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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, 1997
__________________________________________
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
incorporation or organization) Identification No.)
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 13, 1998: $3,000,507 (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
March 13, 1998 was 13,161,739.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
The Exhibit Index appears on page: 31
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.
Recent Developments
On March 2, 1998 the Company announced its strategic marketing alliance
with Perkin-Elmer Corporation, a world leader of thermal analysis
equipment that will broaden the range of solutions available to customers
for material characterizations. Under the agreement, Perkin-Elmer's
Analytical Instruments Division will market certain RSI products in
combination with Perkin-Elmer thermal analysis products. RSI will
continue to independently market all of its products in North America,
Western Europe, and Japan and certain other select areas, while Perkin-
Elmer will market and distribute RSI's complete line of laboratory
rheology systems to the rest of the world.
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.
The Company's Loan and Security Agreement (the "Loan Agreement") expires
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. While
the Company believes it will be able to secure a new credit facility on
or prior to the expiration date of the Loan Agreement, it has not yet
received a commitment for such a facility and there can be no assurance
that it will do so.
Page 2 of 34
DESCRIPTION OF BUSINESS
Financial Information About Industry Segments
The Company operates in one industry segment.
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, 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.
Page 3 of 34
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.
Year 2000 Compliance The Company has consulted with its main software
provider regarding potential year 2000 problems. The majority of this
potential problem has been addressed and the remaining problem area will
be addressed via upgrades, which will be available prior to the year
2000. In addition, the Company has proactively identified program
modifications that may require a change in programming code. Such code
modifications are being actively made and the Company anticipates that
all program modifications will be completed well before the year 2000.
The Company plans to initiate in 1998 communication with its significant
suppliers to determine the effect that it may be impacted by third
parties failure to address this issue. The Company will continue to
monitor and evaluate the impact of year 2000 on its operations.
Employees. At December 31, 1997, the Company had approximately 241 full-
time employees worldwide, none of whom is party to a collective
bargaining agreement.
Financial Information About Foreign and Domestic Operations and Export
Sales
See Note 9 of Notes to Consolidated Financial Statements.
Page 4 of 34
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 25,000 square feet of space in Epsom, England; Bensheim,
Germany; Marne La Vallee, France; and Tokyo, Japan.
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.
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
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.
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 was traded on the Nasdaq National Market under
the symbol "RHEM." The table below presents the high and low sales
prices for each quarter for the years ended December 31, 1997 and 1996.
Rheometric Scientific's common stock 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 expires 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.
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 9, 1998, there were
approximately 170 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,
_______________________________
1997 1996
QUARTER ENDED High Low High Low
March 31 $2.75 $1.63 $2.13 $1.50
June 30 2.13 1.38 3.25 1.63
September 30 1.88 1.00 2.24 1.63
December 31 1.25 0.69 3.13 1.56
Page 5 of 34
Item 6. Selected Financial Data
(In thousands of dollars, except per share data)
12 Months Ended December 31,
___________________________________________________
1997 1996 1995 1994 1993
Sales $37,539 $41,115 $41,244 $34,571 $26,881
Restructuring expense 940 -- -- (98) 1,400
Net (loss) earnings (2,329) (6,347) 391 (1,463) (4,550)
Basic and diluted (loss)
earnings per share (0.18) (0.48) 0.03 (0.12) (0.73)
Total assets 35,434 36,045 40,093 35,110 27,235
Long-term debt 11,055 11,361 10,973 9,403 7,622
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, 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.
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.
Page 6 of 34
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, 1996 vs. 12 Months Ended December 31, 1995
In the year ended December 31, 1996, the Company achieved sales of
$41,115,000 compared to $41,244,000 for the year ended December 31, 1995.
The Japanese and European sales decreased by 23% and 3% respectively,
while domestic sales increased 20%. International and export sales
decreased to 61% of consolidated sales from 66% in 1995. Gross profit
for the year ended December 31,1996 was 45.9% of sales, compared to 46.3%
for the same period in 1995. This small decrease was due in part to the
additional costs incurred relating to the consolidation of all
manufacturing at the Piscataway facility.
Operating expenses of $22,692,000 increased by $6,051,000 for the period
ended December 31, 1996, compared to the corresponding period in 1995.
Of this amount, $2,368,000 (See Note 2) is a one-time charge related to
the sale/leaseback transaction and $2,438,000 (See Note 1) is related to
the write-down of long-lived assets whose value has been deemed impaired.
Excluding these one-time charges the increase over the period is
$1,245,000. This increase is largely due to salary increases that went
into effect in April 1996, severance costs related to the consolidation
of engineering at the Piscataway facility, and the favorable effect on
1995 expenses of both recorded gains related to a foreign exchange
contract, and the capitalization of software development costs.
Interest expense increased $930,000 for the period ended December 31, 1996
compared to the corresponding period in 1995. Approximately $340,000 of
this increase is attributable to the amortization of the lease obligation
recorded under the sale/leaseback arrangement. The remainder of the
increase is a result of carrying higher loan balances throughout the
period with slightly higher interest rates. The increase in interest
expense is partially offset by an increase in interest income due to
interest earned on our mortgage participation.
Net loss for the year ended December 31, 1996 was $6,347,000 compared to
net income of $391,000 in 1995. The 1996 results include a one-time
charge of $2,368,000 related to the sale/leaseback transaction as well as
a one-time charge of $2,438,000 related to the write-down of long-lived
assets. Excluding these one-time charges, net income in 1996 was
adversely affected by an increase in operating expenses of $1,245,000, an
increase in net interest expense of $744,000, and a decrease in gross
profit of $232,000. These were offset by a decrease in the currency loss
of $302,000.
Backlog as of December 31, 1996 and 1995 was $1,745,000 and $2,073,500,
respectively. The Company expects that all of the items in its backlog
will be delivered in the current calendar year.
Financing, Liquidity, and Capital Resources
Management believes that the cash generated from operations and funds
available under its current 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.
Page 7 of 34
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, 1997 the facility limit is $11,500,000
and the inventory sublimit is $6,000,000.
The Company's Loan Agreement expires 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. While the Company believes it will be able to
secure a new credit facility on or prior to the expiration date of the
Loan Agreement, it has not yet received a commitment for such a facility
and there can be no assurance that it will do so.
Cash Flows from Operations
Net cash used in operating activities in the fiscal years ended
December 31, 1997, 1996, and 1995, was $2,924,000, $1,082,000, and
$590,000, respectively. The negative cash flow from operations in 1997
was comprised primarily of an increase in inventories of $3,606,000 as
well as a $2,329,000 net loss. The inventory increase is related to a
planned increase in certain products as well as a shortfall in fourth
quarter sales. Management continuously monitors inventory levels on a
worldwide basis and has implemented plans to reduce inventories in
1998. The above are offset by the following: a one-time charge of
$940,000 related to the European restructuring, non-cash depreciation
and amortization charges of $1,158,000 and an increase in the inventory
reserve of $819,000. 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 $158,000, $469,000, and
$373,000, respectively, in the fiscal years ended December 31, 1997,
1996, and 1995.
Cash Flows from Financing
Net cash provided by financing activities in the fiscal years ended
December 31, 1997, 1996, and 1995, was $2,904,000, $661,000, and
$1,927,000, respectively.
The funds provided by financing activities are due to an increase in
our short-term borrowings of $1,214,000 and borrowings against
receivables of $1,018,000. This was offset by repayments of long term
debt and the company's lease obligation of $189,000. On February 20,
1997 the Landlord refinanced the Mortgage Loan and the Company's
participation in the Mortgage Loan of $861,000 was repaid. The
proceeds from the Company's interest in the Mortgage Loan were applied
to its revolving credit line.
Total borrowings with foreign and domestic banks at December 31, 1997
were $8,769,000 with remaining availability of approximately
$2,400,000.
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.
Page 8 of 34
Item 8. Financial Statements and Supplementary Data
PricewaterhouseCoopers L.L.P.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia PA 19103-2962
Telephone (215) 963 8000
Facsimile (215) 963 8700
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
cash flows present fairly, in all material respects, the financial
position of Rheometric Scientific, Inc. and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997,
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
August 12, 1998, except as to information presented in
Notes 8 and 12, for which the date is August 27, 1998.
Page 9 of 34
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
1997 1996
________ ________
ASSETS
Current Assets
Cash $ 297 $ 486
Receivables - less allowance for doubtful
accounts of $198 and $224 as of
December 1997 and 1996 14,916 15,823
Inventories, net
Finished goods 5,659 2,372
Work in process 2,650 2,006
Assembled components, materials, and parts 3,550 5,040
_______ _______
11,859 9,418
Prepaid expenses and other assets 813 764
_______ _______
Total current assets 27,885 26,491
_______ _______
Property, plant, and equipment 15,904 15,947
Less, accumulated depreciation and amortization 9,475 8,844
_______ _______
Property, plant, and equipment, net 6,429 7,103
Goodwill, net -- 100
Other assets 1,120 2,351
_______ _______
Total Assets $35,434 $36,045
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank borrowings $ 8,769 $ 7,896
Current maturities of long-term debt 227 110
Accounts payable 3,931 3,750
Borrowings against accounts receivable 958 --
Payable to affiliate 1,064 794
Accrued liabilities 5,360 5,239
_______ _______
Total current liabilities 20,309 17,789
_______ _______
Long-term note payable 79 246
Long-term debt lease obligation 4,718 4,857
Long-term debt - affiliate 6,258 6,258
Other long-term liabilities 1,240 1,519
_______ _______
Total liabilities 32,604 30,669
_______ _______
Commitments and Contingencies
Shareholders' Equity
Common stock, stated value of $.001,
authorized 20,000 shares; issued and
outstanding 13,162 shares at
December 31, 1997 and 1996 13 13
Additional paid-in capital 25,492 25,492
Accumulated deficit (22,547) (20,218)
Cumulative translation adjustment (128) 89
_______ _______
Total shareholders' equity 2,830 5,376
_______ _______
Total Liabilities & Shareholders' Equity $35,434 $36,045
======= =======
See Notes to Consolidated Financial Statements
Page 10 of 34
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
12 Months Ended December 31,
1997 1996 1995
_______ _______ _______
Sales $37,539 $41,115 $41,244
Cost of sales 20,728 22,240 22,137
_______ _______ _______
Gross profit 16,811 18,875 19,107
Marketing and selling expenses 9,122 10,537 10,240
Research and development expenses 3,145 3,055 2,705
General and administrative expenses 2,597 3,532 3,115
Impairment of long-lived assets -- 2,438 --
Restructuring expense 940 -- --
Goodwill amortization 96 405 327
Intangible amortization 276 357 254
Loss on sale/leaseback -- 2,368 --
_______ _______ _______
16,176 22,692 16,641
_______ _______ _______
Operating income (loss) 635 (3,817) 2,466
Interest expense (1,523) (1,847) (1,037)
Interest expense - Affiliate (835) (786) (666)
Interest income 12 196 10
Foreign currency loss (437) (5) (307)
______ _______ _______
(Loss) earnings before income taxes (2,148) (6,259) 466
Income tax expense 181 88 75
_______ _______ _______
Net (loss) earnings $ (2,329) $ (6,347) $ 391
======= ======= =======
Net (loss) earnings per share
Basic $(0.18) $(0.48) $0.03
======= ======= =======
Diluted $(0.18) $(0.48) $0.03
======= ======= =======
Average number of shares outstanding
Basic 13,162 13,162 13,162
======= ======= =======
Diluted 13,162 13,162 13,262
======= ======= =======
See Notes to Consolidated Financial Statements
Page 11 of 34
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
12 Months Ended December 31,
1997 1996 1995
______ ______ ______
Cash Flows from Operating Activities
Net (loss) earnings $(2,329) $ (6,347) $ 391
Adjustments to reconcile net (loss) earnings
to net cash used in operating activities:
Depreciation and amortization of plant
and equipment 786 874 1,029
Amortization of goodwill 96 405 327
Provision for slow moving inventory 819 398 267
Amortization of intangibles 276 357 254
Loss on sale/leaseback financing -- 2,368 --
Loss on sale/retirement of property, plant, and
Equipment -- 9 93
Unrealized currency (gain) loss 418 (140) 456
Impairment of long-lived assets -- 2,438 --
Changes in assets and liabilities:
Receivables (224) (1,771) (4,515)
Inventories (3,606) (1,177) 956
Prepaid expenses and other assets (78) 808 (866)
Accounts payable and accrued liabilities (330) 224 439
Payable to affiliate 271 493 668
Other assets 59 (301) (13)
Restructuring reserve 940 -- --
Other non-current liabilities (22) 280 (76)
_______ _______ _______
Net cash used in operating activities (2,924) (1,082) (590)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment (158) (469) (373)
_______ _______ _______
Net cash used in investing activities (158) (469) (373)
Cash Flows from Financing Activities
Repayment under line of credit agreement -- (3,020) --
Borrowings against accounts receivables 1,018 -- --
Borrowings under line of credit agreements 1,214 4,700 80
Repayment of long-term debt/lease obligation (189) (5,763) (553)
Proceeds from long-term note payable -- 246 --
Repayment of short-term debt affiliate -- (375) --
Proceeds from long-term debt affiliate -- -- 2,400
Net proceeds from sale/leaseback arrangement -- 5,734 --
Mortgage participation 861 (861) --
_______ _______ _______
Net cash provided by financing activities 2,904 661 1,927
Effect of Exchange Rate Changes on Cash (11) 12 (347)
_______ _______ _______
Net (decrease) increase in cash (189) (878) 617
Cash at beginning of period 486 1,364 747
_______ _______ _______
Cash at end of period $ 297 $ 486 $ 1,364
======= ======= =======
See Notes to Consolidated Financial Statements
Page 12 of 34
Rheometric Scientific, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Additional Cumulative Total
(In thousands) Common Stock Paid-in (Accumulated Translation Shareholders'
Shares Amount Capital Deficit) Adjustment Equity
________ _____ _______ ________ _________ __________
Balance at December 31, 1994 13,162 $13 $24,759 $(14,262) $ 43 $10,553
______ ___ _______ ________ _____ _______
Net Income -- -- -- 391 -- 391
Translation adjustment -- -- -- -- (56) (56)
______ ___ _______ ________ _____ _______
Balance at December 31, 1995 13,162 13 24,759 (13,871) (13) 10,888
______ ___ _______ ________ _____ _______
Net Income -- -- -- (6,347) -- (6,347)
Warrants -- -- 733 -- -- 733
Translation adjustment -- -- -- -- 102 102
______ ___ _______ ________ _____ _______
Balance at December 31, 1996 13,162 13 25,492 (20,218) 89 5,376
______ ___ _______ ________ _____ _______
Net Income -- -- -- (2,329) -- (2,329)
Translation adjustment -- -- -- -- (217) (217)
______ ___ _______ ________ _____ _______
Balance at December 31, 1997 13,162 $13 $25,492 $(22,547) $ (128) $ 2,830
====== === ======= ======== ====== =======
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, 1997.
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, 1997, 1996, and 1995,
were $3,397,000, $3,820,000, and $3,706,000, respectively. Deferred
revenue relating to maintenance agreements amounted to $813,394 and
$896,098 at December 31, 1997 and 1996, respectively, and is included in
Accrued liabilities in the accompanying Consolidated Balance Sheets.
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, 1997 and
1996 the Company had a reserve of approximately $1,979,000 and
$1,339,000, respectively, for excess and obsolete inventory. The Company
reserved $600,000
Page 13 of 34
of inventory in connection with the completion of the redesign of the
thermal product line. The redesign was completed in the third quarter of
1997.
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 $498,000 as of December 31,
1997 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, 1997 and 1996 was $503,000 and $357,000, respectively. The
unamortized balance of capitalized software development costs totaled
$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, 1997 and 1996 totaled
$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 14 of 34
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,
1997, 1996, and 1995, respectively, reflects cash payments for interest
of $2,044,600, $2,114,700, and $1,165,700, and income taxes of $49,200,
$102,700, and $44,300, respectively. The bad debt expense for the years
ended December 31, 1997, 1996, and 1995 was $108,200, $37,600, and
$182,700, respectively.
Fair Value of Financial Instruments
The estimated fair value of the Company's debt instruments as of December
31, 1997 and 1996 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 remaining
balance of $400,000 will be amortized on a straight-line basis over the
remaining four
Page 16 of 34
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 is reviewing these
standards of disclosure for adoption in 1998.
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, 1999. 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:
1997 1996
___________ __________
Assets under direct financing lease $ 6,300,000 $ 6,300,000
Buildings 133,000 133,000
Machinery and equipment 2,367,000 2,362,000
Office equipment 5,622,000 5,633,000
Transportation equipment 195,000 205,000
Leasehold improvements 434,000 461,000
Assets under capital lease 853,000 853,000
__________ __________
$15,904,000 $15,947,000
========== ==========
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 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.
Page 16 of 34
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 $766,000 and $352,000 as of December
31,1997 and 1996, 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:
1997 1996
________ ________
Obligation under sale/leaseback
payable through February 2011,
with interest imputed at a rate of
13.9% and 22.8%for 1997 and
1996, respectfully $4,857,000 $4,967,000
Note payable through November
1999 with interest at 9.54% 167,000 246,000
___________ ___________
5,024,000 5,213,000
Less current maturities 227,000 110,000
___________ __________
$ 4,797,000 $ 5,103,000
========== ==========
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: 1998
- - $88,000 and 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 Wednesday of each consecutive week
thereafter, both the facility limit and inventory sublimit will decrease
by $25,000. As of December 31, 1997 the facility limit is $11,500,000
and the inventory sublimit is $6,000,000.
Page 17 of 34
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 has working capital lines of credit with certain domestic and
foreign banks. The foreign working capital lines of credit are supported
by letters of credit issued under the Loan Agreement. Total borrowings
were $8,769,000 with remaining availability of approximately $2,400,000
at December 31, 1997. Borrowings at December 31, 1997 were $5,216,000
with domestic banks and $3,553,000 with foreign banks.
The domestic line of credit bears interest at prime plus 1.5% (10.0% at
December 31, 1997 and 9.75% at December 31, 1996). 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 and between 1.9%
and 3.0% in Japan and between 6.0% and 6.8% in Europe as of December 31,
1996. The weighted-average interest rate on short-term debt outstanding
was 7.7% and 6.8% as of December 31, 1997 and 1996, 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 1997 and the first half of 1998, 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 waivers covering these violations and believes that
they will be in compliance with applicable debt covenants for periods
subsequent to June 30, 1998. Financial covenants under the
sale/leaseback arrangement have been waived through December 31, 1998.
The Loan Agreement also provides certain letters of credit facilities for
operations of the Company's foreign subsidiaries.
The Company's Loan and Security Agreement (the "Loan Agreement") expires
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. While
the Company believes it will be able to secure a new credit facility on
or prior to the expiration date of the Loan Agreement, it has not yet
received a commitment for such a facility and there can be no assurance
that it will do so.
The Company's foreign subsidiaries sell certain accounts receivable
balances to financial institutions. At December 31, 1997 trade
receivables discounted with recourse amounted to $958,000 and is shown
as borrowings on the balance sheet. During the years ended December 31,
1997, 1996, and 1995, approximately $4,678,536, $3,205,000, and
$5,276,000, respectively, of trade receivables were sold, with recourse,
to banks.
Page 18 of 34
4. Long-term Debt - Affiliate
Long-term debt - affiliate as of December 31 consisted of the following:
1997 1996
________ ________
Subordinated term note due February 28,
1999 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.
Payment of interest is contingent upon cash flow availability.
5. Income Taxes
The components of deferred tax assets and (liabilities) as of December 31
consisted of the following:
1997 1996
__________ __________
Inventory reserves, inventory capitalization,
and intercompany profit in inventory $1,248,000 $1,012,000
Other 2,098,000 1,140,000
Net operating loss carryforwards 8,250,000 6,191,000
Research and development and other tax
credit carryforwards 1,030,000 1,025,000
__________ __________
Gross deferred tax assets 12,626,000 9,368,000
__________ __________
Gross deferred tax liabilities (308,000) ( 73,000)
__________ __________
Net deferred tax asset before valuation
allowance 12,318,000 9,295,000
Valuation allowance on deferred tax assets (12,318,000) (9,295,000)
__________ __________
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, 1997, the Company had Federal net operating loss
carryforwards for income tax purposes of approximately $8,565,000 which
expire in 2005 through 2011, State net operating losses of $12,649,000,
which expire 1998 through 2003, and foreign loss carryforwards of
approximately $12,878,000, a portion of which may be carried forward
indefinitely. The Company also has other tax credit carryforwards
aggregating approximately
$1,030,000 at December 31, 1997, 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.
(Loss) income before income taxes as of December 31 consisted of the
following:
1997 1996 1995
__________ __________ __________
Domestic $ 73,000 $(4,157,000) $ 34,000
Foreign (2,905,000) (2,102,000) 432,000
__________ __________ __________
$(2,832,000) $(6,259,000) $ 466,000
========= ========== =========
Page 19 of 34
The components of income tax expense for the years ended December 31
consisted of the following:
1997 1996 1995
_________ _________ _________
Federal:
Current $ 30,000 $ -- $ --
Deferred -- -- --
_________ _________ _________
30,000 -- --
_________ _________ _________
Foreign:
Current 143,000 83,000 72,000
Deferred -- -- --
_________ __________ _________
143,000 83,000 72,000
_________ __________ _________
State:
Current 8,000 5,000 3,000
Deferred -- -- --
_________ _________ _________
8,000 5,000 3,000
_________ __________ __________
$ 181,000 $ 88,000 $ 75,000
========= ========== ==========
The Company's effective tax rate varies from the statutory federal tax
rate as of December 31 as a result of the following:
1997 1996 1995
__________ _________ _________
Computed statutory income
tax (benefit) provision $ (974,000) $(2,128,000) $158,000
State income taxes, net Federal
tax benefit 7,000 3,000 2,000
Foreign taxes in excess of statutory rate 75,000 11,000 9,000
Utilization of net operating losses -- -- (146,000)
Effect of loss carryforwards not
recognized 1,067,000 2,195,000 42,000
Goodwill and other nondeductible
acquisition costs -- -- 2,000
Other 6,000 7,000 8,000
_________ _________ _________
$ 181,000 $ 88,000 $ 75,000
========= ========= ==========
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
authorizes the issuance of up to 250,000 shares of the Company's common
stock pursuant to incentive stock options granted under the 1996 Plan.
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.
In September 1997, the Board of Directors amended the plan to include
outside members of the Board of Directors who are not officers or
employees of the Company. The Board of Directors then granted stock
options totaling 50,000 shares at an option price of $1.38. The options
expire no later than 10 years from the date of grant.
In February 1998, the Board of directors amended the 1996 Plan to
increase the number of shares of common stock issuable pursuant to its
terms to 500,000 shares.
Page 20 of 34
Stock option activity for the years 1997 and 1996 is as follows:
1997 1996
___________________ __________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
________ ________ ________ ________
Outstanding at January 1, 145,900 $1.75 146,400 $1.75
Granted 50,000 1.38 -- --
Exercised -- -- -- --
Canceled 29,500 1.75 500 1.75
Outstanding at December 31, 166,400 1.64 145,900 1.75
Excercisable at December 31, 29,100 1.75 18,238 1.75
Available for grant at
December 31, 83,600 104,100
Weighted average fair value of
Options granted during the period $1.38 $1.75
The following table summarizes the information about stock options
outstanding at December 31, 1997.
Options Outstanding Options Exercisable
__________________________ ___________________
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Outstanding at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1997 Life (Years) Price 1997 Price
____________ ___________ _________ ________ __________ _________
$1.38 - $1.75 166,400 2.5 $1.64 29,100 $1.75
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 less than $25,000 for 1997 and 1996. There was no
impact on loss per share for 1997 or 1996.
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:
1997 1996
_____ _____
Risk free interest rate 6.67% 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 21 of 34
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.
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 $150,000, $140,000, and $129,000, for the years ended
December 31, 1997, 1996, and 1995, 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, 1997, 1996, and 1995. 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 $707,000, $760,000, and $857,000,
for the years ended December 31, 1997, 1996, and 1995, 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.
Page 22 of 34
The minimum commitments under noncancellable leases consisted of the
following at December 31, 1997:
Direct
Operating Financing
Year Leases Lease
_________ _________ ___________
1998 474,000 818,000
1999 412,000 820,000
2000 304,000 820,000
2001 268,000 820,000
2002 257,000 820,000
Thereafter 2,000 6,702,000
_________ _________
Total minimum lease payments $1,717,000 10,800,000
Less amounts representing interest 5,943,000
_________
Total lease obligation 4,857,000
Current maturities 139,000
_________
Long term lease obligation under refinancing $ 4,718,000
==========
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
$213,000 per year in years 1998, 1999, 2000, 2001, 2002, and $2,453,000
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
1998 aggregates approximately $385,000, and for 1999 and 2000
approximately $150,000. 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 $61,000. 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. The
Company paid royalties of $9,000 and $25,600 in 1997 and 1996,
respectively.
In the ordinary conduct of its business, the Company may be party to
litigation. At December 31, 1997, 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.
Page 23 of 34
9. Foreign Operations and Geographic Information
Information concerning sales, operating (loss) income, and identifiable
assets by geographic area and foreign operations for the years ended
December 31 are presented below (in $'000s):
1997 1996 1995
_____ _____ _____
Sales:
Domestic $ 16,804 $ 17,694 $ 14,782
Europe 11,527 14,577 15,029
Japan 9,208 8,844 11,433
________ ________ ________
Consolidated $ 37,539 $ 41,115 $ 41,244
======== ======== ========
Operating income (loss):
Domestic $ 2,083 $ (3,913) $ 1,604
Europe (1,959) (256) 281
Japan 511 352 581
________ ________ _________
Consolidated $ 635 $ (3,817) $ 2,466
======== ======== ========
Identifiable assets:
Domestic $ 28,447 $ 25,025 $ 29,035
Europe 2,967 7,539 6,066
Japan 4,020 3,481 4,992
________ ________ ________
Consolidated $ 35,434 $ 36,045 $ 40,093
======== ======== ========
Sales from domestic operations to foreign subsidiaries amounted to
$11,530,000, $9,078,000, and $9,428,000, for the years ended December 31,
1997, 1996, and 1995, respectively. Such 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 $257,000, $1,731,000, and $555,000, for the years ended
December 31, 1997, 1996, and 1995, 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
Page 24 of 34
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, 1997 is $1,540,000.
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,
1997 and 1996 for said services is $517,000 and $450,000, respectively.
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 of $940,000 as of
December 31, 1997 is a component of accrued liabilities in the
Consolidated Balance Sheet. No amounts were charged to the restructuring
reserve in the fourth quarter.
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, 1997, 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.
Age as of
Name March 13, 1998 Offices and Positions Held
Alan R. Eschbach 51 President and Chief Executive Officer
from August 31, 1997 to February 6, 1998 and
Director since August 31, 1997; Executive Vice
President, Chief Operating Officer since
November 10, 1994; prior thereto, Vice
President, Domestic & International Sales &
Marketing since October 1988. Mr. Eschbach was
an officer of the Company from February 1982
to February 1998.
Page 25 of 34
Age as of
Name March 13, 1998 Offices and Positions Held
Joseph Musanti 40 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 Operations 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 59 Vice President, Technology since June
1992, Vice President of Engineering
since July 1977.
Matthew Bilt 55 Vice President, Human Resources and
Administration 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.
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 78 Chairman of the Board since August 31, 1997, 1993
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
Directors of HIMONTIncorporated, a plastics
manufacturing company, since its formation
(1983-1991), and served as CEO (1987-1990).
Mr. Giacco is the father of Richard J. Giacco.
Leonard Bogner 57 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 63 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.
Page 26 of 34
Principal Occupation or Employment
During the Past Five Years and Office Director
Name Age (if any) Held in the Company Since
Alan R. Eschbach 51 President, Flow Technology, Inc. an 1997
instrumentation Company specializing in flow
measurement products since February 1998;
prior thereto President and Chief
Executive Officer, 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 45 Vice President and General Counsel, Axess 1992
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 60 President, Axess Corporation since its 1992
inception in 1991; Prior thereto served as
president and chief operating officer of
HIMONT Incorporated, a plastics manufacturing
company, since 1983.
Robert K. Prud'homme 50 Professor of Chemical Engineering at 1981
Princeton University since 1978; Consultant
to Dow Chemical Company, Block Drug, Helene
Curtis, and Rhodia Incorporated.
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, 1997, 1996, and 1995, to the Company's chief executive officer
and the four most highly compensated executives of the Company whose
aggregate salary and bonus exceeded $100,000 for the 12-month period ended
December 31, 1997 (the "Named Executive Officers"):
Executive Compensation
Annual Compensation Long Term
__________________ Compensation
___________
Awards
All other Securities
Name and Salary Compensation Underlying
Principal Position Year ($) Bonus ($) Options
_________________________ _____ _______ _____ ___________ _________
Alan R. Eschbach (2) 1997 $165,614 0 $2,235 0
President, Chief Executive 1996 161,313 0 3,289 28,000
Officer, and Director 1995 153,948 $4,996 3,150 0
Robert E. Davis (3) 1997 100,000 0 0 0
Chief Executive Officer and 1996 150,000 0 0 0
President 1995 150,000 0 0 0
Page 27 of 34
Awards
All other Securities
Name and Salary Compensation Underlying
Principal Position Year ($) Bonus ($) Options
___________________________ _____ _______ _____ __________ _________
Ronald F. Garritano 1997 146,506 0 2,672 0
Vice President, Technology 1996 144,687 0 2,889 18,000
1995 140,658 3,293 2,809 0
Matthew Bilt 1997 116,693 0 1,660 0
Vice President, Human 1996 115,582 0 1,425 9,400
Resources 1995 114,423 2,585 1,386 0
John Fuhrmeister (4) 1997 120,383 0 2,235 0
Vice President, Finance 1996 124,363 0 2,430 0
& Administration 1995 121,047 2,770 1,986 0
__________________________
(1) Company contributions under the Savings and Investment Retirement
Plan.
(2) Mr. Eschbach resigned on February 6, 1998. Mr. Alexander F. Giacco
became president and chief executive officer effective that date.
(3) Mr. Davis served as president and CEO of the Company from September
20, 1993 to August 31, 1997. Rheometric and Axess verbally agreed that
Rheometric would pay to Axess a management fee, equal to $150,000 per
year, for said services. See Item 13. Certain Relationships and Related
Transactions.
(4) Mr. John Fuhrmeister left the Company effective May 23, 1997.
Options Exercises and Holdings
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the last
fiscal year and unexercised options held as of the end of the last fiscal
year.
Aggregated Option Exercises in Last Fiscal year and FY-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 12-31-97 (#) 12-31-97 ($) (1)
Exercisable Unexercisable Exercisable Unexercisable
Alan R. Eschbach 7,000 21,000 $0 $0
Ronald F. Garritano 4,500 13,500 $0 $0
Matthew Bilt 2,350 7,050 $0 $0
______________
(1) Market value of in-the-money shares on December 31, 1997 ($0.938),
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. No options were granted
to employees during the 12-month period ended December 31, 1997.
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 1997, two non-
employee directors were granted options for 25,000 shares of common
stock.
Page 28 of 34
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.
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 $491,538.
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 13, 1998, 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%
Dr. Joseph M. Starita
20553 State Route 245
Marysville, OH 43040-0648 711,135 5.4%
Security Ownership of Management
Rheometric Scientific, Inc. Common Stock Ownership
The following table sets forth information as of March 13, 1998 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 29 of 34
No. of Shares
Name and Title Beneficially Owned (1) Percent
__________________________________ __________________ ________
Alexander F. Giacco, Chief Executive
Officer, Chairman of the Board 66,000 (2) *
Alan R. Eschbach, Ex-Chief Executive
Officer, Director (3) 2,240 *
Robert E. Davis, Ex-Chief Executive
Officer and Ex-Director 5,000 *
Leonard Bogner, Director (4) -- --
Walter M. Bromm, Director (5) -- --
Richard J. Giacco, Director 3,000 (6) *
R. Michael Hendricks, Director 3,000 *
Robert K. Prud'homme, Director (7) -- --
Matthew Bilt, Vice President, Human
Resources & Administration 4,350 *
Ronald F. Garritano, Vice President,
Technology 8,235 *
Joseph Musanti, Vice President,
Finance & Materials 1,625 *
John C. Fuhrmeister, Ex-Vice President,
Finance & Administration -- --
All directors and executive officers as
a group (12 persons) (8) 93,450 *
* 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 13, 1998. "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) Does not include (i) 28,000 shares underlying options canceled due
to Mr. Eschbach's resignation as an officer of the Company and (ii)
25,000 shares underlying options granted subject to shareholder approval.
(4) Does not include 25,000 shares underlying options granted subject to
shareholder approval.
(5) Does not include 25,000 shares underlying options granted subject to
shareholder approval.
(6) Includes beneficial ownership of 1,000 shares held in an investment
partnership for the benefit of his children and managed by Mr. Giacco.
(7) Does not include 25,000 shares underlying options granted subject to
shareholder approval.
(8) Does not include 100,000 shares underlying options granted subject
to shareholder approval.
Page 30 of 34
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, Chief Executive Officer
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 10 through 25
Independent auditor's report on consolidated financial
statements
and on schedules is on page 9
(2) Financial statement schedules: none
The required information is inapplicable or the information is
presented in the financial statements or related notes
Page 31 of 34
(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 Current
Report on 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 on Form 10-Q for the period ended June 30,
1996 (File No. 0-14617).
*10.3 Amended and Restated Employment Agreement between
Ronald F. Garritano and the Company.
*10.4 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).
*10.5 Employment Agreement between Joseph Musanti and the
Company
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
Page 32 of 34
10.14 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).
10.15 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).
10.16 Amendment to Loan and Security Agreement with Fleet Capital
Corporation dated March 31, 1998
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.
* Management contract or compensatory plan or arrangements
(b) No report on Form 8-K was filed during the quarter ended
December 31, 1997.
(c) Exhibits to this Form 10-K are incorporated by reference as
stated above.
Page 33 of 34
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: September 10, 1998 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 September 10, 1998
Alexander F. Giacco Chief Executive Officer
(principal executive officer)
/s/ Joseph Musanti Vice President, Finance September 10, 1998
Joseph Musanti and Materials; Chief
Financial Officer; and Assistant
Secretary (principal financial and
(principal accounting officer)
/s/ Leonard Bogner Director September 10, 1998
Leonard Bogner
Director
Walter M. Bromm
/s/ Alan R. Eschbach Director September 10, 1998
Alan R. Eschbach
/s/ Richard J. Giacco Director September 10, 1998
Richard J. Giacco
/s/ R. M. Hendricks Director September 10, 1998
R. Michael Hendricks
Director
Robert K. Prud'homme
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