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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-14617
Rheometric Scientific, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 61-0708419
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
One Possumtown Road, Piscataway, N.J. 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (732) 560-8550
_________________________________________________________________
(Former name, former address, and former fiscal year if changed since
last report.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
________________________________________________________________
Title of Class
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
____ ____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
[ X ]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of March 31, 1999: $1,436,729 (For purposes of
this filing only, all executive officers and directors have been
classified as affiliates.)
The number of shares of the registrant's Common Stock outstanding as
of November 1, 1999 was 13,161,739.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
The Exhibit Index appears on page: 34
PART I
(Items either not applicable or not material have been excluded)
Item I. Business
BACKGROUND
General
Rheometric Scientific, Inc., and subsidiaries (referred to as
"Rheometric" or the "Company"), was incorporated in New Jersey in
1981. The Company's corporate executive offices and manufacturing
operation are located in Piscataway, New Jersey. Sales offices are
located in England, France, Germany, and Japan.
History
The Company was co-founded under the name Rheometrics, Inc. in 1970 by
Dr. Joseph M. Starita and Dr. Chris Macosko. In 1985, following
completion of a $7 million stock offering, Rheometrics became a public
company. Through a series of transactions between 1991 and 1993,
Axess Corporation ("Axess") owns 76.6% of the common stock of the
Company. The Company changed its name to Rheometric Scientific, Inc.
in November 1994.
In 1994, the Company acquired the Polymer Laboratories Thermal
Sciences Business (the "PL Thermal Sciences Business") through a
series of transactions involving Axess. In 1995, the Company acquired
from Mettler-Toledo AG ("Mettler") the exclusive, worldwide rights for
two rheological test instruments, the RM180 and RM260, that serve the
coatings, paints, biological fluids, cosmetics, and lubricants
industries. See Note 1 of Notes to Consolidated Financial Statements.
In 1997, the Company completed the consolidation of all manufacturing
of rheology and thermal analysis instruments and engineering functions
at its Piscataway, NJ facility. See Note 12 of Notes to Consolidated
Financial Statements.
On August 27, 1998 the Company consummated the assignment of lease of
its Epsom facility in the United Kingdom to a third party and moved
its sales and service personnel to offices located in Leatherhead.
On August 12, 1998, the Company was notified by its lender that the
Company's Loan and Security Agreement (the "Loan Agreement") would not
be extended beyond the expiration date of February 23, 1999. Following
that notification, the Company commenced discussions with other
prospective lenders to replace the credit facility provided by the
Loan Agreement with a credit facility with a maximum available credit
of $10,000,000. The ability to proceed with a lesser maximum credit
than available under the current Loan Agreement is based on existing
improvements in the management of the Company's working capital.
Recent Developments
Credit Facility
On February 19, 1999, the Loan Agreement was amended so as to extend
the Loan Agreement to May 21, 1999. In addition, the facility limit
was permanently reduced to $10,000,000 and the inventory sublimit
would continue to be permanently and automatically decreased by
$25,000 each week. The Loan Agreement was further extended for one-
month periods through October 31, 1999.
On November 12, 1999 the Company's lender amended the Loan Agreement
extending its term to November 30, 2000. As of this date, all foreign
lines of credit have been consolidated into the domestic line of
credit and the foreign receivables are no longer used in the
calculation of the borrowing base. Foreign working capital
requirements will be satisfied by cash generated from current
operations. In addition, the facility limit was permanently reduced
to $6,500,000
Page 2 of 37
and the inventory sublimit would continue to be permanently and
automatically decreased by $25,000 each week. The advance rate of 69%
on eligible receivables will be reduced in March 2000 to 61% and then
further decreased 2% each month thereafter. Covenant requirements
have been revised based on the Company's forecast for 2000.
Mettler
Effective May 10, 1999, Rheometric Scientific, Inc. (RSI) and Mettler
Toledo GmbH (MT) revised their original agreement dated December 21,
1994 whereas RSI agreed to commence production of the RM180 and RM265
products within 30 days. A payment arrangement was agreed to whereby
the Company would make quarterly payments commencing on May 15, 1999
and continuing through February 15, 2002. Interest is accrued on the
unpaid balance at 6% per annum. The Company anticipates total
payments denominated in Swiss francs to be approximately 2,239,000
over a three-year period. In addition, RSI also agreed to buy the
remaining finished stock, production stock, and accessories for an
initial sum of $200,000 and 15 monthly payments of $25,000 commencing
June 30, 1999 and ending August 30, 2000. See Note 10 of Notes to
Consolidated Financial Statements.
DESCRIPTION OF BUSINESS
Financial Information about Industry Segments
Effective December 31, 1998 the Company adopted SFAS 131 "Disclosures
about Segments of an Enterprise and Related Information." See Note 9.
Prior year information has been restated to present the Company's three
reportable segments: Domestic, Europe, and the Far East. The accounting
policies of the reportable segments are the same as those described in
the Summary of Significant Accounting Policies. The Company evaluates
the performance of its operating segments based on revenue performance
and operating results. Summarized financial information concerning the
company's reportable segments is shown in Note 9.
Narrative
The Company designs, manufactures, markets, and services computer-
controlled materials test systems used to make physical property
measurements, such as viscosity, elasticity, and thermal analysis
behavior, on various materials including, plastics, composites,
petrochemicals, rubber, chemicals, paints, coatings, pharmaceuticals,
cosmetics, and foods. The Company's product offering, most of which
is proprietary or patented, consists of rheological and thermal
analytical laboratory instruments used for research and product
development; on-line rheological sensors for controlling and assuring
product quality in various manufacturing processes; and integrated
systems for direct on-line control of manufacturing processes. These
integrated systems combine special sampling technologies and multiple
sensor technologies to provide various real-time measures of product
quality. The Company sells its products worldwide, primarily to
Fortune 500 and other leading international corporations, as well as
independent research laboratories and educational and governmental
institutions.
Customers. The Company's customers fall generally into three major
categories based on the nature of their products and the processes by
which their products are developed: (1) materials manufacturers, (2)
product manufacturers, and (3) independent and nonprofit research
laboratories and governmental and educational institutions. The
Company does not have any customer that accounts for more than 10
percent of the Company's sales.
Technologies. Each instrument system consists of components, some of
which include actuators, which manipulate or impart force upon a
sample, while others thermally activate samples using controlled
furnaces; sensors, which measure the results of such activities upon
the sample; and microprocessors, which analyze such results. The
design and manufacture of these components requires expertise in
several disparate technologies, including electronics, software,
mechanics, machining, and environmental control. Most of the
Company's instrument systems contain a microcomputer system developed
and manufactured by the Company, which incorporates proprietary
expertise in microprocessor applications, data acquisition and
analysis,
Page 3 of 37
control feedback, and systems development software, including assembly
language programming. The Company's laboratory instruments can control
motion with high precision, some to within two-millionths of an inch.
The testing of materials ranging from low viscosity water-like fluids
to tough steel-like composites requires the precise measurement of
forces over a wide dynamic range. The Company has combined its
engineering resources to develop sophisticated sensors capable of
measuring forces as small as 10 milligrams to as large as 5,000
pounds.
Raw Material & Components. The Company's products consist of
mechanical and electronic assemblies. A number of raw materials,
primarily stainless steel and aluminum, are used to fabricate the
Company's mechanical assemblies, and electronic components are used to
build its electronic assemblies. The Company depends upon, and will
continue to depend upon, a number of outside suppliers for the
components it uses. The Company believes that the raw materials and
component parts it uses are available from alternate suppliers and
does not believe it is dependent upon any one supplier.
Patents & Trademarks. The Company currently has patents for the
design and manufacture of certain of its instruments and systems. Due
to the rapidly changing technology relative to the Company's product
lines, the Company does not believe that technological patent
protection is significant as a competitive factor. The Company's name
and its logo are protected under Federal trademark laws and the
Company believes that there is significant value associated with the
Company's name.
Seasonal Operations & Backlog. Historically, the Company's sales,
(loss) earnings before income taxes, and net (loss) earnings have been
cyclical. Typically the quarters ending June and December outperform
the quarters ending March and September. This cyclicality is primarily
attributable to the capital goods budgeting cycle. Many customers
place their orders in the first calendar quarter (after capital
budgets have been approved) with delivery in the second calendar
quarter due to three- or four- month average delivery times.
Moreover, as the fourth calendar
quarter approaches, many customers review their annual budgets and
determine that they are able to place an order for delivery by the end
of December.
Competition. The Company believes that its principal competitors are
several domestic and foreign manufacturers, some with greater
financial and marketing resources than the Company. The Company
competes with these companies and others by offering products of high
performance, quality and reliability, backed by service capabilities.
The Company believes that technological requirements and high initial
capital expenditures represent significant barriers to entry to this
market. However, there can be no assurance that a larger company with
greater financial resources than the Company will not enter this
market at a later date, and that such entry would not have a material
adverse impact on the operations of the Company.
The Company believes that it is well-positioned in the field of
engineering and technology to remain competitive in the face of
technological changes that may occur in the marketplace. There can be
no assurance, however, that technology superior to the Company's will
not be developed which would have a material adverse effect on the
Company's operations.
Product Research & Development. The Company's research and development
activities primarily focus on the development of new products and new
applications and enhancements for existing products. In its
development and testing of new products and applications, the Company
consults with professionals at universities and in the industry
worldwide. The Company believes that its research and development
activities are necessary to maintain competitiveness and to better
serve its customers.
Employees. At December 31, 1998, the Company had approximately 187
full-time employees worldwide, none of whom is party to a collective
bargaining agreement.
Page 4 of 37
Financial Information about Foreign and Domestic Operations and Export
Sales
See Note 9 of Notes to Consolidated Financial Statements.
Item 2. Properties
The Company leases a 100,000 square foot building on 19 acres of land
in Piscataway, New Jersey. This facility presently accommodates the
Company's manufacturing, marketing, research and development, and
general administrative activities. The Company expects this facility
to accommodate its needs for the foreseeable future.
The Company also leases space for use as sales and service centers in
various locations overseas. The Company leases an aggregate of
approximately 13,000 square feet of space in Leatherhead, England;
Munchen and Aschaffenburg, Germany; Marne La Vallee, France; and
Tokyo, Japan.
Item 3. Legal Proceedings
There are no known material pending legal proceedings involving the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on November 5, 1998, the
following items were called and received the following vote:
The shareholders nominated and elected the directors to hold office
until the next annual meeting of shareholders and until their
respective successors have been elected and qualified with the
following results: The vote for director nominee Alexander F. Giacco,
For 12,941,173; Withheld 39,161; not voted 181,405. The vote for
director nominee Leonard Bogner, For 12,941,173; Withheld 39,161; not
voted 181,405. The vote for director nominee Walter M. Bromm, For
12,941,173; Withheld 39,161; not voted 181,405. The vote for director
nominee Alan R. Eschbach, For 12,833,673; Withheld 146,661; not voted
181,405. The vote for director nominee Richard J. Giacco, For
12,941,173; Withheld 39,161; not voted 181,405. The vote for director
nominee R. Michael Hendricks, For 12,941,173; Withheld 39,161; not
voted 181,405. The vote for director nominee Robert K. Prud'homme, For
12,940,623; Withheld 39,711; not voted 181,405.
The shareholders also approved two amendments to the 1996 Stock Option
Plan with the following results: The vote for the approval of
amendment to the Company's 1996 Stock Option Plan to increase the
number of authorized shares from 250,000 to 500,000: For 12,809,008;
Abstain 2,105; Against 169,221; not voted 181,405. The vote for the
aproval of amendment to the Company's 1996 Stock Option Plan to allow
options to be granted to "Outside" Directors: For 12,774,788; Abstain
21,955; Against 183,591; not voted 181,405.
The shareholders also ratified the appointment of
PricewaterhouseCoopers L.L.P. as the independent auditors of the
Company for the fiscal year ending December 31, 1998 with the
following results: For 12,860,668; Abstain 2,655; Against 117,011; not
voted 181,405.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
Common Stock Market Prices and Dividends
The Company's Common Stock is traded on the OTC Bulletin Board Market
under the symbol "RHEM." From February 1 to April 14, 1998, the
Company's Common Stock was traded on the Nasdaq SmallCap Market under
the symbol "RHEM." Rheometric Scientific's common stock
Page 5 of 37
moved to The Nasdaq SmallCap Market from The Nasdaq National Market on
February 13, 1998 via an exception from the bid price, net tangible
assets and market value of public float initial inclusion
requirements. The Company met all the initial inclusion requirements
as set forth by The Nasdaq Stock Market with the exception of minimum
bid price. The exception expired on April 10, 1998. On April 14,
1998, due to the expiration of an exception from the minimum bid price
of the NASDAQ SmallCap Market, the Company's common stock was moved to
the OTC-Bulletin Board Market. The table below presents the high and
low sales prices for each quarter for the years ended December 31,
1998 and 1997.
Since its initial public offering in December 1985, the Company has
not paid any cash dividends. The Company's current borrowing
arrangements prohibit the payment of cash dividends. At March 19,
1999, there were approximately 168 holders of record of the Company's
Common Stock. In addition, there are approximately 485 beneficial
holders of Common Stock held in street name.
12 Months Ended December 31,
1998 1997
_____________ ____________
QUARTER ENDED High Low High Low
March 31 $1.13 $0.75 $2.75 $1.63
June 30 0.98 0.25 2.13 1.38
September 30 0.72 0.30 1.88 1.00
December 31 0.56 0.13 1.25 0.69
Item 6. Selected Financial Data
(In thousands of dollars, except per share data)
12 Months Ended December 31,
1998 1997 1996 1995 1994
______ ______ ______ ______ _______
Sales $30,608 $37,539 $41,115 $41,244 $34,571
Restructuring expense (198) 940 -- -- (98)
Net (loss) earnings (1,144) (2,329) (6,347) 391 (1,463)
Basic and diluted (loss)
earnings per Share (0.09) (0.18) (0.48) 0.03 (0.12)
Total assets 28,534 35,434 36,045 40,093 35,110
Long-term debt 10,901 11,055 11,361 10,973 9,403
The PL Thermal Sciences Business acquisition has been included as of
March 3, 1994.
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
12 Months Ended December 31, 1998 vs. 12 Months Ended December 31,
1997
In the year ended December 31, 1998, the Company achieved sales of
$30,608,000 compared to $37,539,000 for the year ended December 31,
1997. Japanese sales decreased by 26.8% while domestic and European
sales decreased 3.1% and 34.2%, respectively. Sales for 1998 were
adversely affected by foreign exchange of $450,000 compared to 1997.
International and export sales decreased to 47% of consolidated sales
from 56% in 1997. Gross profit for the year ended December 31, 1998
was 43.8% of sales, compared to 44.8% for the same period in 1997.
Gross profit in 1997 includes a one-time charge for obsolescence
expense of $600,000. See Note 1. Without this charge, gross profit
for 1997 would have been 46.4% of sales.
Page 6 of 37
Operating expenses of $12,313,000 decreased by $3,863,000 for the
period ended December 31, 1998, compared to the corresponding period
in 1997. Included in the 1997 amount is $940,000 relating to the
European restructuring, while $198,000 of this was reversed in 1998.
Excluding these one-time items, the decrease over the period was
$2,725,000. This decrease is largely due to the Company's aggressive
expense reduction efforts in the U.S. and the U.K. Exchange difference
in 1998 versus 1997 on foreign expenses accounted for approximately
$140,000 of the decrease.
Interest expense decreased $62,000 for the period ended December 31,
1998 compared to the corresponding period in 1997. This decrease is due
to carrying lower loan balances throughout the period.
Net loss for the year ended December 31, 1998 was $1,144,000 compared
to net loss of $2,329,000 in 1997. The 1997 results include a one-time
charge of $940,000 related to restructuring and a one-time charge for
obsolescence expense of $600,000. In 1998 $198,000 of the
restructuring reserve was reversed. In addition, net income in 1998
was favorably affected by a decrease in operating expenses of
$2,725,000, a decrease in net interest expense of $62,000, and a
currency gain of $161,000 in 1998 compared to a currency loss of
$437,000 in 1997.
Backlog as of December 31, 1998 and 1997 was $2,335,000 and
$3,532,000, respectively. The Company expects that all of the items in
its backlog will be delivered in the current calendar year.
Inherent in the Company's business is the potential for inventory
obsolescence for older products as the Company develops new products.
Obsolescence has historically related to parts inventory. The Company
continually monitors its exposure relating to excess and obsolete
inventory and establishes an appropriate valuation account. The
Company's development efforts generally enhance existing products or
relate to new markets for existing technology and, therefore, existing
products are generally not rendered obsolete.
12 Months Ended December 31, 1997 vs. 12 Months Ended December 31,
1996
In the year ended December 31, 1997, the Company achieved sales of
$37,539,000 compared to $41,115,000 for the year ended December 31,
1996. Japanese sales increased by 4%, while domestic and European
sales decreased 5% and 21%, respectively. Sales for 1997 were
adversely affected by foreign exchange of $1,620,000 compared to 1996.
International and export sales decreased to 56% of consolidated sales
from 61% in 1996. Gross profit for the year ended December 31,1997
was 44.8% of sales, compared to 45.9% for the same period in 1996.
Gross profit in 1997 includes a one-time charge for obsolescence
expense of $600,000. See Note 1. Without this charge, gross profit
for 1997 would have been 46.4% of sales.
Operating expenses of $16,176,000 decreased by $6,516,000 for the
period ended December 31, 1997, compared to the corresponding period
in 1996. Included in the 1997 amount is $940,000 relating to the
European restructuring. Included in the 1996 amount is $2,368,000, a
one-time charge related to the sale/leaseback transaction and
$2,438,000, related to the write-down of long-lived assets whose value
has been deemed impaired. Excluding these one-time charges, the
decrease over the period was $2,650,000. This decrease is largely due
to the Company's aggressive expense reduction efforts in the U.S. and
the U.K. Exchange difference in 1997 versus 1996 on foreign expenses
accounted for approximately $400,000 of the decrease.
Interest expense decreased $91,000 for the period ended December 31,
1997 compared to the corresponding period in 1996. This decrease is due
to a lower interest rate on the lease agreement. This decrease was
offset by approximately $136,000 as a result of carrying higher loan
balances throughout the period.
Page 7 of 37
Net loss for the year ended December 31, 1997 was $2,329,000 compared
to net loss of $6,347,000 in 1996. The 1997 results include a one-time
charge of $940,000 related to restructuring and a one-time charge for
obsolescence expense of $600,000. Net income in 1997 was favorably
affected by a decrease in operating expenses of $2,650,000, a decrease
in net interest expense of $91,000, and an increase in gross profit
percentage after adjusting for the 1997 one-time charges. These were
offset by an increase in currency loss of $432,000 as compared to
1996.
Backlog as of December 31, 1997 and 1996 was $3,532,000 and
$1,745,000, respectively. The Company expects that all of the items in
its backlog will be delivered in the current calendar year.
Inherent in the Company's business is the potential for inventory
obsolescence for older products as the Company develops new products.
Obsolescence has historically related to parts inventory. The Company
continually monitors its exposure relating to excess and obsolete
inventory and establishes an appropriate valuation account. The
Company's development efforts generally enhance existing products or
relate to new markets for existing technology and, therefore, existing
products are generally not rendered obsolete.
Financing, Liquidity, and Capital Resources
Management believes that the cash generated from operations and funds
available under its Loan Agreement, should be sufficient to meet the
Company's working capital needs for the next year. On February 23,
1996 the Company entered into a three-year Loan and Security Agreement
(the "Loan Agreement"). The Loan Agreement provides a working capital
revolving credit facility with a maximum available credit of
$11,500,000. The amount of available credit is determined by the
level of certain eligible receivables and inventories. Adequacy of
cash flows generated beyond will depend upon the Company's ability to
achieve expected sales volumes to support profitable operations.
On March 31, 1998, the Company's bank amended the Loan Agreement with
regards to the facility limit and inventory sublimit. Effective April
1, 1998 and on the opening of business on Wednesday of each
consecutive week thereafter, both the facility limit and inventory
sublimit will decrease by $25,000. As of December 31, 1998 the
facility limit is $10,500,000 and the inventory sublimit is
$5,000,000.
The Company's Loan Agreement expired on February 23, 1999, and the
lender had notified the Company in August 1998 that the Loan Agreement
would not be extended beyond the expiration date. Following that
notification, the Company commenced discussions with other prospective
lenders to replace the credit facility provided by the Loan Agreement
with a credit facility with a maximum available credit of $10,000,000.
This credit facility would take advantage of both domestic and foreign
receivables in calculating the borrowing base. The ability to proceed
with a lesser maximum credit than available under the current Loan
Agreement is based on existing improvements in the management of the
Company's working capital.
On February 19, 1999, the Loan Agreement was amended so as to extend
the Loan Agreement to May 21, 1999. In addition, the facility limit
was permanently reduced to $10,000,000 and the inventory sublimit
would continue to be permanently and automatically decreased by
$25,000 each week. The Loan Agreement was further extended for one-
month periods to October 31, 1999.
On November 12, 1999 the Company's lender amended the Loan Agreement
extending its term to November 30, 2000. As of this date, all foreign
lines of credit have been consolidated into the domestic line of
credit and the foreign receivables are no longer used in the
calculation of the borrowing base. Foreign working capital
requirements will be satisfied by cash generated from current
operations. In addition, the facility limit was permanently reduced
to $6,500,000
Page 8 of 37
and the inventory sublimit would continue to be permanently and
automatically decreased by $25,000 each week. The advance rate of 69%
on eligible receivables will be reduced in March 2000 to 61% and then
further decreased 2% each month thereafter. Covenant requirements
have been revised based on the Company's forecast for 2000.
Cash Flows from Operations
Net cash provided by operating activities in the fiscal year ended
December 31, 1998 was $4,109,000 compared to net cash used in
operating activities in the fiscal years ended December 31, 1997 and
1996 of $2,924,000 and $1,082,000, respectively. The positive cash
flow from operations in 1998 was comprised primarily on a decrease
in receivables and inventories of $5,711,000 and $700,000,
respectively, as well as an increase in payable to affiliate of
$884,000. This positive cash flow was offset by a decrease in
liabilities of $2,829,000, a decrease in the restructuring reserve
of $940,000, and a net loss of $1,144,000.
Also contributing to this positive cash flow is non-cash
depreciation and amortization charges of $987,000 and an increase in
the inventory reserve of $738,000. A large portion of the reserve
increase is to address obsolescence resulting from product redesign.
Cash Flows from Investing
The Company made capital expenditures of $144,000, $158,000, and
$469,000, respectively, in the fiscal years ended December 31, 1998,
1997, and 1996.
Cash Flows from Financing
Net cash used in financing activities in the fiscal year ended
December 31, 1998 was $3,743,000. This was due mainly to a decrease
in short-term borrowings of $3,349,000. This compares to net cash
provided by financing activities in the fiscal years ended December
31, 1997 and 1996 of $2,904,000 and $661,000, respectively.
Additionally there was a decrease in our borrowing against receivables
and our lease obligation of $196,000 and $229,000, respectively.
Total borrowings with foreign and domestic banks at December 31,
1998 were $5,718,000 with remaining availability of approximately
$1,794,000.
See Statement of Cash Flows for further details of the Company's
cash flows.
See Notes 3 and 4 of the Notes to Consolidated Financial Statements for
additional information.
Year 2000 Issues
Rheometric Scientific recognizes that its operations, as well as those
of its suppliers and customers are reliant upon computer systems for
many aspects of their business. Computer programs and embedded
computer chips that are not Year 2000 compliant will not be able to
distinguish between the calendar years 1900 and 2000. The Company
acknowledges that the Year 2000 situation could adversely impact its
operations and is implementing a comprehensive plan to address all
known aspects of the Year 2000 problem.
In a program that was started in 1997, the Company has completed an
inventory of information systems, production and facilities equipment,
products, customers, and suppliers that may potentially have a Year
2000 problem. The Company has been formally addressing assessments,
conversion plans and conversion implementation and testing for all
internal systems running on a variety of computer platforms.
Approximately 90% of the internal systems conversions and upgrades are
completed. Certain non-compliant systems are being replaced or
retired from service. Converted programs have been tested. Software
and equipment found to be not Year 2000 compliant will be upgraded or
replaced before the end of the fourth quarter of 1999.
In addition to efforts regarding internal systems, the Company has
also been assessing its significant suppliers. These suppliers
include raw material, energy and production supply providers, as well
as suppliers of financial, communication and logistics services. The
Page 9 of 37
Company has communicated with key suppliers and has sent
questionnaires to all critical suppliers regarding year 2000
readiness.
Rheometric Scientific has completed assessment of its manufactured
products and internal systems for Year 2000 compliance. This task was
completed during the first quarter of 1999. The majority of
instruments were found to be Year 2000 compliant. Software upgrades
for non-compliant products have been released via customer support and
the Internet. A summarized listing of instrument compliance status is
posted on the corporate web site at http://www.rheosci.com, which
includes individual instrument information and results of internal
system evaluations.
All internal systems that have not yet been updated for Year 2000
compliance are being revised or tested at this time. Computer
hardware is being replaced in an ongoing equipment renewal program.
Some software revisions are being performed off-site by a Year 2000
consultant. This work has entered the testing stage, and completion of
testing and implementation is expected during fourth quarter of 1999.
All identified systems have been evaluated, and no unexpected problems
have been encountered at this time.
Rheometric Scientific expects that its products, systems and suppliers
will remain fully operational and will not cause any material
disruptions due to Year 2000 problems. Because of the uncertainties
associated with assessing preparedness of suppliers and customers,
there is a risk of material adverse effect on Rheometric's future
results of operations if these constituencies are not capable of
correcting their Year 2000 problems, if any. Contingency plans are
being developed to address any problems that may become known.
The Company's estimate of the total cost for Year 2000 compliance,
based on the work completed to date plus estimates of remediation
costs for systems not yet fully assessed, is approximately $50,000, of
which approximately $35,500 has been incurred through June 30, 1999.
Incremental spending has not been and is not expected to be material
because most Year 2000 compliance costs will be met with amounts that
are normally budgeted for procurement and maintenance of the Company's
information systems and production and facilities equipment. The
redirection of spending from procurement of information systems and
production and facilities equipment to implementation of Year 2000
compliance plans may in some instances delay productivity
improvements. The Company presently believes that the Year 2000 issue
will not cause material operational problems for the Company.
However, if the Company is not successful in identifying all material
Year 2000 problems, or assessment and remediation of identified Year
2000 problems is not completed in a timely manner, there may be an
interruption in, or failure of, certain normal business activities or
operations. Such interruptions or failures could have a material
adverse impact on the Company's consolidated results of operations and
financial condition, or on its relationships with customers,
suppliers, or others.
Page 10 of 37
ITEM 8. Financial Statements and Supplementary Data
PricewaterhouseCoopers L.L.P.
Report of Independent Accountants
To the Board of Directors and
Shareholders of Rheometric Scientific, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity
and comprehensive loss, and cash flows present fairly, in all material
respects, the financial position of Rheometric Scientific, Inc. and
its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 29, 1999
Page 11 of 37
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
1998 1997
_______ ______
ASSETS
Current Assets
Cash $ 488 $ 297
Receivables - less allowance for
doubtful accounts of $407 and $198
as of December 1998 and 1997 9,817 14,916
Inventories, net
Finished goods 3,491 5,659
Work in process 1,491 2,650
Assembled components, materials,
and parts 5,648 3,550
______ ______
10,630 11,859
Prepaid expenses and other assets 990 813
______ ______
Total current assets 21,925 27,885
______ ______
Property, plant, and equipment 15,370 15,904
Less, accumulated depreciation and
Amortization 9,524 9,475
______ ______
Property, plant, and equipment, net 5,846 6,429
Goodwill, net -- --
Other assets 763 1,120
______ ______
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY $28,534 $35,434
====== ======
Current Liabilities
Short-term bank borrowings $ 5,718 $ 8,769
Current maturities of long-term debt 242 227
Accounts payable 2,381 3,931
Borrowings against accounts receivable 874 958
Accrued liabilities 3,267 5,360
______ ______
Total current liabilities 12,482 19,245
______ ______
Long-term note payable -- 79
Long-term debt lease obligation 4,643 4,718
Long-term debt - affiliate 6,258 6,258
Payable to affiliate 1,336 1,240
Other long-term liabilities 102 --
______ ______
Total liabilities 26,769 32,604
______ ______
Commitments and contingencies
Shareholders' Equity
Common stock, stated value of $.001,
Authorized 20,000 shares; issued and
Outstanding 13,162 shares at
December 31, 1998 and 1997 13 13
Additional paid-in capital 25,523 25,492
Accumulated deficit (23,691) (22,547)
Accumulated other comprehensive income
($48 and (217) in 1998 and 1997
respectively) (80) (128)
______ ______
Total shareholders' equity 1,765 2,830
______ ______
Total Liabilities & Shareholders' Equity $28,534 $35,434
====== ======
See Notes to Consolidated Financial Statements
Page 12 of 37
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
12 Months Ended December 31,
1998 1997 1996
_______ _______ _______
Sales $30,608 $37,539 $41,115
Cost of sales 17,196 20,728 22,240
______ _______ _______
Gross profit 13,412 16,811 18,875
______ ______ ______
Marketing and selling expenses 8,522 9,122 10,537
Research and development expenses 2,201 3,145 3,055
General and administrative expenses 1,551 2,597 3,532
Impairment of long-lived assets -- -- 2,438
Restructuring expense (198) 940 --
Goodwill amortization -- 96 405
Intangible amortization 237 276 357
Loss on sale/leaseback -- -- 2,368
______ ______ _______
12,313 16,176 22,692
______ ______ ______
Operating income (loss) 1,099 635 (3,817)
Interest expense (1,378) (1,523) (1,847)
Interest expense - Affiliate (906) (835) (786)
Interest income -- 12 196
Foreign currency Income/(loss) 161 (437) (5)
______ ______ ______
Loss before income taxes (1,024) (2,148) (6,259)
Income tax (benefit)/expense 120 181 88
______ ______ ______
Net loss $ (1,144) $ (2,329) $ (6,347)
====== ====== ======
Net loss per share
Basic $(0.09) $(0.18) $(0.48)
====== ====== ======
Diluted $(0.09) $(0.18) $(0.48)
====== ====== ======
Average number of shares outstanding
Basic 13,162 13,162 13,162
====== ====== ======
Diluted 13,162 13,162 13,162
====== ====== ======
See Notes to Consolidated Financial Statements.
Page 13 of 37
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) 12 Months Ended December 31,
1998 1997 1996
______ ______ ______
Cash Flows from Operating Activities
Net loss $(1,144) $(2,329) $ (6,347)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of
plant and equipment 750 786 874
Amortization of goodwill -- 96 405
Provision for slow moving inventory 738 819 398
Amortization of intangibles 237 276 357
Loss on sale/leaseback financing -- -- 2,368
Loss on sale/retirement of property,
plant, and equipment 91 -- 9
Unrealized currency (gain) loss (137) 418 (140)
Impairment of long-lived assets -- -- 2,438
Changes in assets and liabilities:
Receivables 5,711 (224) (1,771)
Inventories 700 (3,606) (1,177)
Prepaid expenses and other assets (149) (78) 808
Accounts payable and accrued liabilities (2,829) (330) 224
Payable to affiliate 884 271 493
Other assets 153 59 (301)
Restructuring reserve (940) 940 --
Other non current liabilities 102 -- --
Other non-current liability - Mettler (58) (22) 280
______ ______ ______
Net cash provided by (used in)
operating activities 4,109 (2,924) (1,082)
Cash Flows from Investing Activities:
Purchases of property, plant,
and equipment (144) (158) (469)
______ ______ ______
Net cash used in investing activities (144) (158) (469)
Cash Flows from Financing Activities
Repayment under line of credit agreement (3,349) -- (3,020)
(Repayments)/borrowings against accounts
receivables (196) 1,018 --
Borrowings under line of credit agreements -- 1,214 4,700
Repayment of long-term debt/lease
obligation (229) (189) (5,763)
Proceeds from long-term note payable -- -- 246
Repayment of short-term debt affiliate -- -- (375)
Proceeds from warrants 31 -- --
Net proceeds from sale/leaseback arrangement -- -- 5,734
Mortgage participation -- 861 (861)
______ ______ ______
Net cash (used in)/provided by financing
activities (3,743) 2,904 661
Effect of Exchange Rate Changes on Cash (31) (11) 12
_______ _______ ______
Net increase (decrease) in cash 191 (189) (878)
Cash at beginning of period 297 486 1,364
______ ______ ______
Cash at end of period $ 488 $ 297 $ 486
====== ====== ======
See Notes to Consolidated Financial Statements
Page 14 of 37
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
And Comprehensive Loss
Additional Total
(In thousands) Common Stock Paid-in (Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit) Income/(Loss) Equity
Balance at December 31, 1995 13,162 13 24,759 (13,871) (13) 10,888
______ ___ ______ ______ ____ ______
Net loss -- -- -- (6,347) -- (6,347)
Currency translation adjustment -- -- -- -- 102 102
Comprehensive loss -- -- -- -- -- (6,245)
Warrants -- -- 733 -- -- 733
__________________________________________________________________________________
Balance at December 31, 1996 13,162 13 25,492 (20,218) 89 5,376
______ ____ ______ ______ ____ _______
Net loss -- -- -- (2,329) -- (2,329)
Currency translation adjustment -- -- -- -- (217) (217)
Comprehensive loss -- -- -- -- -- (2,546)
___________________________________________________________________________________
Balance at December 31, 1997 13,162 13 25,492 (22,547) (128) 2,830
______ ____ ______ ______ ____ ______
Net loss -- -- -- (1,144) -- (1,144)
Currency translation adjustment -- -- -- -- 48 48
Comprehensive loss -- -- -- -- -- (1,096)
Warrants -- -- 31 -- -- 31
__________________________________________________________________________________
Balance at December 31, 1998 13,162 $13 $25,523 $(23,691) $ (80) $ 1,765
===== === ====== ====== ===== ======
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of
Rheometric Scientific, Inc., and its wholly-owned subsidiaries
(referred to as "Rheometric" or the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation. Axess Corporation ("Axess" or the "Affiliate") owns
76.6% of the outstanding shares of the Company's Common Stock as of
December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
The Company designs, manufactures, markets, and services computer-
controlled material testing systems for use in material and product
research and development, on-line process monitoring, and quality
control.
Revenue Recognition
Product sales are recorded upon shipment. Service revenues are
recorded as services are performed. Maintenance agreement revenues
are recorded on a straight-line basis over the terms of the respective
agreements. Service revenues for the years ended December 31, 1998,
1997, and 1996, were $3,965,000, $3,397,000, and $3,820,000,
respectively. Deferred revenue relating to maintenance agreements
amounted to $766,131, and $813,394 at December 31, 1998 and 1997,
respectively, and is included in Accrued liabilities in the
accompanying Consolidated Balance Sheets.
Page 15 of 37
Inventories
Inventories, consisting of purchased materials, direct labor, and
manufacturing overhead, are stated at the lower of cost (determined on
the first-in, first-out method) or market. As of December 31, 1998
and 1997 the Company had a reserve of approximately $1,315,000 and
$1,979,000, respectively, for excess and obsolete inventory.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation and
amortization of plant and equipment are computed based on the
estimated service lives of the assets or lease terms, if shorter,
using the straight-line method. Betterments and major renewals are
capitalized, while repairs, maintenance and minor renewals are
expensed. When assets are disposed of, the assets and related
allowances for depreciation are eliminated from the accounts and any
resulting gain or loss is reflected in operations.
The estimated useful lives for each class of fixed assets are as
follows:
Buildings 30 years Office equipment 5-8 years
Assets under direct Transportation equipment 3-5 years
financing lease 15 years Leasehold improvements 5 years
Machinery and equipment 5-8 years Assets under capital lease 5 years
Income Taxes
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense
is the tax payable for the period plus the change during the period in
deferred tax assets and liabilities.
No provision has been made for U.S. income taxes which would be
payable if undistributed earnings of approximately $552,000 as of
December 31, 1998 of foreign subsidiaries were distributed to the
Company in the form of dividends, since it is management's intention
to permanently reinvest such earnings in the related foreign
operations.
Goodwill and Intangibles
Goodwill is amortized using the straight-line method over seven years.
All other intangibles are amortized using the straight-line method
over the respective useful life. (See Accounting for the Impairment of
Long-Lived Assets.)
Total accumulated amortization of capitalized software for the year
ended December 31, 1998, 1997 and 1996 was $654,000 and $503,000, and
$357,000 respectively. The unamortized balance of capitalized
software development costs totaled $34,000 in 1998, $167,000 in 1997,
and $313,000 in 1996, which is amortized using a three-year useful
life. Amortization expense relating to capitalized software
development costs for the year ended December 31, 1998, 1997, and 1996
totaled $151,000, $146,000, and $43,000 respectively.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated at
current exchange rates and the effects of these translation
adjustments are reported as a separate component of shareholders'
equity. Realized gains and losses from foreign currency transactions
are included in the consolidated statements of operations, as are
unrealized gains and losses arising from the translation of the
foreign subsidiaries' intercompany liability accounts into U.S.
dollars. The Company's foreign currency exposure policy is to not
enter into foreign currency derivative instruments.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Page 16 of 37
Cash Flow Information
Foreign currency cash flows have been converted to U.S. dollars at an
appropriately weighted-average exchange rate or the exchange rates in
effect at the time of the cash flows, where determinable.
Net cash used in operating activities for the years ended December 31,
1998, 1997, and 1996, respectively, reflects cash payments for
interest of $1,281,000, $2,044,600, and $2,114,700, and income taxes
of $169,000, $49,200, and $102,700, respectively. The bad debt
expense for the years ended December 31, 1998, 1997, and 1996 was
$262,400, $108,200, and $37,600, respectively.
Fair Value of Financial Instruments
The estimated fair value of the Company's debt instruments as of
December 31, 1998 and 1997 approximates the carrying amount. The fair
value of the debt instruments is estimated based on the discounted
future cash flows using currently available interest rates. The
Company's letter of credit instrument is not recognized in the
Company's consolidated balance sheet and a reasonable estimate of fair
value could not be made.
Concentration of Credit Risk
The Company's product line, consisting of rheological and thermal
analytical laboratory instruments, is sold worldwide, principally to
large corporations, and research, educational, and governmental
institutes. The Company does not require collateral from its
customers. The accounts receivable are spread among a number of
customers and are geographically dispersed such that in management's
opinion credit risk is minimized.
Accounting for the Impairment of Long-Lived Assets
The Financial Accounting Standards Board issued Statement of
Accounting Standards No. 121, "(Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121")
in March 1995. FAS 121 requires companies to review their long-lived
assets and certain identifiable intangibles (collectively, "Long-Lived
Assets") for impairment whenever events or changes in circumstances
indicate that the carrying value of a Long-Lived asset may not be
recoverable. As a result of this review, an impairment was
recognized in 1996 relating to the goodwill generated by the
acquisition of PL Thermal Sciences Business in 1994 and the intangible
asset recorded in connection with the 1995 purchase of the Mettler
property rights for the RM180 and the RM260.
In 1994, the Company acquired the PL Thermal Sciences Business which
included an engineering, manufacturing, sales, and service operation
in the United Kingdom. Goodwill of $2,592,000 was recorded and was
being amortized over seven years. In late 1995, management reviewed
the design of the core thermal products and in early 1996 implemented
a plan to redesign the core products and incorporate its new
Windowsr95 RSI Orchestrator software. It was determined that these
redesigns were necessary to remain competitive. Additionally, in mid
1996, management decided it would be cost effective to consolidate the
UK's engineering and manufacturing operations in the United States.
As a result of the significant physical change in the product line
acquired, management reviewed the recoverability of the carrying
amount of the goodwill balance. An evaluation was made of the future
cash inflows and outflows related to the thermal products acquired in
connection with the aforementioned acquisition. Based on this
evaluation, an impairment of $1.7 million was recognized. This loss of
$1,742,000 is included in 1996 operating expenses under Impairment of
long-lived assets.
In 1995, the Company acquired from Mettler-Toledo AG ("Mettler") the
exclusive-worldwide rights for two rheological test instruments, the
RM180 and the RM260. The Company recorded an intangible asset of
$1,525,000 related to these property rights and was amortizing this
asset on a straight-line basis over six years. At the end of 1996,
based on the performance of the products over the past year, an
evaluation was made of the future cash inflows and outflows of these
products. Based on this evaluation, an impairment of $696,000 was
realized. The
Page 17 of 37
remaining balance of $400,000 will be amortized on a straight-line
basis over the remaining four years of the agreement. The loss of
$696,000 is included in 1996 operating expenses under Impairment of
long-lived assets.
(Loss) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and supersedes APB Opinion
No. 15. "Earnings Per Share" ("Opinion 15"). SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS which
excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted reflects the potential
dilution that could occur if outstanding options and warrants were
exercised. The company has adopted SFAS 128 and has restated all
prior-period EPS data presented.
Other Matters
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," and No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for fiscal years beginning after
December 15, 1997. The provisions of SFAS No. 130 establish standards
for reporting and display of comprehensive income and its components
in the financial statements. This statement requires all items that
are required to be recognized under accounting standards as components
of comprehensive income be reported in the financial statements and
displayed with the same prominence as other financial statements. The
provisions of SFAS No. 131 establish standards for the way that
enterprises report information about operating segments in annual
financial statements and require that selected information about
operating segments in interim financial statements be reported. It
also establishes standards for related disclosure about products and
services, geographic areas, and major customers. The Company has
adopted these standards of disclosure for 1998. See Consolidated
Statement of Shareholders' Equity and Comprehensive Loss and Note 9.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for
fiscal years beginning after June 15, 2000. The provisions of SFAS
No. 133 require all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be
designated, reassessed and documented pursuant to the provisions of
SFAS 133. At present time the Company is reviewing the potential
impact of this standard.
2. Property, Plant and Equipment
Property, plant and equipment as of December 31 consisted of the
following:
1998 1997
______ ______
Assets under direct financing lease $ 6,391,000 $ 6,300,000
Buildings 0 133,000
Machinery and equipment 2,382,000 2,367,000
Office equipment 5,509,000 5,622,000
Transportation equipment 100,000 195,000
Leasehold improvements 135,000 434,000
Assets under capital lease 853,000 853,000
__________ __________
$15,370,000 $15,904,000
========= ==========
On February 23, 1996, the Company entered into a sale/leaseback
arrangement whereby the Company sold the Company's corporate
headquarters and main manufacturing facility, and the
Page 18 of 37
19 acres of real property on which the facility is located (the
facility and the real estate being referred to herein as the
"Facility") for $6,300,000. The transaction was treated as a
financing. A lease obligation was recorded and the asset written down
to the amount of the proceeds. As a result of the sale, the Company
recognized a loss on its income statement of $2,368,000, the
differences between the proceeds of the sale and the cost of the
facility as carried on the Company's balance sheet. The assets will
be amortized over the life of the lease on a straight-line basis.
Accumulated amortization on these assets under direct financing was
$1,190,000 and $766,000 as of December 31,1998 and 1997, respectively.
Simultaneously with the sale to the Landlord, the Company entered into
a long-term lease of the Facility from the Landlord. The initial term
of the lease is 15 years, subject to five-year extensions through
2026. Under the terms of the lease, the Company has certain rights of
first refusal to purchase the Facility and the right to acquire up to
11 acres of undeveloped real estate constituting a portion of the
facility (the "Excess Land") under certain circumstances.
Assets under capital lease consisted primarily of computer equipment
which was purchased at the end of the lease term. As of December 31,
1995, the equipment was fully depreciated with an accumulated
depreciation balance of $853,000. The Company's property, plant and
equipment are pledged as collateral under the existing lines of
credit.
3. Long-term Debt and Short-term Borrowings
Long-term debt as of December 31 consisted of the following:
1998 1997
_____ _____
Obligation under sale/leaseback
payable through February 2011,
with interest imputed at a rate of
13.9% and 13.9% for 1998 and
1997, respectively $4,806,000 $4,857,000
Note payable through November
1999 with interest at 9.54% 79,000 167,000
__________ __________
4,885,000 5,024,000
Less current maturities 242,000 227,000
__________ __________
$ 4,643,000 $ 4,797,000
========= ==========
On February 20, 1997, as a result of the Landlord refinancing the
mortgage on the property, the Company's annual lease payment was
significantly reduced for the remaining life of the lease. This
resulted in the reduction of the imputed interest rate to 13.9% from
22.8% in the original lease.
The annual maturities of the long-term note payable are as follows:
1999 - $79,000. For details of the lease obligation, see Note 8 -
Commitments and Contingencies.
Short-term Borrowings
On February 23, 1996, simultaneously with the consummation of the
sale/leaseback arrangement, the Company entered into the Loan
Agreement, which provides for a working capital revolving credit
facility in the amount of $11,500,000 with an initial three-year term,
expiring on February 23, 1999.
On March 31, 1998, the Company's bank amended the Loan Agreement with
regards to the facility limit and inventory sublimit. Effective April
1, 1998 and on the opening of business on
Page 19 of 37
Wednesday of each consecutive week thereafter, both the facility limit
and inventory sublimit will decrease by $25,000. As of December 31,
1998 the facility limit is $10,500,000 and the inventory sublimit is
$5,000,000.
The amount of available credit is determined by the level of certain
eligible receivables and inventory. The Company's obligations under
the Loan Agreement are collateralized by substantially all of the
Company's assets.
The Company at December 31, 1998 had working capital lines of credit
with certain domestic and foreign banks. The foreign working capital
lines of credit were supported by letters of credit issued under the
Loan Agreement. Total borrowings were $5,718,000 with remaining
availability of approximately $1,794,000 at December 31, 1998.
Borrowings at December 31, 1998 were $2,738,000 with domestic banks
and $2,980,000 with foreign banks.
The domestic line of credit bears interest at prime plus 1.5% (9.25%
at December 31, 1998 and 10.0% at December 31, 1997). Interest rates
on the foreign lines of credit range between 1.5% and 3.0% in Japan
and between 6.0% and 8.0% in Europe as of December 31, 1998 and
interest rates on the foreign lines of credit range between 1.9% and
3.0% in Japan and between 6.0% and 8.3% in Europe as of December 31,
1997. The weighted-average interest rate on short-term debt
outstanding was 6.1% and 7.7% as of December 31, 1998 and 1997,
respectively.
The amended Loan Agreement requires the Company to maintain a minimum
tangible net worth and working capital, generate minimum consolidated
and domestic cash flows, and achieve a minimum adjusted funded debt
to adjusted tangible net worth ratio. In addition, the Loan Agreement
prohibits the payment of cash dividends or cash distributions to
shareholders.
During 1998 and the first half of 1999, the Company had been in
violation of certain debt covenants associated with its obligation
under a sale/leaseback arrangement and its short-term loan agreement.
The Company has obtained permanent waivers covering these violations.
The Loan Agreement also provided certain letters of credit facilities
for operations of the Company's foreign subsidiaries.
The Company's Loan and Security Agreement (the "Loan Agreement")
expired on February 23, 1999, and the lender notified the Company in
August 1998 that the Loan Agreement will not be extended beyond the
expiration date. Following that notification, the Company has
commenced discussions with other prospective lenders to replace the
credit facility provided by the Loan Agreement with a credit facility
with a maximum available credit of $10,000,000. The ability to
proceed with a lesser maximum credit than available under the current
Loan Agreement is based on existing improvements in the management of
the Company's working capital.
On February 19, 1999 the Loan Agreement was amended so as to extend
the Loan Agreement to May 21, 1999. In addition, the facility limit
was permanently reduced to $10,000,000 and the inventory sublimit
would continue to be permanently and automatically decreased by
$25,000 each week. The Loan Agreement was further extended for one-
month periods to October 31, 1999.
On November 12, 1999 the Company's lender amended the Loan Agreement
extending its term to November 30, 2000. As of this date, all foreign
lines of credit have been consolidated into the domestic line of
credit and the foreign receivables are no longer used in the
calculation of the borrowing base. Foreign working capital
requirements will be satisfied by cash generated from current
operations. In addition, the facility limit was permanently reduced
to $6,500,000 and the inventory sublimit would continue to be
permanently and automatically decreased by $25,000 each week. The
advance rate of 69% on eligible receivables will be reduced in March
2000 to 61% and then further decreased 2% each month thereafter.
Covenant requirements have been revised based on the Company's
forecast for 2000.
Page 20 of 37
The Company's foreign subsidiaries sell certain accounts receivable
balances to financial institutions. At December 31, 1998 trade
receivables discounted with recourse amounted to $874,000 and is
shown as borrowings on the balance sheet. During the years ended
December 31, 1998, 1997, and 1996, approximately $3,800,625,
$4,678,536, and $3,205,000, respectively, of trade receivables were
sold, with recourse, to banks.
4. Long-term Debt - Affiliate
Long-term debt - affiliate as of December 31 consisted of the
following:
1998 1997
_____ _____
Subordinated term note due February 28,
2002 with interest at 12% per annum $ 6,258,000 $6,258,000
========= =========
The Company and Axess executed various subordinated term loans during
the years ended December 31, 1993, 1994 and 1995 aggregating
$5,740,000. On February 23, 1996, Axess and the Company consolidated
all of the outstanding notes and deferred interest amounting to
$517,972 into a new subordinated note for an aggregate amount of
$6,258,000. The new note bears interest at 12% payable monthly and is
due February 28, 1999. On July 13, 1999 the due date was extended to
February 28, 2002. Payment of interest is contingent upon cash flow
availability. Accrued interest at December 31, 1998 and 1997 was
$1,275,000 and $391,000 respectively.
5. Income Taxes
The components of deferred tax assets and (liabilities) as of December
31 consisted of the following:
1998 1997
______ ______
Inventory reserves, inventory capitalization, and
intercompany profit in inventory $ 919,000 $1,248,000
Other 1,065,000 2,098,000
Net operating loss carryforwards 6,024,000 8,250,000
Research and development and other tax
credit carryforwards 1,001,000 1,030,000
_________ _________
Gross deferred tax assets 9,009,000 12,626,000
_________ _________
Gross deferred tax liabilities 212,000 (308,000)
_________ _________
Net deferred tax asset before valuation
allowance 8,797,000 12,318,000
Valuation allowance on deferred tax assets (8,797,000) (12,318,000)
_________ __________
Net deferred tax asset $ -- $ --
========== =========
A valuation allowance is established when it is more likely than not
that a portion or all of the deferred tax assets will not be realized.
At December 31, 1998, the Company had Federal net operating loss
carryforwards for income tax purposes of approximately $9,275,000
which expire in 2005 through 2011, State net operating losses of
$10,182,000, which expire 1999 through 2003, and foreign loss
carryforwards of approximately $4,378,000, a portion of which may be
carried forward indefinitely. The Company also has other tax credit
carryforwards aggregating approximately
$1,001,000 at December 31, 1998, which expire in 2001 through 2010.
The change in ownership resulting from the August 21, 1992 sale of
Common Stock and a subordinated convertible debenture will result in
a limitation on future annual utilization of domestic tax credits and
net operating losses, pursuant to Internal Revenue Code Sections 382
and 383.
Page 21 of 37
(Loss) income before income taxes as of December 31 consisted of the
following:
1998 1997 1996
____ ____ ____
Domestic $ 2,402,000 $ 757,000 $ (4,157,000)
Foreign (3,426,000) (2,905,000) (2,102,000)
__________ __________ _________
$ (1,024,000) $(2,148,000) $(6,259,000)
========== ========== ==========
The components of income tax expense for the years ended December 31
consisted of the following:
1998 1997 1996
_____ _____ _____
Federal:
Current $ (65,000) $ 30,000 $ --
Deferred -- -- --
_______ ________ ________
(65,000) 30,000 --
_______ ________ _______
Foreign:
Current 181,000 143,000 83,000
Deferred -- -- --
_______ ________ _______
181,000 143,000 83,000
_______ ________ _______
State:
Current 4,000 8,000 5,000
Deferred -- -- --
_______ ________ ________
4,000 8,000 5,000
_______ ________ ________
$ 120,000 $ 181,000 $ 88,000
======== ========= =========
The Company's effective tax rate varies from the statutory federal tax
rate as of December 31 as a result of the following:
1998 1997 1996
_____ _____ _____
Computed statutory income
tax (benefit) provision $ (290,000) $ (974,000) $(2,128,000)
State income taxes, net Federal
tax benefit 2,000 7,000 3,000
Foreign taxes in excess of
statutory rate 164,000 75,000 11,000
Utilization of net operating losses (841,000) -- --
Effect of loss carryforwards not
recognized 1,071,000 1,067,000 2,195,000
Other 14,000 6,000 7,000
________ _________ ________
$ 120,000 $ 181,000 $ 88,000
======== ========= ========
6. Capital Stock and Stock Option and Incentive Plans
The Company has one stock option plan under which stock options may be
granted, the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan,
as amended, authorizes the issuance of up to 500,000 shares of the
Company's common stock as incentive stock options pursuant to Section
422 of the Internal Revenue Code. Stock options are granted at prices
which equate to the market value of the stock on the date of option
grant. Options generally become exercisable in ratable installments
over a four-year period, with unexercised options expiring no later
than 10 years from the date of grant.
Page 22 of 37
Stock option activity for the years 1998 and 1997 is as follows:
1998 1997
____________________ _____________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at January 1, 166,400 $1.64 145,900 $1.75
Granted 220,000 0.62 50,000 1.38
Exercised -- -- -- --
Canceled 34,000 1.75 29,500 1.75
Outstanding at December 31, 352,400 0.99 166,400 1.64
Excercisable at December 31, 140,200 0.78 29,100 1.75
Available for grant at
December 31, 147,600 83,600
Weighted average fair value
of options granted during
the period $0.33 $1.38
The following table summarizes the information about stock options
outstanding at December 31, 1998.
Options Outstanding Options Exercisable
__________________ _________________
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Outstanding at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1998 Life (Years) Price 1998 Price
__________ ___________ __________ ________ __________ ________
$0.39 - $1.75 352,400 9.1 $0.99 140,200 $0.78
The Company has adopted the "disclosure only" provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123") and, accordingly, no compensation cost has
been recognized in the Statements of Operations. Had the Company
accounted for stock options under the fair value method of SFAS 123,
net loss would have increased by approximately $90,000 and $25,000 for
1998 and 1997 respectively. The per share impact was less than $0.01
in both years.
The fair value for the option grants was estimated at the date of
grant using the Black-Scholes option- pricing model with the following
weighted-average assumptions:
1998 1997
-------- --------
Risk free interest rate 6.00% 6.67%
Expected Volatility 50.48% 50.48%
Expected life (years) 4 4
Dividend yield 0% 0%
In connection with the sale/leaseback arrangement, the Company issued
the following three warrants to acquire shares of its Common Stock,
all having an exercise price of $2.00 per share: (1) a warrant to the
Landlord to purchase 132,617 shares of Common Stock of the Company,
exercisable during the term of the lease; (2) a conditional warrant to
the Landlord to purchase 331,543 shares of Common Stock of the Company
which shall only be exercisable if the indebtedness owed by Landlord
under the Mortgage Loan is repaid prior to February 23, 1997; or if
the Landlord is unable to refinance the indebtedness owed under the
Mortgage Loan
Page 23 of 37
prior to February 23, 1997, solely as a result of environmental
contamination relating to the 11 acres of undeveloped real estate
constituting a portion of the facility (the "Excess Land"); and (3) a
conditional warrant to the Landlord's Lender (the "Lender") to
purchase 331,543 shares of Common Stock which shall only be
exercisable if the indebtedness owed under the Mortgage Loan by
Landlord to Lender is not refinanced prior to February 23, 1997. On
February 20, 1997, the Landlord refinanced the Mortgage Loan and the
Company's interest in the Mortgage Loan was repaid. On that same day,
the conditional warrant to the Landlord to purchase 331,543 shares of
Common Stock of the Company became exercisable and the conditional
warrant to Lender terminated. On July 22, 1998 in consideration for
waiving certain covenant violations, the exercise price for the
outstanding warrants was reduced to $1.00 per share. Additionally, on
December 29, 1999, in consideration of waiving certain covenant
violations the exercise price for the outstanding warrants was reduced
to $0.37 per share.
7. Employee Benefit Plans
The Company has a 401(k) Savings and Investment Retirement Plan (the
"401(k) Plan") under which the Company matches a portion of the
employees' salary deduction contributions. Substantially all domestic
employees are eligible to participate in the 401(k) Plan.
Contributions by the Company were $141,000, $150,000, and $140,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company's foreign subsidiaries also sponsor employee retirement
plans. The expense recorded by the Company for such plans was
insignificant for the years ended December 31, 1998, 1997, and 1996.
The Company does not sponsor any post-retirement health, life
insurance, or related benefit plans, nor any significant post-
employment benefit plans.
8. Commitments and Contingencies
The Company and its subsidiaries are parties to various operating
leases relating to office facilities, transportation vehicles, and
certain other equipment, principally data processing. Real estate
taxes, insurance, and maintenance expenses are normally obligations of
the Company. All leasing arrangements contain normal leasing terms
without unusual purchase options or
escalation clauses. Rent expense was $679,000, $707,000, and $760,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
On February 23, 1996, the Company entered into a sale/leaseback
arrangement which is recorded as a financing on its facility in
Piscataway, New Jersey. As a result of this transaction, the Company
is committed to a 15-year lease with an initial annual payment of
$1,180,000 payable quarterly. The facility lease is treated as debt
for financial reporting purposes. See Note 3 - Long-term Debt.
On February 20, 1997, as a result of the Landlord refinancing the
mortgage on the property, the Company's annual lease payment was
significantly reduced for the remaining life of the lease. This
resulted in the reduction of the imputed interest rate to 13.9% from
22.8% in the original lease. The resulting annual payment was
$805,361, payable monthly. The lease is subject to an annual CPI
adjustment which is capped at 3% per year. This decrease was the
result of the Landlord refinancing the mortgage on the property. On
March 1, 1998 the basic rent payment was adjusted to $820,000. On
March 1, 1999 the basic rent payment was again adjusted to $833,137.
Page 24 of 37
The minimum commitments under noncancellable leases consisted of the
following at December 31, 1998:
Direct
Operating Financing
Year Leases Lease
1999 465,000 831,000
2000 372,000 833,000
2001 326,000 833,000
2002 300,000 833,000
2003 280,000 833,000
Thereafter 0 5,971,000
_________ _________
Total minimum lease payments $1,743,000 10,134,000
Less amounts representing interest 5,328,000
_________
Total lease obligation 4,806,000
_________
Current maturities 163,000
_________
Long term lease obligation under refinancing $ 4,643,000
=========
On August 27, 1998, the Company consummated the assignment of lease of
its Epsom facility in the United Kingdom to a third party and moved
its sales and service personnel to offices located in Leatherhead. In
the event of non-performance by the third party, the Company is
liable. Should they not perform the Company's additional cash outflow
would be $216,000 per year in years 1999, 2000, 2001, 2002, 2003, and
$2,264,000 thereafter.
The Company amended and restated written employment agreements with
key management executives in September 1996 and March 1998, as well as
entered into an employment agreement in March 1998 with a certain key
management executive. Two agreements are for one year and one
agreement is for three years. The minimum obligation under those
contracts for 1999 aggregates approximately $385,000, and for 2000 and
2001 approximately $150,000 and $0, respectively. After the initial
terms of the agreements, they will continue on a year-to-year basis.
Additionally, the Company has entered into consulting agreements. The
minimum obligation under the terms of the consultancy agreements is
$121,000. The Company entered into a 15-year royalty agreement in
August 1991 for the Elongational Rheometer Products. This royalty
agreement is based on sales of the product. Accrued royalties were
$76,000 and $110,000 at the end of 1998 and 1997 respectively.
In the ordinary conduct of its business, the Company may be party to
litigation. At December 31, 1998, in the opinion of management, there
are no matters pending or threatened which would have a material
adverse effect on the consolidated financial position or results of
operations of the Company.
9. Operating Segments/Foreign Operations and Geographic Information
Effective December 31, 1998 the Company adopted SFAS 131 "Disclosures
about Segments of an Enterprise and Related Information." Prior year
information has been restated to present the Company's three reportable
segments: Domestic, Europe, and the Far East. The accounting policies
of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies. The Company evaluates the
performance of its operating segments based on revenue performance and
operating income. Summarized financial information concerning the
company's reportable segments is shown below:
Page 25 of 37
(In thousands) Domestic Europe Japan Consolidated
_____________________________________________________________________
Trade Sales:
1998 $16,278 $ 7,587 $ 6,743 $30,608
1997 16,804 11,527 9,208 37,539
1996 17,694 14,577 8,844 41,115
Intercompany Revenues
1998 7,760 1,260 0 ------
1997 11,530 2,658 0 ------
1996 9,078 3,809 10 ------
Operating Income
1998 4,360 (3,141) (120) 1,099
1997 2,083 (1,959) 511 635
1996 (3,913) (256) 352 3,817
Identifiable Assets
1998 25,483 (801) 3,852 28,534
1997 28,447 2,967 4,020 35,434
1996 25,025 7,539 3,481 36,045
Depreciation and Amortization
1998 779 179 29 987
1997 858 157 47 1,062
1996 955 204 72 1,231
Sales between geographic areas are priced on a basis that yields an
appropriate rate of return based on assets employed, risk, and other
factors. Included in domestic sales are export sales of $180,000,
$257,000, and $1,731,000, for the years ended December 31, 1998, 1997,
and 1996, respectively.
10. Property Rights Acquisition
On January 1, 1995, the Company acquired from Mettler-Toledo AG
("Mettler") the exclusive, worldwide rights for two rheological test
instruments, the RM180 and RM260, that serve the coatings, paints,
biological fluids, cosmetics, and lubricants industries.
The Company has established a distribution network while Mettler
continues to manufacture the two instruments and maintain necessary
levels of spare parts. The Company will assume responsibility for the
manufacturing, sales, and service of the two products in 1999.
The Company recorded an intangible asset of $1,525,000, included in
other assets, related to the property rights acquired. The intangible
asset was amortized using the straight-line method over six years. In
the fourth quarter of 1996, an impairment loss of $696,000 was
recognized. (See Note 1 - Accounting for the Impairment of Long-Lived
Assets.)
The original cost of the property rights was 2,500,000 Swiss Francs or
$1,905,500 U.S. dollars.
During the transition phase, the Company will pay Mettler for
manufacturing the products plus a 10% royalty payment on sales. After
the Company assumes manufacturing, Mettler will receive quarterly
royalty payments based upon a percentage of sales or a minimum payment
formula. Beginning in 1995, interest accrues on the unpaid balance at
6% per annum. The original cost of $1,905,500 was adjusted for
anticipated interest costs to arrive at total estimated payments of
$2,225,500. This amount was discounted using a 12.9% effective rate
of interest. The Company recorded a liability of $1,525,000, included
in other long-term liabilities. The discount is being amortized over
a six-year period using the interest method. The liability balance at
December 31, 1998 is $1,536,000.
Page 26 of 37
Effective May 10, 1999, Rheometric Scientific, Inc. (RSI) and Mettler
Toledo GMBH (MT)
revised their original agreement dated December 21, 1994 whereas RSI
agreed to commence production of the RM180 and RM265 products within
30 days. A payment arrangement was agreed to whereby the Company
would make quarterly payments commencing on May 15, 1999 and
continuing through February 15, 2002. Interest is accrued on the
upaid balance at 6% per annum. The Company anticipates total payments
denomiated in Swiss francs, including interest, to be approximately
2,239,000 over a three-year period. In addition, RSI also agreed to
buy the remaining finished stock, production stock, and accessories
for an initial sum of $200,000 and 15 monthly payments of $25,000
commencing June 30, 1999 and ending August 30, 2000.
11. Related Parties
Mr. Robert E. Davis was president and CEO of the Company from
September 20, 1993 through August 31, 1997. Effective January 1, 1994,
the Company and Axess verbally agreed that the Company would pay to
Axess a management fee, equal to $150,000 per year for Mr. Davis's
services paid by Axess. The amount included in payable to affiliate
at December 31, 1998 and 1997 for said services is $517,000 .
12. Restructuring of Operations
In the third quarter of 1997, a restructuring provision totaling
$1,624,000 was recorded for the restructuring of the international
manufacturing and sales and marketing operations. The restructuring
charge consists of approximately $1,300,000 for costs associated with
the planned sub-lease of the UK manufacturing facility, $100,000 for
termination of other leases in Europe and $224,000 of severance costs
for the UK manufacturing employees. At December 31, 1997 the
restructuring reserve of $1,624,000 was reduced by $684,000 as the
result of the assignment of the UK lease to a third party at more
favorable terms than initially anticipated. The restructuring reserve
as of December 31, 1998 is $0. Approximately $198,000 of the original
reserve was reversed in 1998 since actual expenses came in below
original estimates. There were saving related to the european leases
of $143,000 and expenses not incurred related to headcount reductions
of $24,000. In addition, the fixed assets written off were lower than
anticipated by $31,000. The reversal is shown as income on the
Consolidated Statement of Operations.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers. Officers of the Company are appointed to serve,
subject to the discretion of the Company's Board of Directors, until
the meeting of the Board of Directors following the next annual
meeting of shareholders and until their successors have been elected
and qualified.
The following is a list of names and ages of all the executive
officers of the Registrant, as of December 31, 1998, indicating all
positions and offices held with the registrant by each such person and
each such person's principal occupations or employment during the past
five years.
Page 27 of 37
Age as of
Name March 31, 1999 Offices and Positions Held
Alexander F. Giacco 79 Chairman of the Board since August 31, 1997,
President and Chief Executive Officer since
February 6, 1998. Managing Director, Axess
Corporation since its inception in 1991;
prior thereto Chairman of the Board of Director
of HIMONT Incorporated, a plastics manufacturing
company, since its formation (1983-1991),
and served as CEO (1987- 1990). Mr. Giacco is
the father of Richard J. Giacco.
Joseph Musanti 41 Vice President, Finance & Materials and Chief
Financial Officer since June 1, 1997 and
Treasurer and Assistant
Secretary since July 17, 1997; prior thereto
Director of perations from November 1994 to
June 1, 1997; UK Financial
Manager from April 1994 to November 1994;
Manager, Materials, Cost, and Inventory from
October 1992 to April 1994; and Cost Accountant
from February 1989 to October 1992.
Ronald F. Garritano 60 Vice President, Technology since June 1992,
Vice President of Engineering since July 1977.
Matthew Bilt 56 Vice President, Human Resources and Administra-
tion since July 17, 1997; prior thereto Vice
President, Human Resources from November 10,
1994 to July 17, 1997; prior thereto, Vice
President, Human Resources and
Administration from May 3, 1994 to
November 10, 1994 and Director of Human
Resources from June 2, 1986 to May 3, 1994.
Richard J. Giacco 46 Vice President and General Counsel, Axess
Corporation since its inception in 1991; prior
thereto served as associate general
counsel for Safeguard Scientifics, Inc.,
a computer software and electronics company
since 1985. Mr. Giacco is the son of
Alexander F. Giacco.
Board of Directors. Directors of the Company are elected to hold
office for one year, until the next annual meeting of shareholders or
until their respective successors have been elected and qualified.
The following is a list of Directors with biographical information.
Principal Occupation or Employment
During the Past Five Years and Office Director
Name Age (if any) Held in the Company Since
Alexander F. Giacco 79 Chairman of the Board since August 31, 1997, 1993
President and Chief Executive
and Chief Executive Officer since February 6,
1998. Managing Director, Axess Corporation since
its inception in 1991; prior thereto Chairman
of the Board of Directors of HIMONT Incorporated,
a plastics manufacturing company,
since its formation (1983-1991), and served as
CEO (1987-1990). Mr. Giacco is the father of
Richard J. Giacco.
Page 28 of 37
Principal Occupation or Employment
During the Past Five Years and Office Director
Name Age (if any) Held in the Company Since
Leonard Bogner 58 President, Bogner Business Consultants, Inc. 1995
since its formation in November 1994; prior
thereto, Senior Chemicals Research Department
Analyst, Prudential Securities Brokerage Firm,
from May 1986 to October 1994.
Walter M. Bromm 64 Retired; prior thereto, Senior Vice President, 1998
Montell, Inc., a polyolefin materials company,
from 1993 to 1997, and Senior Vice President,
HIMONT Incorporated, a plastics manufacturing
company from 1987 to 1993.
Alan R. Eschbach 52 President, Flow Technology, Inc. an 1997
instrumentation Company specializing in flow
measurement products since February 1998; prior
thereto President and CEO, Rheometric Scientific,
Inc. from August 31, 1997 to February 6, 1998
and Director since August 31, 1997;
Executive Vice President, Chief Operating Officer
from November 1994 to August 1997; and Vice
President, Domestic & International Sales &
Marketing from October 1988 to November 1994.
Richard J. Giacco 46 Vice President, Rheometric Scientific, Inc. 1992
since February 19, 1998; President, Axess
Corporation since April 30, 1999; Vice
President and General Counsel, Axess Corporation
since its inception in 1991; prior thereto served
as associate general counsel for Safeguard
Scientifics, Inc., a computer software and
electronics company since 1985. Mr.
Giacco is the son of Alexander F. Giacco.
R. Michael Hendricks 61 Retired; President, Axess Corporation since 1991
its inception in 1992 to April 30, 1999; Prior
thereto served as president and chief operating
officer of HIMONT Incorporated, a plastics
manufacturing company since 1983.
Robert K. Prud'homme 51 Professor of Chemical Engineering at 1981
Princeton University since 1978; Consultant to
Dow Chemical Company,Block Drug, Helene Curtis,
and Rhodia Incorporated.
Page 29 of 29
Item 11. Executive Compensation
The following table sets forth a summary of all compensation paid or
accrued by the Company for services rendered during the 12-month periods
ended December 31, 1998, 1997, and 1996, to the Company's chief executive
officer and the four most highly compensated executives of the Company
whose aggregate salary and bonus exceeded $100,000 for the 12-month period
ended December 31, 1998 (the "Named Executive Officers"):
Executive Compensation
Long Term
Annual Compensation Compensation
__________________ ____________
Awards
______________
All other Securities
Name and Salary Compensation Underlying
Principal Position Year ($) Bonus ($) (1) Options
_______________ ____ _______ ______ __________ ________
Alexander F. Giacco (2) 1998 0 0 0 0
President, Chief Executive
Officer, and Director
Alan R. Eschbach (3) 1998 $ 58,112 0 $1,278 0
Ex-President, Ex-CEO, 1997 165,614 0 2,235 0
and Director 1996 161,313 0 3,289 28,000
Ronald F. Garritano 1998 162,860 0 2,813 50,000
V P, Technology 1997 146,506 0 2,672 0
1996 144,687 0 2,889 18,000
Matthew Bilt 1998 128,049 0 2,414 15,000
V P, Human Resources 1997 116,693 0 1,660 0
1996 115,582 0 1,425 9,400
Joseph Musanti 1998 128,616 0 2,250 40,000
V P, Finance and CFO
_
________________
(1) Company contributions under the Savings and Investment Retirement
Plan.
(2) Mr. Alexander F. Giacco is managing director of the Company's
parent and serves as CEO. In that capacity, he received no
compensation either directly or indirectly.
(3) Mr. Eschbach resigned on February 6, 1998
Page 30 of 37
Options Exercises and Holdings
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the last
fiscal year and unexercised options held as of the end of the last
fiscal year.
Aggregated Option Exercises in Last Fiscal year and FY-End Option
Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
at
Options at 12-31-98 (#) 12-31-98 ($) (1)
Exercisable Unexercisable Exercisable
Unexercisable
_________ __________ _________
___________
Ronald F. Garritano 9,000 59,000 $0 $0
Matthew Bilt 4,700 19,700 $0 $0
Joseph Musanti 3,250 43,250 $0 $0
______________
(1) Market value of in-the-money shares on December 31, 1998 ($0),
less option exercise price.
Stock Options
The Company currently has a Non-Qualified Stock Option Plan (the "1996
Plan"). The 1996 Plan was adopted by the Board of Directors in February
1996 and approved by the shareholders in June 1996.Options to purchase
170,000 shares of common stock were granted to employees during the 12-
month period ended December 31, 1998.
Option Exercises and Year-End Value
To date, no options under the Option Plan have been exercised.
Compensation of Directors. Non-employee directors of the Company are
paid an annual retainer fee of $3,000, plus $1,000 per Board meeting
attended and reimbursement of their travel expenses. No fees are paid
for committee meetings or special telephone meetings. In 1998, two non-
employee directors were granted options for 25,000 shares of common
stock.
Employment Agreements. The Company amended and restated written
employment agreements with Mr. Bilt in September 1996 and with Mr.
Garritano in March 1998. In addition, the Company entered into a
written employment agreement with Mr. Musanti in March 1998. Under
these agreements, base annual salary is $150,000 for Mr. Garritano,
$115,000 for Mr. Bilt, and $120,000 for Mr. Musanti, all subject to
discretionary increase by the Board of Directors. Messrs. Bilt and
Musanti's employment agreements have an initial term of one year and
can be continued from year to year thereafter. Mr. Garritano's
agreement, which was amended in March 1998, has an initial term of
three years and can be continued from year to year thereafter.
Page 31 of 37
The employment agreements contain a provision that provides for the
executives to be compensated should their employment be terminated
upon a change of control. Messrs. Bilt and Musanti's agreements
indicate that they would be entitled to receive one year's base pay,
plus any bonus participation or other benefit that the executive may
be entitled to for up to one year. Upon a termination due to a
change of control, Mr. Garritano's employment agreement provides for
the greater of the term of the agreement or one year's base pay, plus
any bonus participation or other benefit that the he may be entitled
to. If a change of control were to occur today and Mr. Garritano's
employment was terminated, Mr. Garritano would be entitled to receive
$327,692.
Mr. M. Starita, father of Dr. Joseph M. Starita, past Chairman of the
Board, was party to a contract entered into in 1982, which entitled
him to be paid $15,000 per year for a period of 10 years following his
retirement. During fiscal year ended June 30, 1985, Mr. M. Starita
received an advance payment of $45,115 with respect to such post-
retirement payments. The amount so advanced will be deducted from the
post-retirement payments to be made to him. Mr. M. Starita's post-
retirement payments commenced during 1994.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information with respect to persons
known by the Company, as of March 31, 1999, to be the beneficial
owners of more than 5% of outstanding Common Stock.
Unless otherwise indicated, each such person has sole voting and
dispositive power over the shares indicated.
Name and Address No. of Shares Percent
__________________ ______________ _________
Axess Corporation
100 Interchange Blvd.
Newark, Delaware 19711-3549 10,076,257 76.6%
Security Ownership of Management
Rheometric Scientific, Inc. Common Stock Ownership
The following table sets forth information as of March 31, 1999 with
respect to shares of Common Stock beneficially owned by each director
and named executive officer (see "Item 11. Executive Compensation") of
the Company and by all directors and Named Executive Officers as a
group.
Page 32 of 37
No. of Shares
Name and Title Beneficially Owned (1) Percent
______________ ___________________ ________
Alexander F. Giacco, Chief Executive Officer,
Chairman of the Board 81,000 (2) *
Alan R. Eschbach, Ex-CEO, Director 27,240 *
Leonard Bogner, Director 25,000 --
Walter M. Bromm, Director 25,000 --
Richard J. Giacco, V P and Director 3,000 (3) *
R. Michael Hendricks, Director 3,000 *
Robert K. Prud'homme, Director 25,000 --
Matthew Bilt, V P, Human Resources &
Administration 6,800 *
Ronald F. Garritano, V P, Technology 12,735 *
Joseph Musanti, V P, Finance & Materials 3,250 *
All directors and executive officers as
a group (11 persons) 212,025 *
* Denotes less than 1% of the outstanding shares of Common Stock.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act
of 1934 ("1934 Act"), a person is deemed to be the beneficial owner,
for purposes of this table, of any shares of Common Stock (1) over
which he or she has or shares voting or investment power, or (2) of
which he or she has the right to acquire beneficial ownership at any
time within 60 days from March 31, 1999. "Voting power" is the power
to vote or direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares. All persons
shown in the table above have sole voting and investment power, except
as otherwise indicated.
(2) Includes beneficial ownership of 10,000 shares held as custodian
for grandchildren.
(3) Includes beneficial ownership of 1,000 shares held in an
investment partnership for the benefit of his children and managed by
Mr. Giacco.
Page 33 of 37
Axess Corporation Common Stock Ownership
The following table sets forth information as of March 13, 1998 with
respect to shares of Axess Corporation Common Stock beneficially owned
by directors and Named Executive Officers of Rheometric Scientific,
Inc.:
No. of Shares
Name and Title Beneficially Owned (1)
Percent
____________ ___________________ _______
Robert E. Davis, Ex-CEO, Ex-Director (2)469,565 21.6%
Alexander F. Giacco, CEO
and Chairman of the Board 469,565 (3) 21.6%
Richard J. Giacco, Director 46,957 2.6%
R. Michael Hendricks, Director 187,826 (4) 8.6%
(1) Axess Corporation is a privately held Delaware corporation
established in 1991. See note 1 above under "Rheometric Scientific,
Inc. Common Stock Ownership."
(2) Robert E. Davis retired effective August 31, 1997.
(3) 446,087 shares (20.3%) are owned by revocable trust. 23,478
shares (1.3%) held by a company in which Mr. Giacco has sole voting
power.
(4) Owned by revocable trust.
Item 13. Certain Relationships and Related Transactions
Mr. Robert E. Davis was president and CEO of the Company from
September 20, 1993 to August 31, 1997. In January 1994, the Company
and Axess verbally agreed that the Company would pay to Axess a
management fee, equal to $150,000 per year. Included in accrued
liabilities at December 31, 1997 is $517,000 for said services.
On February 23, 1996, Axess and the Company consolidated all
outstanding debt of the Company to Axess, totaling $5,740,000, along
with deferred interest amounting to $517,972, into a new
subordinated note for an aggregate amount of $6,257,972. The new
note bears interest at 12% payable monthly and is due February 28,
1999.
At December 31, 1997, the Company owed to Axess $148,088.20 for
insurance premium advances.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) The following documents are filed as a part of this Report.
(1) Financial statements - All financial statements
are set forth under Item 8, pages 12 through 27
Independent auditor's report on consolidated financial
statements and on schedules is on page 11
(2) Financial statement schedules: none
The required information is inapplicable or the information is
presented in the financial statements or related notes
Page 34 of 37
(3) Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
3.1 Certificate of Incorporation of the Registrant, as
Amended, incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1995 (File No. 0-14617).
3.2 By-Laws of the Registrant, as Amended,
incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 0-14617).
4.1 Specimen Certificate representing Common Stock of
the Registrant, incorporated by reference to the
exhibits to the Company's Registration Statement on
Form S-1, File No. 33-807 filed on October 10, 1985.
4.2 Warrant to Purchase 132,617 shares Common Stock of Rheometric
Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc., incorporated
by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated February 23, 1996 (File No. 0-14617).
4.3 Warrant to Purchase 331,543 shares of Common Stock of
Rheometric Scientific, Inc. issued to RSI (NJ) QRS 12-13, Inc.
incorporated by reference to Exhibit 2 to the Company's
Form 8-K dated February 23, 1996 (File No. 0-14617).
*4.4 Rheometric Scientific, Inc. 1996 Stock Option Plan, incorporated
by reference to Exhibit 4.3 to the Company's Quarterly Report
of Form 10-Q for the period ended June 30, 1996 (File No.
0-14617).
*10.1 Amended and Restated Employment Agreement
between Ronald F. Garritano and the Company
incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K dated December 31,
1997 (File No. 0-14617).
*10.2 Employment Agreement between Matthew Bilt and the
Company, incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on form 10-Q for the period ended September
30, 1996 (File No. 0-14617).
*10.3 Employment Agreement between Joseph Musanti and
the Company incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K
dated December 31, 1997 (File No. 0-14617).
10.4 Loan and Security Agreement with Fleet Capital
Corporation dated February 23, 1996, incorporated by
reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated February 23, 1996 (File No.
0-14617).
10.5 Lease Agreement by and between RSI (NJ) QRS 12-
13, Inc., and Rheometric Scientific, Inc. dated as
of February 23, 1996, incorporated by reference to
Exhibit 5 to the Company's Current Report on Form 8-
K dated February 23, 1996 (File No. 0-14617).
10.6 Revolving Credit Facility Note - Fleet Capital
Corporation, incorporated by reference to Exhibit 6
to the Company's Current Report on Form 8-K dated
February 23, 1996 (File No. 0-14617).
10.7 Subordination Agreement between Axess Corporation and Fleet
Capital Corporation, incorporated by reference to Exhibit 10.26
to the Company's Annual Report on Form 10-K dated December 31,
1995 (File No. 0-14617).
10.8 Subordination Agreement between Axess Corporation and RSI
(NJ) QRS 12-13, Inc., incorporated by reference to Exhibit 10.27
to the Company's Annual Report on Form 10-K dated December 31,
1995 (File No. 0-14617).
10.9 Amended and Restated Subordinated Unsecured Working Capital
Note - Axess Corporation, incorporated by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K dated December
31, 1995 (File No. 0-14617).
10.10 First Amendment to Lease Agreement dated June 10, 1996
between RSI (NJ) QRS 12-13, Inc. and Rheometric Scientific, Inc.
incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K dated December 31, 1996 (File No. 0-14617).
Page 35 of 37
10.11 Second Amendment to Lease Agreement dated February 20, 1997
between RSI (NJ) QRS 12-13, Inc. and Rheometric Scientific, Inc.
incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K dated December 31, 1996 (File No. 0-14617).
10.12 Amendment Letter dated May 2, 1997 by Fleet Capital
Corporation, amending Sections 9.1(J) and 9.3(D) of the Loan and
Security Agreement dated February 23, 1996, incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K dated December 31, 1996 (File No. 0-14617).
10.13 Amendment Letter dated May 6, 1997 by RSI (NJ) QRS-12-13,
Inc., amending paragraphs 7 and 8 of Exhibit D to the Lease
Agreement dated as of February 23, 1996, incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on
Form 10-K dated December 31, 1996 (File No. 0-14617).
10.14 Amendment to Loan and Security Agreement with Fleet Capital
Corporation dated March 31, 1998 incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K dated
December 31, 1997 (File No. 0-14617).
10.15 Second Amendment to Loan and Security Agreement with Fleet
Capital Corporation dated February 19, 1999.
10.16 Third Amendment to Loan and Security Agreement with Fleet
Capital Corporation dated November 12, 1999.
22 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 0-14617).
23 Consent of Independent Auditors.
27 Financial Data Schedule
* Management contract or compensatory plan or arrangements
(b) No report on Form 8-K was filed during the quarter ended
December 31, 1998.
(c) Exhibits to this Form 10-K are incorporated by reference as
stated above.
Page 36 of 37
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS
ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
RHEOMETRIC SCIENTIFIC, INC.
By: /s/ A. F. Giacco
Date: January 26, 2000 Alexander F. Giacco, Chairman,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
Signature Title Date
/s/ A. F. Giacco Chairman, President, and January 26, 2000
Alexander F. Giacco Chief Executive Officer
(principal executive officer)
/s/ Joseph Musanti Vice President, Finance January 26, 2000
Joseph Musanti and Materials; Chief
Financial Officer; and Assistant
Secretary (principal financial and
(principal accounting officer)
Director
Leonard Bogner
Director
Walter M. Bromm
/s/ Alan R. Eschbach Director January 26, 2000
Alan R. Eschbach
/s/ Richard J. Giacco Director January 26, 2000
Richard J. Giacco
/s/ R. M. Hendricks Director January 26, 2000
R. Michael Hendricks
Director
Robert K. Prud'homme
Page 37 of 37