to 29.9% in 1998.
Wages paid decreased by $130 thousand 1999 as compared to 1998. Staff reductions
and management pay cuts attributed to most of this decline. Bonus payments were
eliminated in 1999, saving $21 thousand. Related taxes and benefits decreased
$48 thousand in the period.
Advertising and promotion expenses were reduced by $97 thousand as the Company
scaled back participation in trade shows and advertising.
Professional services declined by $102 thousand in 1999. Fees related to SEC
filings decreased $82 thousand. In 1998 filings were required due to the split
of the Company's common stock, in addition to the creation of the stock option
plan. These filings were prepared by outside legal counsel, and had no
comparable charge in the current year. Audit fees were reduced $35 thousand in
the period.
Rent expense decreased in 1999 by $61 thousand as the St. Lawrence hydraulic
press facility in Romulus, MI was vacated due to the Detroit Metro airport
expansion and condemnation action. The Company's new CityGate facility was
occupied in mid-September. Future rent expense will return to levels similar to
those in 1998.
Property and casualty insurance decreased $61 thousand in 1999 compared to 1998.
This reduction was in part due to sales results not reaching projected levels.
In addition some benefit was gained in the closure of the Romulus facility.
The Company expensed $50 thousand in salaries, rent and transportation incurred
to close the Houston, TX facility after the Vertech acquisition and $40 thousand
in signing bonuses and travel expenses for a Vertech principal. Non-cash
expenses, related to intangible asset amortization resulting from the Vertech
acquisition, increased $27 thousand or 9.6% for 1999.
Interest Expense
Interest expense for the Year 1999 is 10.0%, or $29 thousand greater than the
same period in 1998. The Company increased borrowings under its line of credit
primarily to finance the Vertech acquisition, consolidate operations into one
facility, and to fund capital requirements. Additional debt was incurred in the
acquisition of the Vertech product line.
Income Taxes
For the year 1999 a net income tax expense of $43 thousand has been recognized,
compared with a $297 thousand benefit the previous year. Although a net loss was
incurred, a full valuation allowance was recognized. Reference is made to Note 3
of Notes to Financial Statements for an analysis and explanation of the current
and deferred provision ( benefit ) for income taxes in 1999 and 1998.
1998 Compared with 1997
Net Sales
Sales for the year of 1998 totaled $13.4 million, a 2.6% decrease over the same
period in 1997. Press sales for the year of 1998 increased by 47% to $10.1
million. Trueblood sales decreased 49% for the year to $2.9 million. Parts and
service revenues increased 39% to $358 thousand. The Company entered 1998 with a
$6.5 million backlog of orders, most of which shipped in 1998. 1998 ended with a
backlog of orders of $5.3 million that will ship in 1999.
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New orders for presses decreased 7.0% in 1998. Orders for injection molding
machines declined 63%. 1997 orders of injection molding machines was positively
impacted by a $3.4 million order from one customer that was not duplicated in
1998. Parts and service orders increased by 84% during 1998, adding increased
business having greater profit margins.
Gross Margin
Gross Margin in 1998 has been adversely impacted by the shipment of highly
specialized presses, and the additional costs associated with metric machines.
Many of these machines were research and development related projects using new
technology unique to a given customer. Material cost of shipments in the period
was 52% of sales compared to 47% for the same period in 1997. Cost projections
on specialty machines used to price these projects were understated compared to
the actual material, labor and engineering expenses incurred.
Labor as a percent of sales increased to 9.7% versus 8.8% in 1997. This increase
was primarily due to staffing requirements at the Romulus, Michigan facility
performed by Columbus personnel. The corresponding labor rate is lower when
provided by Columbus personnel as compared to Romulus, Michigan. The benefit of
that reduced rate was eroded by travel-related costs. In addition, the unique
nature of the special orders required more labor hours to complete.
Selling, General and Administrative
Selling, General and Administrative ("SG & A") expenses for the year 1998 have
increased $487,000 or 13.9% over the comparable 1997 amount primarily due to
salary, consulting fees, investment banking fees, travel and entertainment
expenses, and rent of the vacated Romulus facility.
As a percent of sales, SG&A represents 29.9% in 1998 compared to 25.6% in 1997.
Salaries increased $86,000 more in 1998 compared to 1997 amounts. The Company
began to see a decline in salary expense as all work transferred from the
Romulus facility to Columbus, thus eliminating duplicate positions and expenses
at the two facilities.
Consulting expenses in the amount of $45,000 were incurred to review the Company
computer software system and its implementation. Investment banking fees of
$25,000 were incurred in an effort to obtain outside equity financing. There
were no comparable charges in 1997. Travel and entertainment expenses are
$25,000 higher than the comparable period of 1997 in part due to the staffing of
Romulus with personnel from Columbus to complete orders in progress.
Rent expense in the amount of $133,000 relating to the Romulus facility has been
reclassified from Manufacturing to Selling, General and Administrative expense
as the building was used primarily as a storage facility during the last half of
the year. The Company had a full 12 months of the St. Lawrence facility expenses
in 1998 as compared to eight months in 1997.
Research and Development expenses in 1998 of $39,000 were incurred with an
outside engineering firm in the design of new products and processes. In-house
engineering efforts on the same projects amounted to approximately $50,000 of
additional expense. There were no similar expenses in 1997.
Interest Expense
Interest expense for the Year 1998 is 50.7% greater than the same period in
1997. The new design and complex nature of many of the large manufacturing jobs
in 1998 required significant cash resources and added to the increased amount of
time that it takes to convert the order to cash. This has led to increased
borrowing against the credit line, resulting in greater interest expense.
Income Taxes
For the year 1998 a net income tax benefit of $297,000 has been recognized,
compared with a $331,300 expense in the previous year. This is due to the net
loss incurred in 1998.
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Liquidity and Capital Resources
The Company's primary cash requirements are for operating expenses and capital
expenditures. These cash requirements have historically been met through a
combination of cash flow from operations, and bank lines of credit.
Cash provided by operations in 1999 totaled $1,684,000. Offsetting the net loss
of $1,545,000 and an increase in accounts payable of $548,000 was cash provided
from accounts receivable of $2,127,000, inventory of $648,000, and customer
deposits of $183,000. The change in accounts receivable was the result of
reduced shipments in the last four months of the year. This was in large part
due to the relocation to the new CityGate facility. The move took longer to
complete, and was much more disruptive to the production process than had been
anticipated. The increase in accounts payable was impacted by the slowdown in
shipment activity.
Investing activities used $535,000 in cash flow. This was primarily the result
of acquiring the assets of Vertech Systems, LLC of $219,000 and capital
investment in the new facility of $307,000.
Financing activities used $1,145,000 of cash flow. The cash outflow was
primarily due to contractually obligated payments on the term loan of $422,000
and reduction in available borrowings on the line of credit of $524,000.
At December 31, 1999, The Company had available borrowing capabilities of
$369,000 under its short-term debt facilities. Management believes that these
sources, along with internally generated funds from operations are sufficient to
fund immediate operating expenses and capital requirements. The Company is
currently seeking a new long-term banking relationship, as well as an equity
partner to fund future growth of the business.
Income Taxes
The balance sheet at December 31, 1999 contained no deferred tax balance,
compared to 1998, which included a deferred tax asset of $473,800, net of a
valuation allowance of $54,000. In 1999 a full valuation allowance was recorded,
eliminating any deferred tax benefit. The valuation allowance relates primarily
to the capital loss carry forward and deferred costs. The deferred tax asset is
net of a valuation allowance since it is more likely than not that a portion of
the deferred tax asset may be realized in the future. Reference is made to Note
3 of Notes to Financial Statements for an analysis and explanation of the
current and deferred provision ( benefit ) for income taxes in 1999 and 1998.
Inflation
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. We believe that, because rates of inflation have
been moderate during the periods presented, inflation has not had a significant
impact on our results of operations.
Year 2000 Compliance
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, these programs could cause date-related transaction
failures. As of the date of the filing of this annual report on Form 10-K, the
Company has not experienced any Year 2000 problems, either internally or with
third party vendors or customers. Although the Company is not aware of any Year
2000 problems experienced by its third party vendors and does not expect that
its operations will be affected by any Year 2000 problems in the future, there
can be no assurance that the Company's operations will not be affected by Year
2000 problems. However, the Company believes that the possibility of significant
interruptions of normal operations is remote.
Regarding "Forward-Looking" Statements
The foregoing outlook contains forward-looking statements that are based on
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from current expectations due to a number
of factors, including general economics; competitive factors and pricing
pressures; shifts in market demand;
11
<PAGE> 12
the performance and needs of industries served by the Company's business; actual
future costs of operating expenses such as material, wages and benefits; actual
cost of continuing investments in technology; the availability of capital to
finance possible growth; the ability of management to implement Company strategy
of acquisitions and process improvements; and the risks described from time to
time in the Company's SEC reports.
Market Price and Dividends
The Company's common stock is traded over the counter on the electronic bulletin
board (NASDAQ) under the symbol PHHH. The Company's stock is thinly traded;
however, to stimulate trading volume and liquidity the Company split the stock
25 percent effective January 2, 1998. The Company goal is to have the Company's
stock listed on the NASDAQ small cap market.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to establish accounting and reporting requirements for
derivative instruments. This standard requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. In June
1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137)
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 deferred the adoption of
SFAS 133 until January 1, 2001. The Company is currently assessing the impact of
this statement on its results of operations and financial position.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company, and the related notes, together with
the report of Deloitte & Touche LLP dated June 14, 2000, are set forth at pages
F-1 through F-16 attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
At a meeting held on July 10, 1998, the Board of Directors of PH Group Inc. (the
"Company") agreed to dismiss, effective July 21, 1998, the accounting firm of
Greene & Wallace, Inc., which had served as independent public accountants for
the Company prior to and until July 21, 1998. At the same meeting, the Company
agreed to appoint the accounting firm of Deloitte & Touche LLP to serve as
independent public accountants for the Company effective July 21, 1998. The
decision to change accountants was recommended by the Audit Committee of the
Board of Directors, and approved by the Board.
The report of Greene & Wallace, Inc. on the financial statements for the fiscal
year ended December 31, 1997 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
The report of Deloitte & Touche LLP on the financial statements for the fiscal
year ended December 31, 1998 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. The report of Deloitte & Touche LLP on the financial
statements for the fiscal year ended December 31, 1999 contained no adverse
opinion or disclaimer of opinion but was modified as to uncertainty regarding
going concern.
12
<PAGE> 13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
Bob Binsky, age 60, has served as a director of the Company since 1993. Mr.
Binsky has served as Chairman of the Board of Cable Link, Inc., a company that
refurbishes cable television components, since July 31, 1995. Mr. Binsky's
current term expires in 2001.
Alida Breen, age 52, has served as a director of the Company since 1996. Since
1979, Ms. Breen has been Vice President of Finance of Ohio Transmission & Pump
Company, a distributor of industrial products. Ms. Breen's current term expires
in 2000.
Michael W. Gardner, age 49, has served as a director of the Company since 1996.
From 1987 until October 1996, Mr. Gardner served as Vice President of
Manufacturing of PH Hydraulics. From October 1996 until July 1998, Mr. Gardner
served as Vice President of Manufacturing of the Company and from July 1998 has
served as Senior Vice President. Mr. Gardner's current term expires 2001.
Terry L. Sanborn, age 57, has served as a director of the Company since 1991.
From 1993 to 1997, Mr. Sanborn served as Chief Operating Officer of Medex, Inc.,
a medical device manufacturing company. Since retiring from Medex in 1997, Mr.
Sanborn has been a business consultant and advisor. Mr. Sanborn's current term
expires in 2001.
Charles T. Sherman, age 54, has served as a director of the Company since 1987.
From 1987 until 1996, Mr. Sherman served as Vice President of Operations of the
Company and as President of PH Hydraulics and Automation, Inc. ("PH
Hydraulics"), the wholly owned subsidiary of the Company that was merged into
the Company in 1996. Mr. Sherman was elected President of the Company in May
1996. Mr. Sherman's current term expires in 2000.
EXECUTIVE OFFICERS
All of the executive officers of the Company are named above, except:
Gregory N. Bakeman, age 44, has been Chief Financial Officer of the Company
since May, 2000. From March 1998 until April 2000 Mr. Bakeman served as CFO of
Micro C Technologies Inc., a manufacturer of semi-conductor capital equipment.
Kenneth P. Furlong, age 46, has been Treasurer of the Company since November
1997. From 1977 to 1997, Mr. Furlong was employed as Supervisor, Cost Accounting
by The Marion Power Shovel Company, a manufacturer of surface mining equipment.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10
percent of the Company's common shares, to file reports of ownership and changes
in ownership with the SEC. Executive offices, directors and greater than 10
percent shareholders 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, the
Company believes that, with respect to transactions occurring during the 1999
fiscal year, all filing requirements applicable to its executive officers,
directors and greater than 10 percent shareholders were complied with.
No disclosure is required under Item 405 of Regulation S-B.
13
<PAGE> 14
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table shows for the last three fiscal years, cash compensation and
other benefits paid or provided by the Company to the chief executive officer of
the Company whose salary totaled more than $100,000 during the 1999 fiscal year.
All dollar amounts are rounded to the nearest whole dollar.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Name and Principal Year Annual Annual Long Term All Other
Position Compensation: Compensation: Compensation Compensation
Salary ($) Bonus ($) Awards/Common
Shares Underlying
Options (#)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles T. Sherman 1999 $131,000 - 0 - 25,000 $27,854(2)
President (1) 1998 $165,000 $50,000 12,500(3) $27,854
1997 $150,000 $25,000 0 $27,854
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Sherman became President of the Company on May 28, 1996. Prior to that
time, he served as President of PH Hydraulics, the wholly owned subsidiary
of the Company that was merged into the Company in October 1996.
(2) Represents premiums paid by the Company for an insurance policy of the
life of Mr. Sherman in the face amount of $425,000 pursuant to a split
Dollar Agreement entered into on September 11, 1997.
(3) Reflects adjustment for five-for-four share split on January 2, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grants of options made
under the Company's 1997 Stock Incentive Plan (the "1997 Plan") during the 1999
fiscal year to the executive officer named in the Summary Compensation Table.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Name Number of Common % of Total Options Exercise Price Expiration Date
Shares Underlying Granted to Employees ($/Share)
Options Granted (#) in Fiscal Year
(1)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles T. Sherman 25,000 55.5% $1.38 February 9, 2009
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These options vest in two equal annual installments beginning on
February 9, 1999; however, each of these options becomes fully exercisable in
the event of certain defined changes-in-control of the Company.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
There were no exercises of stock options during fiscal year 1999 by the
executive officer named in the Summary Compensation Table.
EMPLOYMENT AGREEMENT
Charles T. Sherman has an employment agreement with the Company effective
January 23, 1997. Pursuant to an amendment the contract was extended to August
31, 2003. A copy of the amendment us included as Exhibit 10.3 of this Form
10KSB.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Non-employee directors receive a fee of $500 for each board meeting
attended and $200 for each committee meeting attended, unless the director is a
chair of the committee, in which case the fee is $450 per committee meeting
attended. On January 21, 1998, the Board determined to increase the fees paid to
non-employee directors by authorizing the issuance of 250 common shares to each
non-employee director on the date of each annual meeting of shareholders.
The non-employee directors are also eligible to receive options under the
1997 Plan. On the date of each annual meeting, an option covering 5,000 common
shares will be granted automatically to each person who is first elected as a
non-employee director at such meeting. Each person who is first appointed as a
non-employee director
14
<PAGE> 15
to fill a vacancy on the Board is automatically granted an option covering a
number of common shares equal to 5,000 multiplied by a fraction, the numerator
of which equals the number of whole months remaining in the term for which the
director is appointed and the denominator of which is 24. If a new director
receives an option under the 1997 Plan and is not the beneficial owner of at
least 1,000 common shares as of the first annual meeting following his election
or appointment, the director is required to exercise such option with respect to
at least 1,000 common shares on the date of such annual meeting, subject to
compliance with all applicable laws, rules and regulations. In addition, an
option will be granted automatically to each person whose term of office as a
non-employee director expires on such date or continues through such annual
meeting or who is re-elected for a subsequent term on such meeting date. The
number of common shares underlying these options is based upon the increase in
the Company's total income before taxes each year, and ranges from 0 to 3,000
common shares. Each option granted to a non-employee director has and will have
an exercise price equal to the fair market value of a common share on the date
of grant or with respect to options granted based on the increase in the
Company's total income before taxes, on the date of the annual meeting of
shareholders of the Company occurring during the applicable Performance Year, as
defined in the 1997 Plan. Each option is subject to the vesting schedule
outlined in the 1997 Plan. Each option will lapse and cease to be exercisable
upon the earliest to occur of: (a) ten years from the grant date; (b) nine
months after the option holder ceases to be a director because of death or
disability; (c) immediately upon resignation of the option holder as a director;
and (d) one year after the option holder ceases to be a director for any reason
other than death, disability or resignation. Directors employed by the Company
do not receive any separate compensation for their services as directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 1, 2000, certain information with
respect to the beneficial ownership of commons shares by (I) each person,
including any group of persons, known to the Company to be the beneficial owner
of more than five percent of the outstanding common shares, (ii) each director
of the Company, (iii) the executive officers identified in the Summary
Compensation Table, and (iv) the Company's directors and executive officers as a
group:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner (1) Percent of Class
------------------- -------------------- ----------------
<S> <C> <C>
Phoenix Management, Ltd. (2) 382,500 (2)(3) 24.0%
Charles T. Sherman, Director and 274,847 (3)(4) 15.5%
Chief Executive Officer (4)
Bob Binsky, Director (5)(6) 165,042 (3)(5)(6) 10.3%
Theodore P. Schwartz (7) 116,435 (3)(7) 7.3%
Michael W. Gardner, Director 46,250 (3)(8) 2.9%
And Senior Vice President (8)
Kenneth J. Warren (9) 16,000 (9) 1.0%
Alida L. Breen, Director (6)(11) 14,750 (11) (10)
Terry L. Sanborn (6)(12) 28,500 (12) 1.8%
All directors and executive officers 502,389 (13) 31.5%
as a group (five pesons) (13)
Phoenix and its Members (14) 801,074 (14) 50.2%
</TABLE>
(1) Unless otherwise indicated, the beneficial owner has sole voting and
investment power over these common shares subject to the spousal rights, if any,
of the spouses of those beneficial owners who have spouses. Under the rules of
the Securities and Exchange Commission (the "SEC"), options which become
exercisable within 60 days of
15
<PAGE> 16
June 1, 2000 are deemed to be currently exercisable options and the holder
thereof is deemed to beneficially own the underlying common shares.
(2) The address of Phoenix Management, Ltd. ("Phoenix") is c/o Charles T.
Sherman, 2241 City Gate Drive, Columbus, Ohio 43219. The members of Phoenix, an
Ohio limited liability company, and their percentages of ownership in Phoenix,
are Bob Binsky (28.5 percent), Michael W. Gardner (5 percent), Theodore P.
Schwartz (31.667 percent), Charles T. Sherman (31.667 percent) and FSW
Investments LLC (3.167 percent) (collectively, the "Members"). Includes (a)
324,375 common shares owned outright by Phoenix, (b) 39,375 common shares as to
which Phoenix has the right to acquire (by virtue of assignment) but has yet to
purchase under the agreements dated September 11, 1996, to purchase common
shares from Lyman Brownfield, Candace Brownfield, Charlotte Brownfield (a.k.a.
Charlotte Huddle), individually and as Trustee of the Candace Brownfield Trust,
and Diane McBee (collectively, the "Brownfield Agreements"), and as to which
Phoenix has the power to vote by proxy, and (c) 18,750 common shares as to which
Phoenix has the right to acquire (by virtue of assignment) but has yet to
purchase under the agreement, dated June 6, 1996, to purchase common shares from
Paul M. Gillmor (the "Gillmor Agreement"). As to the 18,750 common shares
covered by the Gillmor Agreement, Mr. Sherman and Mr. Schwartz, individually,
have the power to vote by proxy; therefore, such 18,750 common shares are also
reported as beneficially owned by each of Mr. Schwartz and Mr. Sherman
individually.
(3) Each Member shares the power to vote or direct the voting and to
dispose or direct the disposition of the 324,375 block of common shares owned
outright by Phoenix by virtue of each Member being a member in Phoenix. Each of
the Members also shares the power to vote or direct the voting of the 39,375
common shares as to which Phoenix has the power to vote by proxy. By virtue of
assignment, Phoenix has the right to acquire the 39,375 block of common shares
under the Brownfield Agreements and the right to acquire the 18,750 block of
common shares under the Gillmor Agreement. Until the purchase of the 18.750
block of common shares from Mr. Gillmor, Mr. Sherman and Mr. Schwartz share the
power to vote such common shares by virtue of a proxy granted by Mr. Gillmor,
and such common shares are also reported as beneficially owned by each of Mr.
Schwartz and Mr. Sherman. The common shares listed as beneficially owned by each
Member individually are exclusive of the common shares such Member may be deemed
to indirectly beneficially owned by virtue of his membership interest in
Phoenix.
(4) Mr. Sherman's address is c/o PH Group Inc., 2241 CityGate Drive,
Columbus, Ohio 43219. Includes 90,747 common shares owned outright by Mr.
Sherman, 100 common shares owned jointly by Mr. Sherman and his wife as to which
they share voting and dispositive power, and 83,750 common shares subject to
currently exercisable options. Also includes 18,750 common shares with respect
to which Mr. Sherman and Mr. Schwartz share the power to vote by virtue of a
proxy granted by Mr. Gillmor. Such common shares are also reported as
beneficially owned by Mr. Schwartz. Mr. Sherman's wife has sole voting and
dispositive power with respect to 250 common shares reported as beneficially
owned by Mr. Sherman. Mr. Sherman is a Member of Phoenix.
(5) Mr. Binsky's address is c/o Cable Link, Inc., 280 Cozzins Street,
Columbus, Ohio 43215. Includes 137,042 common shares owned outright by Mr.
Binsky and 28,000 common shares subject to currently exercisable options. Mr.
Binsky is a Member of Phoenix.
(6) Does not include 250 common shares which the director will have the
right to receive at the Annual Meeting as additional director's compensation.
See "COMPENSATION OF MANAGEMENT - Compensation of Non-Employee Directors."
(7) Mr. Schwartz's address is 3817 Lyon Drive, Columbus, Ohio 43220.
Includes 16,435 common shares owned outright by Mr. Schwartz. Also includes
18,750 common shares with respect to which Mr. Schwartz and Mr. Sherman share
the power to vote by virtue of a proxy granted by Mr. Gillmor. Such common
shares are also reported as beneficially owned by Mr. Sherman. Mr. Schwartz is a
Member of Phoenix.
(8) Mr. Gardner's address is c/o PH Group Inc., 2241CityGate Drive,
Columbus, Ohio 43219. Includes 1,250 common shares jointly owned by Mr. Gardner
and his wife as to which they share voting and dispositive power. Also includes
45,000 common shares subject to currently exercisable options. Mr. Gardner is a
Member of Phoenix.
16
<PAGE> 17
(9) Mr. Warren's address is 5920 Cromdale Drive, Suite 1, Dublin, Ohio
43017. Includes 500 common shares owned by FSW Investments LLC, of which Mr.
Warren is a member, and 15,500 common shares subject to currently exercisable
options. Does not include 250 common shares which Mr. Warren will have the right
to receive at the Annual Meeting as additional compensation.
(10) Less than 1 percent.
(11) Ms. Breen's address is c/o Ohio Transmission & Pump Co., 666 Parsons
Avenue, Columbus, Ohio 43215. Includes 3,000 common shares owned outright by Ms.
Breen, and 11,750 common shares subject to currently exercisable options.
(12) Mr. Sanborn's address is 4817 88TH Street East, Bradenton, Florida
34202. Includes 25,500 common shares which Mr. Sanborn owns outright, and 3,000
common shares subject to currently exercisable options.
(13) Sherman, Binsky, Gardner, Breen and Sanborn
(14) Includes all common shares reported as beneficially owned by Phoenix
and all common shares reported as beneficially owned individually by the
Members, except that the 18,750 common shares listed as beneficially owned by
each of Phoenix, Mr. Sherman and Mr. Schwartz are included only once. Under the
Operating Agreement of Phoenix which expires December 31, 2016, (i) the common
shares owned by Phoenix are voted in accordance with the vote of a majority in
interest of its Members, and (ii) the Members are obligated to vote common
shares owned by them individually in the same manner as the common shares voted
by Phoenix.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not Applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS.
1. DESCRIPTION OF BUSINESS
1.1. Amendment to Asset Purchase Agreement between the Company and St.
Lawrence Hydraulics, Inc. f/k/a St. Lawrence Press Company, Inc. dated
September 22, 1999 (incorporated by reference to Exhibit 1.1 of the
Company's Quarterly Report on Form 10 - QSB for the quarterly period
ended March 31, 1997; Commission File No. 0-8115).
1.2. First Amendment of Aemeded And Restated Asset Purchase Agreement
between the Company and Vertech Systems, LLC dated October 26, 1999
(incorporated by reference to Exhibit 1.2 of the Company's Report Form
8-K filed April 15, 1999, and Form 8-K/a filed June 15, 1999 ;
Commission File No. 0-8115).
2. DESCRIPTION OF PROPERTY
2.1. Building Lease between the Company and Parker Industrial, L.L.C.,
dated September 15, 1998.
2.2. First Amendment To Lease Agreement between the Company and Parker
Industrial, L.L.C., dated December 23, 1998.
17
<PAGE> 18
10. MATERIAL CONTRACTS (*indicates management contract or compensatory
plan or arrangement).
10.1. Third Modification Agreement between the Company and FIRSTAR BANK,
N.A. dated May 17, 2000.
10.2. Renewal of Revolving Note between the Company and Fifth Third Bank
dated May 21, 2000.
10.3. First Amendment to Employment Agreement between the Company and
Charles T. Sherman dated August 30, 1999 (incorporated by reference to Exhibit
10 to the Company's Annual Report on Form 10-KSB for the period ended December
31, 1997; Commission File No. 0-8115). *
16. CERTIFYING ACCOUNTANT (incorporated by reference on Form 8-K, filed
July 21, 1998: Commission File No. 0-8115).
23. CONSENT OF EXPERTS.
23.1. Consent of Deloitte & Touche LLP
24. POWERS OF ATTORNEY.
24.1. Powers of Attorney.
24.2. Certified resolution of the Registrant's Board of Directors
authorizing officers and directors signing on behalf of the Company to sign
pursuant to a power of attorney.
27. FINANCIAL DATA SCHEDULE
27. Financial Data Schedule (submitted electronically for SEC information
only).
(b) REPORTS ON FORM 8-K.
There were no Forms 8-K filed by the Company during the fourth quarter of
fiscal year 1999.
18
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: June 14, 2000
PH GROUP INC.
(the "Registrant")
By: /s/ CHARLES T. SHERMAN
-----------------------------
Charles T. Sherman, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the 14th day of June, 2000.
SIGNATURE TITLE
--------- -----
/s/ CHARLES T. SHERMAN Director, President,
------------------------------- Chief Executive Officer
Charles T. Sherman (principal executive officer)
GREGORY N. BAKEMAN(*) Chief Financial Officer
------------------------------
Gregory N. Bakeman
KENNETH P. FURLONG(*) Treasurer
------------------------------
Kenneth P. Furlong
MICHAEL W. GARDNER(*) Director, Senior Vice President
------------------------------
Michael W. Gardner
BOB BINSKY(*) Director
------------------------------
Bob Binsky
ALIDA BREEN(*) Director
-----------------------------
Alida Breen
TERRY L. SANBORN(*) Director
-----------------------------
Terry L. Sanborn
(*) Charles T. Sherman, by signing his name hereto, does sign this document on
behalf of the person indicated above pursuant to a Power of Attorney duly
executed by such person.
(*)By: /s/ CHARLES T. SHERMAN
--------------------------------------
Charles T. Sherman, Attorney-in-fact
19
<PAGE> 20
EXHIBIT INDEX
Page in
Sequentially
Numbered
Exhibit No. Description Copy
----------- ----------- ------------
1.1 Amendment to Asset Purchase Agreement
between the Company and St. Lawrence
Hydraulics, Inc. f/k/a St. Lawrence
Press Company, Inc. dated September 22,
1999.
1.2 First Amendment of Aemeded And Restated
Asset Purchase Agreement between the
Company and Vertech Systems, LLC dated
October 26, 1999.
2.1 Building Lease between the Company and
Parker Industrial, L.L.C., dated
September 15, 1998.
2.2 First Amendment To Lease Agreement
between the Company and Parker
Industrial, L.L.C., dated
December 23, 1998.
10.1 Third Modification Agreement between
the Company and FIRSTAR BANK, N.A.
dated May 17, 2000.
10.2 Renewal of Revolving Note between the
Company and Fifth Third Bank dated
May 21, 2000.
10.3. First Amendment to Employment Agreement
between the Company and Charles T.
Sherman dated August 30, 1999.
23.1 Consent of Deloitte & Touche LLP
24.1. Powers of Attorney.
24.2. Certified resolution of the Registrant's
Board of Directors authorizing officers
and directors signing on behalf of the
Company to sign pursuant to a power of
attorney.
27. Financial Data Schedule (submitted
electronically for SEC information only).
*Incorporated by reference
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
PH Group Inc.
We have audited the accompanying balance sheets of PH Group Inc. as of December
31, l999 and 1998, and the related statements of operations, shareholders'
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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of PH Group Inc. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
difficulty in generating sufficient cash flows to meet its obligations and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Columbus, Ohio
June 14, 2000
21
<PAGE> 22
<TABLE>
<CAPTION>
PH GROUP INC.
BALANCE SHEETS, DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash $ 9,958 $ 5,862
Accounts receivable (less allowance for doubtful accounts:
1999 - $31,798; 1998 - $30,000) 1,925,504 3,974,134
Federal and state income tax receivables 200,836 157,646
Inventories 2,394,389 2,942,799
Deferred income taxes 186,300
Other current assets 139,701 85,260
------------ ------------
Total current assets 4,670,388 7,352,001
PROPERTY AND EQUIPMENT:
Office equipment 964,897 756,890
Manufacturing equipment 1,419,351 1,090,015
Leasehold improvements 455,509 281,821
Vehicles 125,271 140,271
------------ ------------
Total property and equipment 2,965,028 2,268,997
Less accumulated depreciation and amortization (1,525,002) (1,329,574)
------------ ------------
Property and equipment, net 1,440,026 939,423
OTHER NONCURRENT ASSETS:
Land held for investment 20,570 20,570
Goodwill, net 1,106,792 698,030
Deferred income taxes, net 287,500
Other noncurrent assets, net 189,258 285,261
------------ ------------
Total other noncurrent assets 1,316,620 1,291,361
------------ ------------
TOTAL ASSETS $ 7,427,034 $ 9,582,785
============ ============
</TABLE>
See notes to financial statements.
22
<PAGE> 23
<TABLE>
<CAPTION>
PH GROUP INC.
BALANCE SHEETS, DECEMBER 31, 1999 AND 1998 (CONTINUED)
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,837,364 $ 2,285,591
Current portion of debt 3,280,226 3,281,539
Accrued expenses 373,641 460,257
Customer deposits 1,234,336 924,949
----------- -----------
Total current liabilities 6,725,567 6,952,336
NONCURRENT LIABILITIES:
Long-term debt (less current portion) 467,920 951,068
Deferred compensation 17,083 12,083
----------- -----------
Total noncurrent liabilities 485,003 963,151
----------- -----------
Total liabilities 7,210,570 7,915,487
COMMON STOCK SUBJECT TO REPURCHASE,
93,750 shares issued and outstanding, at redemption value 262,500 262,500
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, at stated value: .008 per share
authorized 10,000,000 shares; outstanding
shares 1999 - 1,593,345; 1998 - 1,519,846 12,757 12,157
Additional paid-in capital 1,498,854 1,403,321
Treasury stock, at cost (1,500 shares) (1,831)
Accumulated deficit (1,555,816) (10,680)
----------- -----------
Total shareholders' equity (deficit) (46,036) 1,404,798
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,427,034 $ 9,582,785
=========== ===========
</TABLE>
See notes to financial statements.
23
<PAGE> 24
<TABLE>
<CAPTION>
PH GROUP INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
NET SALES $ 9,815,619 $ 13,394,357
COST OF SALES 7,371,676 10,042,780
------------ ------------
GROSS MARGIN 2,443,943 3,351,577
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including moving expenses of $133,981 in 1999) 3,671,585 4,006,233
------------ ------------
LOSS FROM OPERATIONS (1,227,642) (654,656)
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (314,199) (285,623)
Other, net 39,705 151,977
------------ ------------
Total other income (expenses), net (274,494) (133,646)
------------ ------------
LOSS BEFORE INCOME TAXES (1,502,136) (788,302)
PROVISION (BENEFIT) FOR INCOME TAXES 43,000 (297,000)
------------ ------------
NET LOSS $ (1,545,136) $ (491,302)
============ ============
PER SHARE DATA:
Basic and diluted loss per share $ (0.96) $ (0.33)
============ ============
Weighted average shares outstanding:
Basic and diluted 1,611,515 1,490,475
============ ============
</TABLE>
See notes to financial statements.
24
<PAGE> 25
<TABLE>
<CAPTION>
PH GROUP INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
---------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING ADDITIONAL RETAINED EARNINGS TOTAL
COMMON STOCK PAID-IN TREASURY (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT) EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 1,418,731 $ 11,350 $ 1,292,051 $ 480,622 $ 1,784,023
Issuance of Common Stock 101,115 807 111,270 112,077
Net loss (491,302) (491,302)
--------- -------- ----------- --------- ----------- -----------
BALANCES AT DECEMBER 31, 1998 1,519,846 12,157 1,403,321 (10,680) 1,404,798
Issuance of Common Stock 74,999 600 95,533 96,133
1,500 shares repurchased (1,500) $ (1,831) (1,831)
Net loss (1,545,136) (1,545,136)
--------- -------- ----------- --------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 1,593,345 $ 12,757 $ 1,498,854 $ (1,831) $(1,555,816) $ (46,036)
========= ======== =========== ======== =========== ===========
</TABLE>
See notes to financial statements.
25
<PAGE> 26
<TABLE>
<CAPTION>
PH GROUP INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,545,136) $ (491,302)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 447,359 393,380
Deferred income tax expense (benefit) 473,800 (255,500)
Loss (gain) on sale of property and equipment 43,054 (52,696)
Changes in assets and liabilities affecting cash flows
from operating activities:
Accounts receivable 2,126,610 (1,136,360)
Income taxes receivable (43,190) (598,172)
Inventories 647,896 (113,627)
Other current assets (54,441) 103,236
Other noncurrent assets 34,997 (34,949)
Accounts payable (548,227) 334,666
Accrued expenses (86,616) (150,152)
Customer deposits 182,688 (797,286)
Deferred compensation 5,000 (833)
------------ ------------
Net cash provided by (used in) operating activities 1,683,794 (2,799,595)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 32,558 246,514
Net assets of business acquired (218,711)
Capital expenditures for property and equipment (348,957) (264,587)
------------ ------------
Net cash used in investing activities (535,110) (18,073)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt obligations (6,689,989) (8,919,365)
Proceeds from debt obligations 5,520,099 11,673,029
Proceeds from issuance of common stock 27,133 112,077
Payment for treasury stock (1,831)
Payment for common stock subject to repurchase (50,000)
------------ ------------
Net cash provided by (used in) financing activities (1,144,588) 2,815,741
------------ ------------
NET INCREASE (DECREASE) IN CASH 4,096 (1,927)
CASH, beginning of year 5,862 7,789
------------ ------------
CASH, end of year $ 9,958 $ 5,862
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 12,317 $ 557,642
============ ============
Cash paid for interest expense $ 314,199 $ 285,623
============ ============
SUPPLEMENTAL NON CASH DISCLOSURE:
Issuance of common stock for net assets acquired $ 69,000
============
Assumption of liabilities for net assets acquired $ 812,128
============
</TABLE>
See notes to financial statements.
26
<PAGE> 27
PH GROUP INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - PH Group Inc., an Ohio corporation, is the product
of the merger of several companies, the oldest of which was incorporated in
1906. The primary operations of the Company are the manufacture and
marketing of a line of hydraulic presses and injection molding equipment
under the names PH Hydraulics, St. Lawrence Press and Trueblood. The
principal market area of these product lines is North America.
LOSS FROM OPERATIONS - The Company incurred net losses of approximately
$1,545,000 and $491,000 in 1999 and 1998, respectively. In addition,
current liabilities exceed current assets by approximately $2,055,000 at
December 31, 1999 and the Company has a shareholders' deficit of $46,036 at
December 31, 1999. Should losses continue to occur, the Company will
continue to have difficulty satisfying liabilities as they come due and,
accordingly, may not be able to continue as a going concern. Management
continues to seek additional equity investors and amendments to its
existing bank agreements to provide the Company long-term debt financing.
Currently, the Company's two line of credit agreements with two banks
expired on February 29, 2000 and the banks have granted the Company a
90-day extension. As of June 14, 2000 the Company continues to negotiate an
extension of the line of credit. In view of these matters, realization of a
portion of the assets in the accompanying balance sheet is dependent upon
the Company's ability to meet its financing requirements and the success of
its future operations. Additionally, the Company seeks to improve its
margins in its manufacturing process and has implemented various cost
savings plans to reduce operating losses. Accordingly, management believes
the actions being taken to improve the Company's operating and financial
requirements will enable the Company to return to profitable operations,
realize its assets and satisfy its liabilities in the normal course of
business.
INVENTORIES - Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market. Inventories are comprised of the following:
DECEMBER 31,
1999 1998
Raw materials $ 672,073 $ 420,661
Finished and work-in-process goods 1,722,316 2,522,138
----------- -----------
Total $ 2,394,389 $ 2,942,799
=========== ===========
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method
for financial reporting purposes
27
<PAGE> 28
and accelerated methods for income tax purposes over the estimated useful
lives of the related assets ranging from 3 to 20 years.
Depreciation expense was approximately $322,000 and $278,000 in 1999 and
1998, respectively.
SIGNIFICANT CUSTOMERS AND INDUSTRY CONCENTRATION - A significant portion of the
Company's business activity is with customers directly or indirectly related to
the automotive industry. One of the Company's customers accounted for
approximately 14% and 15% of net sales in 1999 and 1998 and 6% and 24% of the
accounts receivable balance at December 31, 1999 and 1998. The Company's
exposure to credit risk is impacted by the economic climate affecting its
industry. The Company manages this risk by performing on-going credit
evaluations of its customers and maintains reserves for potential uncollectible
accounts.
LAND HELD FOR INVESTMENT - Land held for investment is valued at the lower of
cost or market. Expenditures that add to the recoverable value of the property
are capitalized as land development costs.
GOODWILL - Goodwill is being amortized using the straight-line method over
periods ranging from six to fifteen years for financial statement purposes. The
amortization expense for 1999 and 1998 was approximately $86,000 and $78,000,
respectively. Goodwill on the balance sheets is shown net of accumulated
amortization at December 31, 1999 and 1998 of approximately $293,000 and
$214,000, respectively. See also Note 8.
IMPAIRMENT OF ASSETS - At each balance sheet date, a determination is made by
management to ascertain whether property and equipment, goodwill, land held for
investment and non-compete and consulting agreements have been impaired based on
several criteria, including, but not limited to, revenue trends, undiscounted
operating cash flows and other operating factors. For the years presented, there
has been no impairment of assets.
OTHER NONCURRENT ASSETS - Included in other noncurrent assets are noncompetition
and consulting agreements with costs of approximately $147,000 at December 31,
1999 and 1998. These agreements are being amortized using the straight-line
method over the lives of the agreements which range from 32 to 116 months. The
amortization expense for 1999 and 1998 was approximately $37,000 per year.
Accumulated amortization at December 31, 1999 and 1998 was approximately $99,000
and $62,000, respectively.
REVENUE RECOGNITION - Revenue from equipment sales and the related costs of
sales are recognized when products are completed, and accepted for shipment by
the customer, and all costs are incurred or subject to reasonable estimate.
Advance payments from customers prior to completion are reported as customer
deposits.
PRODUCT WARRANTY - The Company generally provides a warranty against defects in
its products for periods ranging from one to two years. A liability for
estimated warranty costs is recognized on current sales. The Company has
determined the estimate based on the historical relationship of actual warranty
costs to sales revenue.
28
<PAGE> 29
ADVERTISING - The Company expenses advertising costs as incurred. Advertising
costs relate primarily to product brochures, industry magazines and trade shows.
Advertising expenses were approximately $101,000 and $242,000 in 1999 and 1998,
respectively.
RESEARCH AND DEVELOPMENT - The Company expenses research and development costs
as incurred. Research and development expenses were approximately $108,000 and
$39,000 in 1999 and 1998, respectively.
PER SHARE INFORMATION - Basic earnings per share amounts (EPS) are computed
based on the weighted average number of common shares actually outstanding. No
adjustments to net loss were required for purposes of computing diluted per
share amounts.
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share of common stock calculation because
to do so would be antidilutive for the years indicated:
1999 1998
Stock options 247,000 205,300
Restricted stock subject to put options 93,750 93,750
------- -------
Total 340,750 299,050
======= =======
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities 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.
BUSINESS SEGMENTS - The Company is managed in one operating segment, the
manufacturer of equipment for the machine tool industry. Within their one
operating segment, the Company has identified three revenue categories;
Hydraulic Presses, Injection Molding Machines and Repair Parts and Services. The
following is supplemental information on net sales by product group:
HYDRAULIC INJECTION REPAIR PARTS
PRESSES MOLDING AND SERVICE TOTAL
1999 $ 7,266,475 $ 2,085,137 $ 464,007 $ 9,815,619
1998 $ 10,151,921 $ 2,884,539 $ 357,897 $ 13,394,357
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," to establish accounting and
reporting requirements for derivative instruments. This standard requires
recognition of all derivative instruments in the statement of financial position
as either assets or liabilities, measured at fair value, and is effective for
fiscal years beginning after June 15, 2000. This statement additionally requires
changes in the fair value of derivatives to be recorded each period in current
earnings or comprehensive income depending on the intended use of the
derivatives. The Company is currently assessing the impact of this statement on
its results of operations, financial position and cash flows.
29
<PAGE> 30
RECLASSIFICATIONS - Reclassifications have been made to prior years' amounts to
conform with the current year's classifications.
2. DEBT AND OTHER OBLIGATIONS
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Bank line of credit agreements $2,339,716 $3,056,716
Term loan payable to bank at interest rate of 8.07%, secured,
monthly payments of $14,286 through June 2005. Additional
payments of $25,000 and $50,000 were due and paid on
January 31, and February 28, 2000, respectively. The term loan
is cross collateralized with the line of credit. 692,576 1,114,286
Other installment notes at interest rates ranging from 5%
to 11.25%, secured by certain vehicles and manufacturing
equipment, requiring monthly principal and interest
payments with various maturities through October 2002 679,246 37,841
Capital lease obligations at interest rates ranging from 7% to 13%,
secured by computer equipment requiring monthly principal
and interest payments through July 2004 36,608 23,764
---------- ----------
Total 3,748,146 4,232,607
Less current portion 3,280,226 3,281,539
---------- ----------
Long-term portion $ 467,920 $ 951,068
========== ==========
</TABLE>
BANK LINE OF CREDIT - At December 31, 1999, the Company has two line of credit
agreements with banks. Under the primary bank agreement, the Company can borrow
up to $2,476,000, subject to certain borrowing base restrictions. Interest is
payable monthly at bank prime plus 1.75% (total of 10.25% at December 31, 1999).
The agreement expired on February 29, 2000. The bank has granted the Company a
90 day extension on the maturity date of the agreement. The outstanding balance
due was $2,064,716 at December 31, 1999. This line of credit agreement was
amended in December 1999 to reduce available borrowings and remove all debt
covenants. At December 31, 1998, the agreement provided that the Company could
borrow up to $3,000,000, subject to certain borrowing base restrictions and the
outstanding balance was $3,056,716. At December 31, 1998 the Company was in
violation of certain debt covenants regarding the following; tangible net worth,
debt to tangible net worth ratio, defined cash flow coverage ratio and annual
capital expenditures. On March 30, 1999 the Company obtained a waiver from the
bank with respect to such events of noncompliance.
Under the secondary agreement, which was entered into on October 21, 1999, the
Company can borrow up to $500,000. Interest is payable monthly at bank prime
plus 3%. The agreement expired on February 21, 2000 and is secured by virtually
all assets of the Company. The outstanding balance due was $275,000 at December
31, 1999. The bank has granted the Company a 90 day extension on the maturity
date of the agreement.
30
<PAGE> 31
Maturities of debt at December 31, 1999 are as follows:
2000 $3,280,226
2001 107,693
2002 353,306
2003 4,653
2004 2,268
----------
Total $3,748,146
==========
Debt is secured by substantially all assets of the Company and the
assignment of the proceeds of a $500,000 life insurance policy.
Estimated fair values of the Company's significant financial instruments,
all of which are held for non-trading purposes approximate their carrying
amounts at December 31, 1999 and 1998. The fair values of bank line of
credit and long-term debt including current portions, are based on current
rates at which the Company could borrow funds with similar remaining
maturities.
3. INCOME TAXES
Components of the provision (benefit) for income taxes are as follows:
1999 1998
Current:
Federal $(430,800) $ 11,100
State and local (52,600)
--------- ---------
(430,800) (41,500)
--------- ---------
Deferred:
Federal 479,100 (250,100)
State and local (5,300) (5,400)
--------- ---------
473,800 (255,500)
--------- ---------
Provision (benefit) for income taxes $ 43,000 $(297,000)
========= =========
A reconciliation of the income tax provision (benefit) based on the federal
statutory income tax rate of 34% to the Company's income tax provision (benefit)
is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Provision (benefit) at federal statutory rate $ (510,700) $ (268,000)
State and local tax expense (benefit), net of federal effect (3,500) (35,400)
Increase in valuation allowance 562,000
Other items, net (4,800) 6,400
---------- ----------
Provision (benefit) for income taxes $ 43,000 $ (297,000)
========== ==========
</TABLE>
31
<PAGE> 32
Deferred tax assets (liabilities) consist of the following:
DECEMBER 31,
1999 1998
Current assets:
Accrued liabilities $ 80,900 $ 106,800
Inventory 90,500 67,300
Bad debt allowance 13,000 12,200
-------- ---------
Total current assets 184,400 186,300
-------- ---------
Non-current asset (liability):
Property, plant and equipment (95,535) (58,100)
Net operating loss carryforwards 320,100 254,100
Goodwill 22,700 90,100
Capital loss carryforwards 49,300 55,400
Accrued liabilities 107,400
Other, net 27,635
-------- ---------
Total non-current asset 431,600 341,500
-------- ---------
Total deferred tax asset 616,000 527,800
Less valuation allowance (616,000) (54,000)
-------- ---------
Total deferred tax asset - net $ 0 $ 473,800
======== =========
At December 31, 1999, the Company has approximately $940,000 of net operating
losses carryforwards for Federal income tax purposes expiring in 2013 and
approximately $145,000 in capital loss carryforwards expiring in 2003.
4. OPERATING LEASES
During 1998, the Company entered into a lease of office and manufacturing space
at the CityGate development in Columbus, Ohio. At the time the lease was
initiated, the building was under construction. The building was completed and
the Company took possession in September 1999. The initial lease term runs for
15 years from the date of completion. The Company has the option to renew the
lease for two additional terms of five years ("Option Periods"). The rent for
the first Option Period shall be 106% of the previous year's annual rent and the
rent for the second Option Period shall also be 106% of the previous year's
annual rent. The Company also has a right of first offer for purchase of the
building as well as a right to 20% of the net sales proceeds of the building.
32
<PAGE> 33
The Company also leases equipment under operating leases. Minimum future rental
payments for the above noncancelable operating leases having remaining terms in
excess of one year as of December 31, 1999 are as follows:
2000 $ 300,670
2001 297,485
2002 297,485
2003 293,940
2004 297,890
Thereafter 2,912,750
Rental expense under all operating leases was approximately $193,000 in 1999 and
$255,000 in 1998.
5. STOCK OPTIONS
The Company has a fixed director's stock option plan. Under this plan the
Company can grant up to 6,250 options per newly elected director after May 1996.
The maximum term of the options is ten years and they become fully vested at the
end of two years. Directors who held their position before May 1996 could
receive up to 25,000 options which were fully vested upon receipt, and expire in
the year 2005. The exercise price of each option is equal to the market price of
the Company's stock on the date of the grant.
The Company's 1997 Stock Incentive Plan allows the Board of Directors to grant
stock options to employees, directors and consultants. The total number of
aggregate shares which may be granted under the Plan shall not exceed 187,500.
Options to acquire Company stock for employees and consultants shall not be
granted with exercise prices less than the fair market value of a share on the
date of the grant. The number of shares granted to employees and consultants is
at the discretion of the board. Shares are granted to non-employee directors
upon appointment to the board and at each annual meeting based upon the increase
in total income before taxes over the prior calendar year. Options granted to
non-employee directors are made at exercise prices equal to the fair market
value of the stock at the date of the annual meeting corresponding to the
performance year. During 1999, 45,000 options were granted at $1.38 under the
Plan. During 1998, 72,400 options were granted at $3.11 under the Plan.
The Company accounts for its stock option plans in accordance with APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for all stock option plans been determined consistent with the SFAS No.
123, "Accounting for Stock Based Compensation," the Company's pro forma 1999 net
loss and loss per common share would have been $1,626,000 and $1.01 per basic
and diluted share. For 1998, pro forma net loss and loss per common share would
have been $554,269 and $.37 per basic and diluted share. The pro forma amounts
are not representative of the effects on reported net earnings or earnings per
common share for future years.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes Formula. The following weighted average assumptions were made in
estimating the fair value for options granted in 1999 and 1998, respectively,
weighted average risk-free interest rates of 5.12% and 5.09%; and volatility
factors of 94% and 119%. The expected life of the options was
33
<PAGE> 34
assumed at 10 years and the expected dividend yields were assumed to be zero for
both 1999 and 1998.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 205,300 $ 1.57 233,750 $ 1.02
Granted 45,000 1.38 72,400 3.11
Exercised (600) 3.06 (71,700) 0.86
Forfeited or expired (2,700) 2.00 (29,150) 2.62
------- ------ ------- ------
Outstanding at end of year 247,000 $ 1.51 205,300 $ 1.57
======= ====== ======= ======
Exercisable at end of year 213,000 $ 1.48 162,550 $ 1.16
======= ====== ======= ======
Weighted average fair value of options
granted during the year $ 1.23 $ 2.84
====== ======
Options available for grant 89,450 131,750
======= =======
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
<S> <C> <C> <C> <C> <C> <C>
$.80 96,250 $0.80 3.2 96,250 $0.80
$1.20 to $1.50 92,500 1.31 6.5 64,250 1.29
$2.10 to $3.06 46,250 2.92 7.1 42,750 2.91
$3.25 12,000 3.25 8.3 9,750 3.25
------- ----- ------- -----
247,000 $1.51 213,000 $1.48
======= ===== ======= =====
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES
In 1999 and 1998 fees of $16,000 and $26,400, respectively, were paid to a
director for services provided to the Company.
In December 1996 the Company agreed to lend $59,000 to an entity owned by
certain shareholders. The outstanding balance was $47,200 and $44,250 at
December 31, 1999 and 1998, respectively. Interest is computed on the
outstanding principal amount at a rate of bank prime plus 1.25%. The remaining
balance on this note is due in 2000.
34
<PAGE> 35
7. PROFIT-SHARING PLAN
The Company sponsors a profit-sharing plan covering employees completing at
least six months of service, working at least 1,000 annual hours, and having
attained the age of 21. Contributions to the plan are made at the discretion of
the Board of Directors. Employees have an option to make voluntary contributions
to the Plan under the provisions of Internal Revenue Code Section 401(k). There
was no employer contributions under the plan in 1999. Profit-sharing expense was
approximately $20,000 in 1998.
8. BUSINESS COMBINATION
On April 30, 1997, the Company acquired certain net assets of the St. Lawrence
Press Company in a business combination accounted for as a purchase. The
purchase agreement contains a contingent earnout component where the purchase
price is subject to future increases. The increases are based on 5% of gross
sales in excess of an annual specified level ($2.5 million in the first two
years and $3 million in the last two years) for eligible products in each of the
four years following the purchase date. The maximum earn out for any one year is
$200,000 and the minimum is $50,000. A $124,775 liability has been included in
the balance sheet (see Note 2) for the present value of the minimum annual
contingent earnout payments with a corresponding increase in the cost of the
purchase price.
On April 1, 1999, the Company acquired certain net assets of Vertech Systems,
LLC in a business combination accounted for as a purchase. The acquired business
is engaged in the design, manufacturing and marketing of vertical injection
molding equipment. The results of operations of the acquired business are
included in the financial statements from the date of acquisition. The
approximately $1,000,000 purchase price, including acquisition costs, exceeded
the value of the net tangible assets acquired by approximately $464,000. The
excess amount was allocated entirely to goodwill and is being amortized over 15
years.
The purchase agreement, as amended, contains a contingent earnout component
where the purchase price is subject to future increase. The increases are based
on 5% of Vertech machines "EBIT" for the years 1999 through 2004. "EBIT" as
defined in the agreement is gross revenues less production costs, overhead
allocation, travel and commission expense, royalty expense, and defective
inventory, warranty, and collections deductions. At December 31, 1999 there was
no contingent earnout liability included in the financial statements and there
was no payment due for 1999.
The purchase agreement, as amended, also provides for two separate royalty
payments. The first royalty payment is based on 5% and 2.5% of gross revenues of
Vertech machines for the years 1999 through 2003 and 2004 through 2008,
respectively. The second royalty payment is based on 5% of gross revenues of
Vertech machines. While there is no expiration date on this royalty payment, the
maximum amount payable for this royalty is $350,000 plus 10% interest, with
interest retroactive to April 1, 1999. At December 31, 1999, a liability of
$9,900 has been included in the balance sheet representing the total royalty
payments due under the above agreement.
The acquisition was funded with cash, the assumption of certain liabilities,
notes payable, and 75,000 shares of common stock.
35
<PAGE> 36
The following financial information presents the pro forma effect of the
acquisition on the historical results of operations for the years ended December
31, 1999 and 1998 as if the transactions occurred on January 1, 1998:
1999 1998
Net sales $ 10,034,350 $ 13,710,061
Net loss $ (1,610,244) $ (911,277)
Basic and diluted net loss per share $ (1.00) $ (0.61)
9. COMMON SHARES SUBJECT TO REPURCHASE
In conjunction with the St. Lawrence Press asset acquisition discussed in Note
8, the Company issued 125,000 shares of common stock, which are subject to a
repurchase agreement. The issued shares are subject to restrictions on their
transfer and voting rights. The Company has guaranteed the value of these shares
by providing the holders four separate put rights which can require the Company
to redeem these shares as follows: 31,250 shares on April 30, 1998 at $1.60 per
share; 31,250 shares on April 30, 1999 at $2.40 per share; 31,250 shares on
April 30, 2000 at $2.80 per share; and 31,250 shares on April 30, 2001 at $3.20
per share. Each separate put option is not exercisable until the dates shown
above and expires one year from this vesting date. The holders are required to
attempt to sell the shares in the market at a price equal to or greater than the
minimum share price for 90 days prior to requiring the Company to redeem them.
On the date issued, there was no significant difference between the estimated
fair value of the common shares subject to repurchase and the future mandatory
redemption amounts.
No put options were exercised on the first installment at April 30, 1998 as
stockholders sold 31,250 shares in the market. However, the holders did not
exercise their put options that were due on April 30, 1999 and 2000.
In conjunction with the Vertech Systems, LLC asset acquisition discussed in Note
8, the Company agreed to issue 25,000 shares of common stock, which are subject
to a repurchase agreement. The Company has guaranteed the value of these shares
by providing the holders with a put option of $1.00 per share following the
holder's minimum 2 year holding period of the shares. These shares were not yet
issued at December 31, 1999.
10. CONTINGENCIES
At December 31, 1999, the Company is a party to various legal matters which have
arisen in the ordinary course of business. Such matters did not have a material
adverse effect on the current year's results of operations and, in the opinion
of management, their ultimate disposition will not have a material adverse
effect on the Company's future financial position, results of operations, or
cash flows.
In June 2000, the Company negotiated a settlement with representatives of Wayne
County, Michigan relating to the closing of the Company's former Michigan
facility. The Company will receive approximately $150,000 (net of expenses) in
2000.
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