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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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14617
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Rheometric Scientific, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 61-0708419
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Possumtown Road, Piscataway, N.J. 08854
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 560-8550
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section12(g) of the Act:
Common Stock, $.01 par value per share
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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 X No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 22, 2001: $11,022,000 (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
22, 2001 was 22,942,017.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: Portions of the
registrant's definitive Proxy Statement to be filed on or before April 30, 2001
in connection with the registrant's Annual Meeting of Stockholders scheduled to
be held on May 15, 2001, are incorporated by reference into Part III of this
report.
The Exhibit Index appears on page: 32
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Page 1 of 34
Part I
(Items either not applicable or not material have been excluded)
Item I. Business
Background
General
Rheometric Scientific, Inc. (referred to as "Rheometric" or the "Company"), was
incorporated in New Jersey in 1981 and reincorporated in Delaware on or about
October 31, 2000. The Company's corporate executive offices and manufacturing
operation are located in Piscataway, New Jersey. Sales offices are located in
Virginia, England, France, Germany, Italy and Japan.
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, viscosity 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. All systems combine special sampling
technologies and multiple sensor technologies to provide various measurements
for research, development and product quality. The Company has developed a
proprietary software product enabling it to operate most of its instruments and
develop sophisticated reporting for its customers. 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.
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, Rheometric became a public company. Through a series of
transactions between 1991 and 1994, Axess Corporation ("Axess") acquired 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.
Effective May 10, 1999, the Company and Mettler Toledo GmbH ("Mettler") revised
their original agreement dated December 21, 1994 whereby the Company agreed to
commence production of the RM180 and RM260 products within 30 days. A payment
arrangement was agreed to whereby the Company would make quarterly payments
commencing on May 15, 1999 and continuing through February 15, 2002. Interest
accrued on the unpaid balance at 6% per annum. See Note 10 of Notes to
Consolidated Financial Statements.
Andlinger Capital XXVI
On March 6, 2000, pursuant to a Securities Purchase Agreement dated as of
February 17, 2000, by and between the Company, Axess and Andlinger Capital XXVI
LLC ("Andlinger Capital XXVI"), as amended (the "Purchase Agreement") and
certain related agreements, to provide Andlinger Capital XXVI with control of
the Company, Andlinger Capital XXVI purchased (i) 10,606,000 shares of newly
issued common stock of the Company (the "Investor Shares") and (ii) warrants to
purchase (x) an additional 2,000,000 shares of common stock of the Company at an
exercise price of $1.00 per share, exercisable at any time prior to March 6,
2007 (the "Investor A Warrants") and (y) an additional 4,000,000 shares of
common stock of the Company at an exercise price of $3.00 per share, exercisable
at any time prior to March 6, 2003 (the "Investor B Warrants," and collectively
with the Investor A Warrants, the "Investor Warrants"), for the aggregate
Page 2 of 34
consideration of $1,825,000 (the "Purchase Price"). Upon consummation of this
transaction Andlinger Capital XXVI acquired the power to vote an aggregate of
16,606,000 shares of the Company's common stock (of which 6,000,000 shares are
attributable to the Investor Warrants) representing at that time approximately
74% of the issued and outstanding common stock of the Company (including as
outstanding for the purposes of determining such percentage the 6,000,000 shares
issuable upon exercise of the Investor Warrants). Based on reports filed with
the SEC, as of March 22, 2001, Andlinger Capital XXVI was the beneficial owner
of 16,606,000 shares of the Company's common stock, representing approximately
59.4% of the issued and outstanding common stock of the Company (including as
outstanding for purposes of determining such percentage 5,000,000 shares
issuable upon exercise of remaining Investor Warrants). See "Financing,
Liquidity and Capital Resources" under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the Purchase Agreement and related transactions.
Credit Facility
On March 6, 2000, in connection with the transactions under the Purchase
Agreement and with the support and assistance of Andlinger Capital XXVI, the
Company made a final payment under its then existing working capital revolving
credit facility (the "Prior Loan Agreement") and terminated such facility and
obtained a new credit facility with PNC Bank, National Association ("PNC Bank").
The new Revolving Credit, Term Loan and Security Agreement (the "Loan
Agreement") provides for a total facility of $14,500,000 of which $13,000,000 is
a working capital revolving credit facility with an initial three-year term
expiring on March 6, 2003. The amount of available credit is determined by the
level of certain eligible receivables and inventories. The line of credit bears
interest at the prime rate. Additionally the Loan Agreement contains various
covenants including a financial covenant that generally requires the Company to
maintain a fixed charge coverage ratio (as defined in the Loan Agreement) of .7
to 1 for the three-month period ending June 30, 2000 and 1.1 to 1 thereafter.
The Loan Agreement also includes a term loan with PNC Bank in the amount of
$1,500,000 to be repaid in 4 equal quarterly installments of $75,000, 23 monthly
installments of $25,000, and a final payment of $625,000 at maturity on March 6,
2003. The term loan bears interest at prime plus 1.5 percent which is due
monthly. The Loan Agreement is subject to customary event of default and
acceleration provisions and is collateralized by substantially all of the
Company's assets.
On March 6, 2000 in conjunction with the Andlinger Capital XXVI transaction, the
Mettler debt was settled for the amount of $1,212,296. This payment satisfied
the entire debt to Mettler including the amount related to the inventory.
Page 3 of 34
Protein Solutions Acquisition
Effective November 17, 2000, the Company acquired all of the issued and
outstanding capital stock of PSI Holding Corporation, a Virginia corporation
("PSI"), and its wholly-owned subsidiaries, Protein Solutions, Inc., a Virginia
corporation and its affiliate Protein Solutions Ltd., a corporation organized
under the laws of England and Wales, when PSI merged with and into PSI
Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Sub"),
pursuant to a Merger Agreement (the "Merger Agreement"), dated as of November
20, 2000. PSI was acquired for approximately $525,000 cash and approximately
680,000 shares of Rheometric common stock. Upon consummation of the merger,
Acquisition Sub changed its name to Protein Solutions Holdings, Inc. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the net assets were allocated based upon their fair values at the
acquisiton's effective date of November 17, 2000. The Company's consolidated
statements of operations do not include the revenues and expenses of PSI prior
to this date. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) of approximately $2,356,000 will be amortized on a
straight-line basis over 40 years.
PSI, based in Charlottesville, VA., is a leading manufacturer and marketer of
Dynamic Laser Light Scattering ("DLS") instrumentation, software and services.
PSI is a recognized leader in the application of light scattering techniques for
biomolecular characterization. PSI's products are based on a proprietary,
patented technology for which PSI has an application exclusive license.
The PSI DLS technology employs sophisticated optical components and advanced
digital signal processing to measure molecular physical properties such as size,
mass, and diffusion. Pharmaceutical, biotechnology, and government funded
research and development laboratories use this information to gain a better
understanding of the stability and conformation of purified biomolecules. PSI
products are optimized for specialized applications in protein science including
biotherapeutic drug development, applied three-dimensional protein structure
analysis, and developing structural genomics initiatives.
The acquisition of PSI complements and extends the Company's physical properties
measurement capability beyond rheology, viscosity and thermal analysis into the
life sciences instrumentation areas of particle sizing and biomolecular
characterization which address significant, complementary market segments.
In conjunction with this transaction, Andlinger Capital XXVI LLC, the Company's
majority stockholder, exercised Investor A Warrants for the purchase of one
million shares of common stock of the Company at an exercise price of $1.00 per
share. These warrants were acquired by Andlinger Capital XXVI in March of 2000
in connection with its majority equity investment in the Company. A portion of
the one million received by the Company upon exercise was applied to the cash
portion of the purchase price of PSI. The Company used the remaining portion of
such proceeds for general working capital purposes.
Reologica
On March 12, 2001 the Company signed an agreement to form a strategic alliance
with Reologica Instruments AB Lund, Sweden ("Reologica") to be the sole marketer
and distributor for all Reologica products in Europe.
Reologica, based in Lund, Sweden and established in 1993, is a manufacturer of
rheological and viscometry instrumentation, software and services. Rheological
technology measures the viscoelastic properties on numerous substances.
Potential customers cover many fields from food, cosmetics, paints,
pharmaceuticals, inks, household and personal care products.
The alliance with Reologica allows Rheometric to add to its already broad
product range in rheological instrumentation and extend its product range in the
viscometry area.
Page 4 of 34
Camtel
On January 20, 2000 the Company signed an agreement to form a strategic alliance
with Camtel Ltd. ("Camtel") to be the sole marketer and distributor for all
Camtel instruments. In addition, under the terms of the agreement, the Company
has an exclusive option for the next 15 months to acquire all of the shares of
Camtel for cash and shares of the Company's common stock.
Camtel based in Royston, UK and established in 1993, is a leading manufacturer
of interfacial rheology and contact angle tensiometry instrumentation, software
and services. Camtel is also a recognized leader in the application of these
techniques. Camtel's products are based on a proprietary technology for which
Camtel has an application exclusive license.
DESCRIPTION OF BUSINESS
Financial Information about Industry Segments
Effective December 31, 1998 the Company adopted SFAS 131 "Disclosures about
Segments of an Enterprise and Related Information." See Note 9. The Company's
three reportable segments are: Domestic, Europe and the Far East. The accounting
policies of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies. The Company evaluates the
performance of its operating segments based on revenue performance and operating
results. Summarized financial information concerning the company's reportable
segments is shown in Note 9 of Notes to the Consolidated Financial Statements.
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, viscosity 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. All systems combine special sampling
technologies and multiple sensor technologies to provide various measurements
for research, development and product quality. The Company has developed a
proprietary software product enabling it to operate most of its instruments and
develop sophisticated reporting for its customers. The Company sells its
products worldwide, primarily to Fortune 500 and other leading international
corporations, as well as independent research laboratories and educational and
governmental institutions.
Customers. The Company's customers fall generally into three major categories
based on the nature of their products and the processes by which their products
are developed: (1) materials manufacturers, (2) product manufacturers, and (3)
independent and nonprofit research laboratories and governmental and educational
institutions. The Company does not have any customer that accounts for more than
10 percent of the Company's sales.
Technologies. Each instrument system consists of components, some of which
include actuators, which manipulate or impart force upon a sample, while others
thermally activate samples using controlled furnaces; sensors, which measure the
results of such activities upon the sample; and microprocessors, which analyze
such results. The design and manufacture of these components requires expertise
in several disparate technologies, including electronics, software, mechanics,
machining, and environmental control. Most of the Company's instrument systems
contain a microcomputer system developed and manufactured by the Company, which
incorporates proprietary expertise in microprocessor applications, data
acquisition and analysis,
Page 5 of 34
control feedback, and systems development software, including assembly language
programming, as well as its own proprietary software and reporting package
"Orchestrator." The Company's laboratory instruments can control motion with
high precision, some to within two-millionths of an inch.
The testing of materials ranging from low viscosity water-like fluids to tough
steel-like composites requires the precise measurement of forces over a wide
dynamic range. The Company has combined its engineering resources to develop
sophisticated sensors capable of measuring forces as small as 10 milligrams to
as large as 5,000 pounds.
Raw Material & Components. The Company's products consist of mechanical and
electronic assemblies. A number of raw materials, primarily stainless steel and
aluminum, are used to fabricate the Company's mechanical assemblies, and
electronic components are used to build its electronic assemblies. The Company
depends upon, and will continue to depend upon, a number of outside suppliers
for the components it uses. The Company believes that the raw materials and
component parts it uses are available from alternate suppliers and does not
believe it is dependent upon any one supplier.
Patents & Trademarks. The Company currently has patents for the design and
manufacture of certain of its instruments and systems. Due to the rapidly
changing technology relative to the Company's product lines, the Company does
not believe that technological patent protection is significant as a competitive
factor. The Company's name and its logo are protected under federal trademark
laws and the Company believes that there is significant value associated with
the Company's name.
Seasonal Operations & Backlog. Historically, the Company's sales, (loss)
earnings before income taxes, and net (loss) earnings have been cyclical.
Typically the quarters ending June and December outperform the quarters ending
March and September. This cyclicality is primarily attributable to the capital
goods budgeting cycle. Many customers place their orders in the first calendar
quarter (after capital budgets have been approved) with delivery in the second
calendar quarter due to three or four month average delivery times. Moreover, as
the fourth calendar quarter approaches, many customers review their annual
budgets and determine that they are able to place an order for delivery by the
end of December.
Competition. The Company believes that its principal competitors are several
domestic and foreign manufacturers, some with greater financial and marketing
resources than the Company. The Company competes with these companies and others
by offering products of high performance, quality and reliability, backed by
service capabilities. The Company believes that technological requirements and
high initial capital expenditures represent significant barriers to entry to
this market. However, there can be no assurance that a larger company with
greater financial resources than the Company will not enter this market at a
later date, and that such entry would not have a material adverse impact on the
operations of the Company.
The Company believes that it is well-positioned in the field of engineering and
technology to remain competitive in the face of technological changes that may
occur in the marketplace. There can be no assurance, however, that technology
superior to the Company's will not be developed which would have a material
adverse effect on the Company's operations.
Product Research & Development. The Company's research and development
activities primarily focus on the development of new products and new
applications and enhancements for existing products. In its development and
testing of new products and applications, the Company consults with
professionals at universities and in the industry worldwide. The Company
believes that its research and development activities are necessary to maintain
competitiveness and to better serve its customers.
Employees. At December 31, 2000, the Company had approximately 176 full-time
employees worldwide, none of whom is party to a collective bargaining agreement.
Page 6 of 34
Financial Information about Foreign and Domestic Operations and Export Sales
See Note 9 of Notes to Consolidated Financial Statements.
Item 2. Properties
The Company leases a 100,000 square foot building on 19 acres of land in
Piscataway, New Jersey. This facility 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 in the United States and overseas. The Company leases an aggregate of
approximately 17,000 square feet of space in Charlottesville, VA; High Wycombe,
UK; Munchen and Aschaffenburg, Germany; Marne La Vallee, France; and Tokyo,
Japan.
Item 3. Legal Proceedings
There are no known material pending legal proceedings involving the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 31, 2000 and June 1, 2000, the
following items were submitted to the stockholders and received the following
votes:
The stockholders nominated and elected the directors to hold office until the
next annual meeting of stockholders and until the respective successors have
been elected and qualified with the following results: The vote for director
nominee Robert M. Castello, For 14,210,365; Withheld 1,470; Not Voted 2,609,656.
The vote for director nominee Mark F. Callaghan, For 14,210,365; Withheld 1,470;
Not Voted 2,609,656. The vote for director nominee David R. Smith, For
14,210,165; Withheld 1,670; Not Voted 2,609,656. The vote for director nominee
Merrick G. Andlinger, For 14,210,365; Withheld 1,470; Not Voted 2,609,656. The
vote for director nominee Richard J. Giacco, For 14,210,365; Withheld 1,470; Not
Voted 2,609,656. The vote for director nominee Robert K. Prud'homme, For
14,210,365; Withheld 1,470; Not Voted 2,609,656.
The stockholders also voted on the following: Increasing the number of
authorized shares of common stock to 49,000,000: For 14,154,220, Abstain 610;
Against 21,105; Not Voted 2,645,556. Authorizing 1,000,000 shares of preferred
stock. For 14,132,458; Abstain 900; Against 42,577; Not Voted 2,645,556.
Approval of the Company's 2000 Stock Option Plan: For 14,139,153, Abstain 3,310;
Against 33,472; Not Voted 2,645,556.
The stockholders also ratified the appointment of Mahoney Cohen and Company,
CPA, P.C. as the independent auditors of the Company for fiscal year ended
December 31, 2000 with the following results: For 14,161,605, Abstain 183;
Against 14,147; Not Voted 2,645,556.
Also, the following item was submitted to the stockholders and received the
following vote: Change state of incorporation from New Jersey to Delaware: For
14,165,935; Abstain 1,500; Against 8,500; Not Voted 2,465,556.
Page 7 of 34
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Common Stock Market Prices and Dividends
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"RHEM." From February 1 to April 14, 1998, the Company's common stock was traded
on the Nasdaq SmallCap Market under the symbol "RHEM." 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. The
table below presents the high and low sales prices for each quarter for the
years ended December 31, 2000 and 1999.
Since its initial public offering in December 1985, the Company has not paid any
cash dividends. At March 22, 2001, there were approximately 148 holders of
record of the Company's common stock. In addition, there were approximately
1,527 beneficial holders of common stock held in street name.
12 Months Ended December 31,
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2000 1999
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QUARTER ENDED High Low High Low
March 31 $12.88 $0.28 $0.53 $0.19
June 30 9.88 3.81 0.34 0.17
September 30 5.88 3.25 0.44 0.19
December 31 4.63 1.88 0.66 0.25
Item 6. Selected Financial Data
(In thousands of dollars, except per share data)
12 Months Ended December 31,
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2000 1999 1998 1997 1996
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Sales $29,883 $28,363 $30,608 $37,539 $41,115
Restructuring expense -- -- (198) 940 --
Net earnings/(loss) 91 (5,138) (1,144) (2,329) (6,347)
Basic and diluted
earnings/(loss) per share 0.00 (0.39) (0.09) (0.18) (0.48)
Total assets 26,792 23,983 28,534 35,434 36,045
Long-term debt 6,395 12,731 10,901 11,055 11,361
The 2000 figures include sales, net earnings, and total assets (in thousands)
for PSI acquired effective November 17, 2000 of $481, $15, and $3,755
respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
12 Months Ended December 31, 2000 vs. 12 Months Ended December 31, 1999
In the year ended December 31, 2000, the Company achieved sales of $29,883,000
compared to $28,363,000 for the same period in 1999. Domestic and European sales
increased by 11.9% and 9.8%, respectively, while Japanese sales decreased by
13.4%. Included in the 2000 sales is the acquisition (effective November 17,
2000) of PSI, which accounted for $481,000 of domestic sales. Sales for 2000
were unfavorably affected by foreign exchange of $1,075,752 compared to 1999.
Export sales decreased to 44% of consolidated sales, compared to 47% in 1999.
Gross
Page 8 of 34
profit for the year ended December 31, 2000 was 47.4% of sales, compared to
38.5% for 1999. Gross profit in 1999 includes a charge for obsolete and slow
moving product lines of $1,840,000. The charge in 1999 relates primarily to
management's decision to scrap certain inventories based on the continued
decline in the utilization of certain inventories related to the company's
thermal business; without this charge gross profit in 1999 would have been
45.0%. The balance of the increase in gross profit versus 1999 (adjusted)
relates to sales volume increases and product mix changes.
Operating expenses of $12,137,000 decreased by $1,445,000 for the year ended
December 31, 2000, compared to 1999. The company's continued effort to maximize
the efficiency of each department has contributed to a reduction in operating
expenses in all areas. Exchange difference in 2000 versus 1999 on foreign
expenses accounted for approximately $272,000 of the decrease.
Interest expense decreased $800,000 for the period ended December 31, 2000
compared to 1999. This decrease is due to the elimination of affiliated interest
expense, $1,020,000 in 1999, offset by increased bank interest of $220,000
versus 1999, due to carrying larger outstanding balances.
Backlog as of December 31, 2000 and 1999 was $1,500,000 and $2,000,000,
respectively. The Company expects that all of the items in its backlog at
December 31, 2000 will be delivered in the current calendar year.
Net Income for the period ended December 31, 2000 was $91,000 compared to a loss
of $5,138,000 in 1999. Included in the 1999 loss was a $1,840,000 charge to
obsolescence, $285,000 of bank charges, and $1,020,000 of affiliate interest
expense.
Inherent in the Company's business is the potential for inventory obsolescence.
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, 1999 vs. 12 Months Ended December 31, 1998
In the year ended December 31, 1999, the Company achieved sales of $28,363,000
compared to $30,608,000 for the year ended December 31, 1998. Japanese sales
remained flat, while domestic and European sales decreased 7.1% and 14.8%,
respectively. Sales for 1999 were favorably affected by foreign exchange of
$448,000 compared to 1998. Export sales remained at 47% of consolidated sales,
compared to 1998. Gross profit for the year ended December 31, 1999 was 38.5% of
sales, compared to 43.8% for the same period in 1998. Gross profit in 1999
includes a charge for obsolete and slow moving product lines of $1,840,000,
compared to $738,000 in 1998. The increase in 1999 relates primarily to
management's decision to scrap certain thermal business inventories based on the
continued decline in their utilization.
Operating expenses of $13,582,000 increased by $1,269,000 for the period ended
December 31, 1999, compared to the corresponding period in 1998. Included in the
1998 amount is a reversal of $198,000 relating to the European restructuring
from 1997. Excluding this one-time item, the increase for the period was
$1,071,000. $285,000 of the increase relates to bank fees for extensions of its
line of credit and charges for looking for new financing. Sales and marketing
expenses increased by $374,000 as the company redirects resources to these
departments. Exchange difference in 1999 versus 1998 on foreign expenses
accounted for approximately $137,000 of the increase.
Interest expense decreased $179,000 for the period ended December 31, 1999
compared to the corresponding period in 1998. This decrease is due to carrying
lower loan balances throughout the period.
Page 9 of 34
Backlog as of December 31, 1999 and 1998 was $2,000,000 and $2,335,000,
respectively.
Financing, Liquidity, and Capital Resources
On March 6, 2000 (the "Closing Date"), pursuant to a Securities Purchase
Agreement, dated as of February 17, 2000, by and between the Company, Axess, and
Andlinger Capital XXVI LLC ("Andlinger Capital XXVI"), as amended (the "Purchase
Agreement") and certain related agreements, Andlinger Capital XXVI purchased (i)
10,606,000 shares of newly issued common stock of the Company (the "Investor
Shares") and (ii) warrants to purchase (x) an additional 2,000,000 shares of
common stock of the Company at an exercise price of $1.00 per share, exercisable
at any time prior to March 6, 2007 (the "Investor A Warrants") and (y) an
additional 4,000,000 shares of common stock of the Company at an exercise price
of $3.00 per share, exercisable at any time prior to March 6, 2003 (the
"Investor B Warrants," and collectively with the Investor A Warrants, the
"Investor Warrants"), for the aggregate consideration of $1,825,000 (the
"Purchase Price"). Upon consummation of this transaction Andlinger Capital XXVI
acquired beneficial ownership (as determined under the rules of the Securities
and Exchange Commission) of an aggregate of 16,606,000 shares of the Company's
common stock (of which 6,000,000 shares are attributable to the Investor
Warrants) representing approximately 74% of the issued and outstanding common
stock of the Company (including as outstanding for the purposes of determining
such percentage the 6,000,000 shares issuable upon exercise of the Investor
Warrants). Prior to the purchase by Andlinger Capital XXVI of the Investor
Shares and the Investor Warrants, Axess agreed to contribute 2,800,000 shares of
common stock to the Company.
At the May 31, 2000 Annual Stockholders' Meeting the following proposals that
were contemplated in the Purchase Agreement were approved: (i) proposal to
reincorporate the Company from New Jersey to Delaware (the "Reincorporation");
(ii) proposal to increase the authorized number of shares of capital stock to
49,000,000 shares of common stock and 1,000,000 shares of preferred stock; and
(iii) proposal to authorize the issuance of preferred stock as contemplated in
the Purchase Agreement. In order to effect the intent of the parties to the
Purchase Agreement that the Company issue the Investor Shares on the Closing
Date, at the closing of the Purchase Agreement Axess contributed 4,400,000
shares of common stock to the Company, in exchange for the Company's agreement
to reissue to Axess 4,400,000 shares of common stock (the "Axess Reissue
Shares") subject to stockholder approval and Reincorporation and amendment of
the Company's certificate of incorporation to authorize the issuance of such
shares. These transactions have been reflected in the accompanying financial
statements.
Prior to the closing under the Purchase Agreement, the Company had been indebted
to Axess in the principal amount of $8,205,907, plus interest of $1,020,231 (the
"Axess Debt"). Upon the closing, Axess cancelled the Axess Debt in exchange for
(x) the payment by the Company to Axess of $3,500,000 in cash; (y) the issuance
to Axess of a promissory note in the principal amount of $1,000,000 payable upon
the sale of one of the Company's product lines and (z) the issuance to Axess, of
a warrant (the "Preferred Stock Warrant") to purchase 1,000 shares of the
Company's non-voting convertible redeemable preferred stock to be issued,
subject to stockholder approval, pursuant to an amendment to the certificate of
incorporation of the Company. Stockholder approval was received at the May 31,
2000 Annual Stockholder Meeting.
On March 6, 2000, in connection with the transactions under the Purchase
Agreement and with the support and assistance of Andlinger Capital XXVI, the
Company made a final payment under the Prior Loan Agreement and terminated such
agreement and obtained a credit facility with PNC Bank. The new Loan Agreement
provides for a total facility of $14,500,000 of which $13,000,000 is a working
capital revolving credit facility with an initial three-year term expiring on
March 6, 2003. The amount of available credit is determined by the level of
certain eligible receivables and inventories. The line of credit bears interest
at the prime rate, 9.5% at December 31, 2000. Additionally the Loan Agreement
contains various covenants including a financial covenant that generally
requires the Company to maintain a fixed charge coverage ratio (as defined in
the Loan Agreement) of .7 to 1 for the three-month period ending June 30,
Page 10 of 34
2000 and 1.1 to 1 thereafter. At December 31, 2000, the Company was in
compliance with all required covenants.
The Loan Agreement also includes a term loan with PNC Bank in the amount of
$1,500,000 to be repaid in 4 equal quarterly installments of $75,000, 23 monthly
installments of $25,000, and a final payment of $625,000 at maturity on March 6,
2003. The term loan bears interest at prime plus 1.5 percent which is due
monthly. The outstanding balance of this obligation was $1,275,000 at December
31, 2000. The Loan Agreement is subject to customary event of default and
acceleration provisions and is collateralized by substantially all of the
Company's assets.
Management believes that the cash generated from operations and funds available
under its new Loan Agreement should be sufficient to meet the Company's working
capital needs in 2001.
Cash Flows from Operations
Net cash provided by operating activities in the fiscal year ended December 31,
2000 was $1,682,000. This compares to net cash provided by operating activities
in the fiscal years ended December 31, 1999 and 1998 of $828,000 and $4,109,000
respectively. The positive cash flow from operations in 2000 was comprised
primarily of a decrease in accounts receivable of $571,000 as well as an
increase in accounts payable and accrued liabilities of $248,000. This positive
cash flow is offset by an increase in other assets and prepaid expenses of
$326,000 and $146,000 respectively primarily as a result of prepaid bank charges
related to the new credit line. Also contributing to this positive cash flow is
non-cash depreciation and amortization charges of $999,000.
Cash Flows from Investing
The Company made capital expenditures of $201,000, $115,000, and $144,000
respectively, in the fiscal years ended December 31, 2000, 1999 and 1998. In
connection with the acquisition of Protein Solutions net cash used totaled
$385,000. The Company currently has no major capital commitments.
Cash Flows from Financing
Net cash used in financing activities in the fiscal year ended December 31, 2000
was $960,000. This compares to net cash used in financing activities in the
fiscal years ended December 31, 1999 and 1998 of $1,034,000 and $3,743,000
respectively. The Company's borrowing against its accounts receivables during
the year ended December 31, 2000 decreased $594,000 while its borrowing under
line of credit agreements increased $1,775,000. Repayments of long-term debt and
the lease obligations totaled $419,000 for the period. In connection with the
transactions under the Purchase Agreement, long term debt increased $1,500,000
while the Mettler note decreased by $1,212,000. Axess debt decreased $8,226,000
as a result of repayment of $3,500,000, issuance of Preferred Stock of
$1,000,000 and forgiveness of debt of $3,726,000. There were also net proceeds
from issuance of common stock of $875,000. In connection with the PSI
acquisition, Andlinger Capital XXVI LLC, exercised Investor A Warrants for
1,000,000 shares of common stock at an aggregate exercise price of $1,000,000.
Total borrowings under its working capital credit facility at December 31, 2000
were $6,553,000 with remaining availability of approximately $2,353,000.
See Statement of Cash Flows for further details of the Company's cash flows.
See Notes 3 and 4 of the Notes to Consolidated Financial Statements for
additional information.
Year 2000 Issues
The Company completed its Year 2000 systems updates and did not experience any
interruptions in or failure of normal business activities or operations on
January 1, 2000 or thereafter as a result of Year 2000 issues.
Page 11 of 34
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act, and Section 21E of the Securities Exchange Act of
1934, as amended. Statements in this report regarding future events or
conditions, including statements regarding industry prospects and the Company's
expected financial position, business and financing plans, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in this report and include the risks associated with the expansion of
the Company's business, the possible inability of the Company to integrate the
PSI business it has acquired, dependence on the capital spending policies of the
Company's customers, as well as factors that affect the materials test systems
industry generally. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligations to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The company
does not enter into derivatives, or other financial instruments for trading or
speculative purposes. The company is exposed to immaterial levels of market risk
related to changes related to exchange and interest rates.
Page 12 of 34
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Rheometric Scientific, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Rheometric Scientific, Inc. and Subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity
(deficiency) and comprehensive income, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rheometric
Scientific, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
March 24, 2001
Page 13 of 34
PricewaterhouseCoopers LLP
Report of Independent Accountants
To the Board of Directors and
Shareholders of Rheometric Scientific, Inc.:
In our opinion, the accompanying consolidated statements of operations,
shareholders' equity and comprehensive loss, and cash flows present fairly, in
all material respects, the results of operations and cash flows for Rheometric
Scientific, Inc. and its subsidiaries for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audit provides a
reasonable basis for the opinion expressed above.
PrecewaterhouseCooopers LLP
Philadelphia, Pennsylvania
December 29, 1999
Page 14 of 34
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands) December 31,
2000 1999
-------- ---------
ASSETS
Current Assets
Cash $ 786 $ 265
Receivables - less allowance for doubtful accounts
of $188 and $216 at December 31, 2000 and 1999 9,858 10,340
Inventories, net
Finished goods 1,664 1,596
Work-in-process 1,045 773
Assembled components, materials and parts 4,138 4,172
-------- --------
6,847 6,541
Prepaid expenses and other current assets 882 705
-------- --------
Total current assets 18,373 17,851
-------- --------
Property, plant and equipment 16,062 15,638
Less accumulated depreciation and amortization 10,815 10,051
-------- --------
Property, plant and equipment, net 5,247 5,587
-------- --------
Goodwill 2,349 --
Other assets 823 545
-------- --------
Total Assets $ 26,792 $ 23,983
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Short-term bank borrowings $ 6,553 $ 4,789
Current maturities of long-term debt 524 190
Accounts payable 3,400 1,980
Borrowings against accounts receivable 385 1,064
Accrued liabilities 3,543 4,397
-------- --------
Total current liabilities 14,405 12,420
-------- --------
Long-term debt 5,395 4,525
Payable to affiliate 1,020
--
Long-term debt - affiliate 1,000 8,206
Long-term liability - Mettler -- 696
Other long-term liabilities 151 103
-------- --------
Total liabilities 20,951 26,970
-------- --------
Commitments and Contingencies (Note 8)
Convertible Redeemable Preferred Stock 1,000 --
-------- --------
Shareholders' Equity (Deficiency)
Preferred Stock, par value of $.01,
Authorized 1,000 shares, issued and
outstanding 1 share at December 31, 2000. -- --
Common stock, par value of $.01,
Authorized 49,000 shares; issued 25,716
at December 31, 2000 and 13,162 at
December 31,1999 257 132
Additional paid-in capital 33,248 25,571
Treasury Stock, at cost, 2,800
shares at December 31, 2000 -- --
Accumulated deficit (28,738) (28,829)
Accumulated other comprehensive income 74 139
-- --
Total shareholders' equity (deficiency) 4,841 (2,987)
-------- --------
Total Liabilities and Shareholders' Equity $ 26,792 $ 23,983
======== ========
See Notes to Consolidated Financial Statements.
Page 15 of 34
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
2000 1999 1998
------- ------- -------
Sales $29,883 $28,363 $30,608
Cost of sales 15,721 17,448 17,196
------- ------- -------
Gross profit 14,162 10,915 13,412
------- ------- -------
Marketing and selling expenses 8,010 8,896 8,522
Research and development expenses 1,958 2,127 2,201
General and administrative expenses 1,999 2,379 1,551
Restructuring expense -- -- (198)
Goodwill amortization 7 -- --
Intangible amortization 163 180 237
--- --- ---
12,137 13,582 12,313
------- ------- -------
Operating income/(loss) 2,025 (2,667) 1,099
Interest expense (1,305) (1,085) (1,378)
Interest expense - affiliate -- (1,020) (906)
Foreign currency income (loss) (620) (123) 161
------- ------- -------
Income/(Loss) before income taxes 100 (4,895) (1,024)
Income taxes 9 243 120
------- -------- -------
Net income/(loss) $ 91 $(5,138) $(1,144)
======= ======== ========
Net income/(loss) per share
Basic $0.00 $(0.39) $(0.09)
===== ======= =======
Diluted $0.00 $(0.39) $(0.09)
===== ======= =======
Average number of shares outstanding
Basic 18,937 13,162 13,162
====== ====== ======
Diluted 22,959 13,162 13,162
====== ====== ======
See Notes to Consolidated Financial Statements.
Page 16 of 34
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities:
Net income/(loss) $ 91 $ (5,138) $ (1,144)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization of plant and equipment 829 710 750
Amortization of goodwill 7 -- --
Provision for slow moving inventory -- 1,840 738
Amortization of intangibles 163 180 237
Loss on sale/retirement of property, plant and equipment -- 4 91
Warrants issued for services -- 167 --
Unrealized currency loss/(gain) 458 (145) (137)
Changes in assets and liabilities (net of effect of PSI
Acquisition):
Receivables 571 (488) 5,711
Inventories (261) 1,898 700
Prepaid expenses and other current assets (146) 253 (149)
Accounts payable and accrued liabilities 248 542 (2,829)
Payable to affiliate -- 1,020 884
Other assets (326) 60 153
Restructuring reserve -- -- (940)
Other non-current liabilities 48 1 102
Other non-current liability - Mettler -- (76) (58)
-------- --------- ---------
Net cash provided by operating activities 1,682 828 4,109
Cash Flows from Investing Activities:
PSI acquisition (net of cash acquired) (385) -- --
Purchases of property, plant and equipment (201) (115) (144)
-------- --------- ---------
Net cash used in investing activities (586) (115) (144)
Cash Flows from Financing Activities:
Net borrowings from/(repayments of) line of credit
Agreements 1,775 (893) (3,349)
(Repayments)/borrowings against accounts receivable (594) 103 (196)
Proceeds from long-term debt 1,500 -- --
Repayment of long-term debt/lease obligation (419) (244) (229)
Repayment of long-term debt affiliate (3,500) -- --
Proceeds from issuance of common stock, net of
Issuance costs 875 -- --
Proceeds from warrants exercised 1,000 -- 31
Repayment of Mettler Liability (1,212) -- --
--------- --------- ---------
Net cash used in financing activities (575) (1,034) (3,743)
Effect of Exchange Rate Changes on Cash -- 98 (31)
--------- --------- ---------
Net increase (decrease) in cash 521 (223) 191
Cash at beginning of year 265 488 297
-------- --------- ---------
Cash at end of year $ 786 $ 265 $ 488
======== ========= =========
See Notes to Consolidated Financial Statements.
Page 17 of 34
RHEOMETRIC SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME
Accumulated
(In thousands) Additional Comprehensive Total
Common Stock Paid-in Treasury Accumulated Other Shareholders'
Shares Amount Capital Stock Deficit Income/(Loss) Equity
------ ------ ---------- ------- ----------- ------------- ------
Balance at December 31, 1997 13,162 $132 $25,373 -- $(22,547) 128) $2,830
------ ----- -------- ------- ---------- --------
Net loss -- -- -- -- (1,144) -- (1,144)
Currency translation adjustment -- -- -- -- -- 48 48
Comprehensive loss -- -- -- -- -- -- (1,096)
Warrants issued -- -- 31 -- -- 31
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 13,162 132 25,404 -- (23,691) (80) 1,765
------ --- ------ -------- ------ ---------- --------
Net loss -- -- -- -- (5,138) -- (5,138)
Currency translation adjustment -- -- -- -- -- 219 219
Comprehensive loss -- -- -- -- -- -- (4,919)
Warrants issued for services -- -- 167 -- -- -- 167
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 13,162 132 25,571 -- (28,829) 139 (2,987)
------ ---- ------ -------- ------- --------- ----------
Net income -- -- -- -- 91 -- 91
Currency translation adjustment -- -- -- -- -- (65) (65)
Comprehensive income -- -- -- -- -- -- 26
Axess indebtedness contributed
To capital -- -- 3,727 -- -- -- 3,727
Common stock issued to Andlinger
Capital XXVI,
Net of offering costs 10,606 106 769 -- -- -- 875
Exercise of stock warrants 1,268 13 987 -- -- -- 1,000
Treasury stock (2,800) -- -- -- -- -- --
Common stock issued pursuant to
Protein Solutions Acquisition 680 6 2,194 -- -- -- 2,200
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 22,916 $257 $33,248 $ -- $(28,738) $ 74 $ 4,841
====== === ====== ====== ======= ===== =======
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.
On March 6, 2000, pursuant to a Securities Purchase Agreement, dated as of
February 17, 2000, by and between the Company, Axess and Andlinger Capital XXVI
LLC ("Andlinger Capital XXVI"), as amended (the "Purchase Agreement") and
certain related agreements, to provide Andlinger Capital XXVI with control of
the Company, Andlinger Capital XXVI purchased (i) 10,606,000 shares of newly
issued common stock of the Company (the "Investor Shares") and (ii) warrants to
purchase (x) an additional 2,000,000 shares of common stock of the Company at an
exercise price of $1.00 per share, exercisable at any time prior to March 6,
2007 (the "Investor A Warrants") and (y) an additional 4,000,000 shares of
common stock of the Company at an exercise price of $3.00 per share, exercisable
at any time prior to March 6, 2003 (the "Investor B Warrants," and collectively
with the Investor A Warrants, the "Investor Warrants"), for the aggregate
consideration of $1,825,000 (the "Purchase Price"). Upon consummation of this
transaction Andlinger Capital XXVI acquired the power to vote an aggregate of
16,606,000 shares of the Company's common stock (of which 6,000,000 shares are
Page 18 of 34
attributable to the Investor Warrants) representing approximately 74% of the
issued and outstanding common stock of the Company (including as outstanding for
the purposes of determining such percentage the 6,000,000 shares issuable upon
exercise of the Investor Warrants). Prior to the purchase by Andlinger Capital
XXVI of the Investor Shares and the Investor Warrants, Axess agreed to
contribute 2,800,000 shares of common stock to the Company.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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.
Revenue Recognition
Product sales are recorded upon shipment. Service revenue is recorded as
services are performed. Maintenance agreement revenue is recorded on a
straight-line basis over the terms of the respective agreements. Service revenue
for the years ended December 31, 2000, 1999 and 1998 was $4,012,000, $3,473,000,
and $3,965,000, respectively. Deferred revenue relating to maintenance
agreements amounted to $812,000 and $780,000 at December 31, 2000 and 1999,
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, 2000 and 1999, the Company had a reserve
of approximately $1,941,000 and $2,909,000, respectively, for excess and
obsolete inventory. Approximately $558,000 of the decrease in the reserve
resulted from disposal of obsolete inventory, upon which the Company received no
proceeds.
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, whichever is 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:
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 or minus the change during the period in
deferred tax assets and liabilities.
Page 19 of 34
No provision has been made for U.S. income taxes which would be payable if
undistributed earnings of approximately $290,000 as of December 31, 2000 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 forty years. All other
intangibles are amortized using the straight-line method over the respective
useful lives. (See Accounting for the Impairment of Long-Lived Assets.)
Capitalized software development costs have been fully amortized at December 31,
1999. Amortization expense relating to capitalized software development costs
for the years ended December 31, 1999 and 1998 totaled $34,000 and $151,000,
respectively.
Deferred financing costs are amortized over the life of the loan. The
unamortized balance of deferred financing costs at December 31, 2000 is
$282,000.
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.
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 provided by operating activities for the years ended December 31, 2000,
1999 and 1998 reflects cash payments for interest of $1,301,000, $2,071,000 and
$1,281,000, respectively, and income taxes of $194,000, $15,700 and $169,000,
respectively. The bad debt expense for the years ended December 31, 2000, 1999
and 1998 was $21,500, $376,900 and $262,400, respectively.
In 2000, noncash transactions from investing activities resulted in the issuance
of approximately 680,000 shares of common stock valued at approximately
$2,200,000 in connection with the acquisition of PSI. Additionally, noncash
transactions from financing activities resulted in an increase in paid in
capital of $3,730,000 from the Axess debt forgiveness.
Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments as of December
31, 2000 and 1999 approximates the carrying amounts.
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 institutions. 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
Page 20 of 34
Of" ("SFAS 121") in March 1995. SFAS 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.
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 was amortized on a straight-line basis over the remaining
four years of the agreement.
Earnings (Loss) Per Share
The Company calculates net income per share as required by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 replaces the calculation of primary and fully diluted earnings per share
with basic and diuted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effect of stock options,
warrants, and convertible securities.
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended
December 31, 2000
-----------------
(dollars in thousands except per share data)
Net income available to common
Shareholders 91
------
Denominator for basic earnings per share:
Weighted average:
Common shares outstanding 18,937
Effect of dilutive securities:
Preferred Stock 833
Stock options 381
Warrants 2,808
------
Denominator for diluted earnings per share 22,959
Basic earnings per share $ 0.00
Diluted earnings per share $ 0.00
For the years ended December 31, 1999 and 1998 common stock equivalents were
anti-dilutive.
The Company changed its authorized number of shares of common stock from
20,000,000 to 49,000,000 and adjusted the par value from no par with a stated
value of .001 to par value of .01. The Company's financial statements give
effect to the change in the par value for all years presented.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), for fiscal years beginning after June 15,
2000. The provisions of SFAS 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. The Company is
prepared to adopt this standard in the first quarter of 2001.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), which must be
Page 21 of 34
adopted no later than fourth quarter of 2000. As the Company's accounting
policies are consistent with the provisions of SAB 101, there was no impact on
the financial statements.
2. Property, Plant and Equipment
Property, plant and equipment as of December 31 consisted of the following:
2000 1999
---- ----
Assets under direct financing lease $ 6,607,000 $ 6,465,000
Machinery and equipment 3,781,000 3,651,000
Office equipment 5,445,000 5,294,000
Transportation equipment 94,000 80,000
Leasehold improvements 135,000 148,000
----------- -----------
$16,062,000 $15,638,000
=========== ===========
On February 23, 1996, the Company entered into a sale/leaseback arrangement
whereby the Company sold its 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. A lease obligation
was recorded and the asset was written down to the amount of the proceeds. The
asset is being amortized over the life of the lease on a straight-line basis.
Accumulated amortization on the asset under direct financing was $2,066,000 and
$1,623,000 as of December 31, 2000 and 1999, 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.
3. Long-Term Debt and Short-Term Borrowings
Long-term debt as of December 31 consisted of the following:
2000 1999
---- ----
Obligation under sale/leaseback
payable through February 2011,
with interest imputed at a rate of
13.9% for 2000 and 1999 $4,644,000 $4,715,000
Term-Note payable through March
2003 with interest at prime plus 1.5%
(11.00% at December 31, 2000) 1,275,000 --
---------- ----------
5,919,000 4,715,000
Less current maturities 524,000 190,000
---------- ----------
$5,395,000 $4,525,000
========== ==========
Following are the annual maturities of long-term debt (in thouands): 2001 $524;
2002 $566; 2003 $980; 2004 $350; 2005 $402; and $3,097 thereafter.
Page 22 of 34
Short-Term Borrowings
On February 23, 1996, simultaneously with the consummation of the sale/leaseback
arrangement, the Company entered into the Loan and Security Agreement (the
"Prior Loan Agreement"), which provided for a working capital revolving credit
facility.
On November 12, 1999, the Company's lender amended the Prior Loan Agreement
extending its term to November 30, 2000. As of November 12, 1999, all foreign
lines of credit were consolidated into the domestic line of credit and the
foreign receivables were no longer used in the calculation of the borrowing
base. In addition, the facility limit was permanently reduced to $6,500,000 and
the inventory sublimit was to be permanently and automatically decreased by
$25,000 each week. The advance rate of 69% on eligible receivables was reduced
in March 2000 to 61%. Covenant requirements were revised based on the Company's
forecast for 2000.
On March 6, 2000, in connection with the transactions under the Purchase
Agreement and with the support and assistance of Andlinger Capital XXVI, the
Company made a final payment under the Prior Loan Agreement and terminated such
agreement and obtained a credit facility with PNC Bank, National Association
("PNC Bank"). The new Revolving Credit, Term Loan and Security Agreement (the
"Loan Agreement") provides for a total facility of $14,500,000, of which
$13,000,000 is a working capital revolving credit facility with an initial
three-year term expiring on March 6, 2003. The amount of available credit is
determined by the level of certain eligible receivables and inventories. The
line of credit bears interest at the prime rate, 9.5% at December 31, 2000.
Additionally, the Loan Agreement contains various covenants including a
financial covenant that generally requires the Company to maintain a fixed
charge coverage ratio (as defined in the Loan Agreement) of .7 to 1 for the
three-month period ending June 30, 2000 and 1.1 to 1 thereafter. As of December
31, 2000 the Company is in compliance with these covenants. The Loan Agreement
also includes a term loan with PNC Bank in the amount of $1,500,000 to be repaid
in 4 equal quarterly installments of $75,000, 23 monthly installments of $25,000
and a final payment of $625,000 due at maturity on March 6, 2003. The term loan
bears interest at prime plus 1.5 percent which is due monthly. The outstanding
balance of the term loan obligation is $1,275,000 at December 31, 2000. The Loan
Agreement is subject to customary event of default and acceleration provisions
and is collateralized by substantially all of the Company's assets.
The Company at December 31, 2000 had total borrowings under its working capital
credit facility of $6,553,000 with remaining availability of approximately
$2,353,000. The weighted-average interest rate on short-term debt outstanding
was 9.5% and 9.89% as of December 31, 2000 and 1999, respectively.
The Company's foreign subsidiaries sell certain accounts receivable balances to
financial institutions. At December 31, 2000, trade receivables discounted with
recourse amounted to $385,000 and are shown as borrowings on the consolidated
balance sheet. During the years ended December 31, 2000 and 1999, approximately
$2,233,000 and $3,732,000, respectively, of trade receivables were sold, with
recourse, to banks.
4. Long-Term Debt - Affiliate
Long-term debt - affiliate as of December 31 consisted of the following:
2000 1999
---- ----
Subordinated promissory note due
February 28, 2006 with interest at 6%
per annum beginning March 6, 2001 $1,000,000 --
Subordinated term note due February 28,
2002 with interest at 12% per annum -- $8,206,000
Page 23 of 34
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 $518,000 into a new subordinated note for an
aggregate amount of $6,258,000. The new note bore interest at 12% payable
monthly and was due February 28, 1999. On July 13, 1999, the due date was
extended to February 28, 2002.
On September 30, 1999, Axess and the Company executed an Amended and Restated
Subordinated Unsecured Working Capital Note combining the indebtedness of the
$6,258,000 term note with other indebtedness of $1,948,000 for an aggregate
amount of $8,206,000. This term note was due February 28, 2002 and bore interest
at 12%.
On March 6, 2000 in conjunction with the Andlinger transaction, Axess cancelled
the debt of $8,206,000 and the accrued interest thereon in exchange for (x) the
payment by the Company to Axess of $3,500,000 in cash; (y) the issuance to Axess
of a subordinated promissory note in the principal amount of $1,000,000 payable
upon the sale of one of the Company's product lines and (z) the issuance to
Axess, of a warrant (the "Preferred Stock Warrant") to purchase 1,000 shares of
the Company's non-voting convertible redeemable preferred stock (convertible
into 1,000,000 shares of common stock) to be issued, subject to stockholder
approval, pursuant to an amendment to the certificate of incorporation of the
Company.
The subordinated promissory note calls for a mandatory prepayment in the event
of the sale of one of the Company's product lines. Beginning on March 31, 2001,
repayment shall begin in the amount of $50,000 per quarter plus accrued interest
on the unpaid balance at a rate of 6% per annum. The entire unpaid principal and
interest balance is due and payable on February 28, 2006.
Accrued affiliate interest at December 31, 1999 was $1,020,000.
5. Income Taxes
The components of deferred tax assets and liabilities as of December 31
consisted of the following:
2000 1999
---- ----
Inventory reserves, inventory capitalization
and intercompany profit in inventory $ 500,000 $1,236,000
Other 160,000 1,171,000
Net operating loss carryforwards 7,385,000 7,046,000
Research and development and other tax
credit carryforwards 1,002,000 1,001,000
------------ -------------
Gross deferred tax assets 9,047,000 10,454,000
------------ -------------
Gross deferred tax liabilities (229,000) (159,000)
------------ -------------
Net deferred tax asset before valuation
allowance 8,818,000 10,295,000
Valuation allowance on deferred tax assets (8,818,000) (10,295,000)
------------ -------------
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, 2000, the Company had federal net operating loss carryforwards
for income tax purposes of approximately $11,813,000 that expire in 2005 through
2020, state net operating losses of $6,102,000 that expire 2000 through 2010,
and foreign loss carryforwards of approximately $6,290,000, a portion of which
may be carried forward indefinitely. The
Page 24 of 34
Company also has other tax credit carryforwards aggregating approximately
$1,002,000 at December 31, 2000, 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 has resulted in a limitation on future
annual utilization of domestic tax credits and net operating losses, pursuant to
Internal Revenue Code Sections 382 and 383.
On March 6, 2000 pursuant to a Securities Purchase Agreement between Rheometric
Scientific, Axess Corporation and Andlinger Capital XXVI, Andlinger Capital
acquired the power to vote an aggregate of 16,606,000 shares of the Company's
common stock representing approximately 74% of the issued and outstanding common
stock of the Company. This includes 6,000,000 shares issuable upon exercise of
the Investor Warrants. This will result in a further limitation on future annual
utilization of domestic tax credits and net operating losses, pursuant to
Internal Revenue Code Sections 382 and 383.
Income/(loss) before income taxes as of December 31 consisted of the following:
2000 1999 1998
---- ---- ----
Domestic $ 55,000 $ (2,438,000) $ 2,402,000
Foreign 45,000 (2,457,000) (3,426,000)
-------- ---------- -------------
$ 100,000 $ (4,895,000) $ (1,024,000)
=========== ============= =============
The components of income tax expense for the years ended December 31 consisted
of the following:
2000 1999 1998
---- ---- ----
Federal:
Current -- $ (35,000) $ (65,000)
Deferred -- -- --
-------- ----------- -----------
-- (35,000) (65,000)
-------- ----------- -----------
Foreign:
Current 5,000 276,000 181,000
Deferred -- -- --
-------- ----------- -----------
5,000 276,000 181,000
-------- ----------- -----------
State:
Current 4,000 2,000 4,000
Deferred -- -- --
-------- ----------- -----------
4,000 2,000 4,000
-------- ----------- -----------
$ 9,000 $ 243,000 $ 120,000
======== =========== ===========
The Company's effective tax rate varies from the statutory federal tax rate as
of December 31 as a result of the following:
2000 1999 1998
---- ---- ----
Computed statutory income
tax (benefit) $ 34,000 $(1,664,000) $(290,000)
State income taxes, net of Federal
tax benefit 4,000 2,000 2,000
Foreign taxes in excess of/(less than)
statutory rate (10,000) 274,000 164,000
Utilization of net operating losses (19,000) -- (841,000)
Effect of loss carryforwards not
recognized -- 1,713,000 1,071,000
Warrants issued for services -- (57,000) --
Other -- (25,000) 14,000
-------- ------------ ---------
$ 9,000 $ 243,000 $ 120,000
======== ============ =========
Page 25 of 34
6. Capital Stock and Stock Option and Incentive Plans
The Company has two stock option plans under which stock options may be granted,
the 1996 Stock Option Plan (the "1996 Plan") and the 2000 Stock Option Plan (the
"2000 Plan"). The 1996 Plan, as amended, authorizes the issuance of up to
500,000 shares of the Company's common stock as incentive stock options pursuant
to Section 422 of the Internal Revenue Code. The 2000 Plan authorizes the
issuance of up to 1,000,000 shares of the Company's common stock. 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.
Stock option activity for the years 2000 and 1999 is as follows:
2000 1999
------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------- --------
Outstanding at January 1, 414,400 $0.84 352,400 $0.99
Granted 333,700 4.19 75,000 0.28
Exercised -- -- -- --
Canceled 24,000 3.83 13,000 1.75
Outstanding at December 31, 724,100 2.28 414,400 0.84
Excercisable at December 31, 328,650 0.93 269,550 0.99
Available for grant at
December 31, 775,900 85,600
Weighted average fair value of
options granted during the period $3.39 $0.38
- --------------------------------------------------------------------------------
The following table summarizes the information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
- ---------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Outstanding at Exercise
Prices December 31, Life (Years) Price December 31, Price
---------- -------------- ------------ -------- -------------- --------
$0.28-$4.375 724,100 8.32 $2.28 328,650 $0.93
- -------------------------------------------------------------------------------
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 income
Page 26 of 34
would have decreased by approximately $39,000 in 2000 and net loss would have
increased by $29,000 for 1999. The per share impact was less than $0.01 in both
years.
The fair value of the options granted were estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999
---- ----
Risk free interest rate 5.75% 5.875%
Expected volatility 36.10% 88.46%
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 the 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 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 the 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
the Lender terminated. On July 22, 1998 in consideration for waiving certain
covenant violations, the exercise price for the outstanding warrants was reduced
to $1.00 per share. Additionally, on December 29, 1999 in consideration of
waiving certain covenant violations, the exercise price for the outstanding
warrants was reduced to $0.37 per share.
On March 6, 2000, pursuant to a Securities Purchase Agreement dated as of
February 17, 2000, by and between the Company, Axess and Andlinger Capital XXVI
LLC ("Andlinger Capital XXVI"), as amended (the "Purchase Agreement") and
certain related agreements, to provide Andlinger Capital XXVI with control of
the Company, Andlinger Capital XXVI purchased (i) 10,606,000 shares of newly
issued common stock of the Company (the "Investor Shares") and (ii) warrants to
purchase (x) an additional 2,000,000 shares of common stock of the Company at an
exercise price of $1.00 per share, exercisable at any time prior to March 6,
2007 (the "Investor A Warrants") and (y) an additional 4,000,000 shares of
common stock of the Company at an exercise price of $3.00 per share, exercisable
at any time prior to March 6, 2003 (the "Investor B Warrants," and collectively
with the Investor A Warrants, the "Investor Warrants"), for the aggregate
consideration of $1,825,000 (the "Purchase Price"). Upon consummation of this
transaction, Andlinger Capital XXVI acquired the power to vote an aggregate of
16,606,000 shares of the Company's common stock (of which 6,000,000 shares are
attributable to the Investor Warrants) representing approximately 74% of the
issued and outstanding common stock of the Company (including as outstanding for
the purposes of determining such percentage the 6,000,000 shares issuable upon
exercise of the Investor Warrants). Prior to the purchase by Andlinger Capital
XXVI of the Investor Shares and the Investor Warrants, Axess agreed to
contribute 2,800,000 shares of common stock to the Company.
In conjunction with the acquistion of Protein Solutions, Andlinger Capital XXVI
exercised Investor A Warrants for the purchase of one million shares of common
stock of the Company at an exercise price of $1.00 per share.
Page 27 of 34
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 $110,000,
$124,000 and $141,000 for the years ended December 31, 2000, 1999 and 1998,
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, 2000, 1999 and 1998. 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 $480,000, $527,000 and $679,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
On February 23, 1996, the Company entered into a sale/leaseback arrangement that
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.
The lease is subject to an annual CPI adjustment that is capped at 3% per year.
On March 1, 2000 the basic rent payment was adjusted to $854,986 and on March 1,
2001, the basic rent payment was again adjusted to $884,288.
The minimum commitments under noncancellable leases consisted of the following
at December 31, 2000:
Direct
Operating Financing
Year Leases Lease
----------------- --------- ---------
2001 $ 442,000 $ 879,000
2002 151,000 884,000
2003 50,000 884,000
2004 23,000 884,000
2005 18,000 884,000
Thereafter 0 4,570,000
--------- ------------
Total minimum lease payments $ 684,000 8,985,000
=========
Less amounts representing interest 4,341,000
-----------
Total lease obligation 4,644,000
Less current maturities 224,000
Long-term lease obligation under refinancing $ 4,420,000
===========
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 $194,000 per year in years 2001, 2002, 2003,
2004 and 2005 and $1,650,000 thereafter.
Page 28 of 34
The Company has employment agreements with key management executives. The
agreements provide for one-year's base pay for terminations up to February 2001
and ten month's base pay for terminations from February 17, 2001 to February 17,
2002. Thereafter these agreements will expire. If termination occurs between
February 17, 2001 and February 17, 2002, the minimum obligation approximates
$461,000. Additionally, the Company has entered into consulting agreements. The
minimum obligation under the terms of the consulting agreements is $10,000. The
Company entered into a 15-year royalty agreement in August 1991 for the
Elongational Rheometer Products. This royalty agreement is based on sales of the
product. Accrued royalties were $27,000 and $87,000 at the end of 2000 and 1999,
respectively.
In the ordinary conduct of its business, the Company may be party to litigation.
At December 31, 2000, in the opinion of management, there are no matters pending
or threatened which would have a material adverse effect on the consolidated
financial position or results of operations of the Company.
9. Operating Segments/Foreign Operations and Geographic Information
Effective December 31, 1998, the Company adopted SFAS 131 "Disclosures about
Segments of an Enterprise and Related Information". The Company's three
reportable segments are: Domestic, Europe, and the Far East. The accounting
policies of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies. The Company evaluates the
performance of its operating segments based on revenue performance and operating
income.
Summarized financial information concerning the Company's reportable segments is
shown below:
(In thousands) Domestic Europe Japan Consolidated
- -------------- --------- -------- --------- ------------
Trade Sales:
2000 $ 16,906 $ 7,100 $ 5,877 $ 29,883
1999 15,114 6,465 6,784 28,363
1998 16,278 7,587 6,743 30,608
Intercompany Revenues
2000 6,972 1,242 0 --
1999 5,950 1,113 0 --
1998 7,760 1,260 0 --
Operating Income (loss)
2000 2,296 (681) 410 2,025
1999 (1,119) (1,737) 189 (2,667)
1998 4,360 (3,141) (120) 1,099
Total Assets
2000 17,737 4,419 4,636 26,792
1999 15,347 3,949 4,687 23,983
1998 25,483 (801) 3,852 28,534
Depreciation and Amortization (including intangibles)
2000 844 129 26 999
1999 765 101 24 890
1998 779 179 29 987
Page 29 of 34
PSI, acquired effective November 17, 2000, is included in the domestic segment.
The figures above include the following PSI numbers (in thousands): Sales of
$481; Operating income of $21; Total assets of $3,755; and Depreciation of $3.
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 $2,996,000, $728,000 and $180,000 for the
years ended December 31, 2000, 1999 and 1998, 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 established a distribution network while Mettler continued to
manufacture the two instruments and maintain necessary levels of spare parts.
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 paid Mettler
for manufacturing the products plus a 10% royalty payment on sales. After the
Company assumed manufacturing, Mettler was to receive quarterly royalty payments
based upon a percentage of sales or a minimum payment formula. Beginning in
1995, interest accrued 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. The
discount was being amortized over a six-year period using the interest method.
The liability balance at December 31, 1999 was $1,212,000.
On March 6, 2000 in conjunction with the Andlinger transaction, the Mettler debt
was settled for the amount of $1,212,000. This payment satisfied the entire debt
to Mettler.
11. 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. Approximately
$198,000 of the original reserve was reversed in 1998 since actual expenses came
in below original estimates. There were savings related to the European leases
of $143,000 and expenses not incurred related to headcount reductions of
$24,000. In addition, the fixed assets written off were lower than anticipated
by $31,000. The reversal is shown as income on the consolidated statements of
operations.
12. Convertible Redeemable Preferred Stock
In conjunction with the March 6, 2000 Purchase Agreement, the Company issued to
Axess 1,000 shares of convertible redeemable preferred stock with a $1,000 per
share liquidation preference, redeemable over a five year period. Each such
preferred share is subject to mandatory redemption at $1,000 per share, or
convertible at the holder's option into 1,000 shares of the Company's common
stock.
Page 30 of 34
The mandatory redemption dates are as follows:
No of Shares of
Date Preferred Stock Price/Share Total
- ------------- ---------------- ---------- ----------
March 6, 2001 200 $ 1,000 $ 200,000
March 6, 2002 200 1,000 200,000
March 6, 2003 200 1,000 200,000
March 6, 2004 200 1,000 200,000
March 6, 2005 200 1,000 200,000
----- ----------
1,000 $1,000,000
On March 1, 2001 Axess elected to convert 200 shares of the preferred stock to
200,000 shares of common stock of the Company.
13. Protein Solutions Acquisition
Effective November 17, 2000, the Company acquired all of the issued and
outstanding capital stock of PSI Holding Corporation, a Virginia corporation
("PSI"), and its wholly-owned subsidiaries, Protein Solutions, Inc., a Virginia
corporation and its affiliate Protein Solutions Ltd., a corporation organized
under the laws of England and Wales, when PSI merged with and into PSI
Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Sub"),
pursuant to a Merger Agreement (the "Merger Agreement"), dated as of November
20, 2000. PSI was acquired for approximately $525,000 cash and approximately
680,000 shares of Rheometric common stock. Upon consummation of the merger,
Acquisition Sub changed its name to Protein Solutions Holdings, Inc. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the net assets were allocated based upon their fair values at the
acquisiton's effective date of November 17, 2000. The Company's consolidated
statements of operations do not include the revenues and expenses of PSI prior
to this date. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) of approximately $2,356,000 will be amortized on a
straight-line basis over 40 years.
In conjunction with this transaction, Andlinger Capital XXVI exercised Investor
A Warrants for the purchase of one million shares of common stock of the Company
at an exercise price of $1.00 per share. These warrants were acquired by
Andlinger Capital in March of 2000 in connection with its majority equity
investment in the Company. A portion of the one million received by the Company
upon such exercise was applied to the cash portion of the purchase price of PSI.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Company's 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or prior to
April 30, 2001, and is made a part hereof.
Item 11. Executive Compensation
Information regarding this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Company's 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or prior to
April 30, 2001, and is made a part hereof.
Page 31 of 34
Item 12. Security Ownership of Management and Others
Information regarding this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Company's 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or prior to
April 30, 2001, and is made a part hereof.
Item 13. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Company's 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or prior to
April 30, 2001, and is made a part hereof.
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 13 through 31
Independent auditor's report on consolidated financial statements
is on pages 13 and 14
(2) Financial statement schedules: none
The required information is inapplicable or the information is
presented in the financial statements or related notes
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
2.1 Securities Purchase Agreement, dated as of February 17, 2000,
by and between Rheometric Scientific, Inc., Andlinger Capital
XXVI LLC and Axess Corporation, incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
March 21, 2000.
2.2 Merger Agreement, dated as of November 20, 2000, among
Sheridan D. Snyder, Robert P. Collins, Jr., PSI Holding
Corporation, Rheometric Scientific, Inc., and PSI Acquisition
Corp., incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated November 29, 2000.
3.1 Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 2000.
3.2 By-Laws of the Registrant, as Amended, incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the year ended September 30, 2000.
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.
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.
10.1 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.
10.2 Rheometric Scientific, Inc. 2000 Stock Option Plan.
10.3 Revolving Credit, Term Loan and Security Agreement, dated as
of March 6, 2000, by and among PNC Bank, National Association,
as agent and a lender, and Rheometric Scientific, Inc. and
certain subsidiaries thereof, as borrowers.
10.4 First Amendment to the Revolving Credit, Term Loan and
Security Agreement, dated as of August 31, 2000.
10.5 Second Amendment to the Revolving Credit, Term Loan and
Security Agreement, dated as of March 16, 2001.
Page 32 of 34
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 Registration Rights Agreement, dated as of March 6, 2000, by
and between Rheometric Scientific Inc., Andlinger Capital XXVI
and Axess Corporation, incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated March
21, 2000.
10.12 Stockholders' Agreement, dated as of March 6, 2000, by and
between Rheometric Scientific Inc., Andlinger Capital XXVI and
Axess Corporation, incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K dated March 21,
2000.
10.13 Voting Agreement, dated as of February 17, 2000, by and
between Rheometric Scientific Inc., Andlinger Capital XXVI and
Axess Corporation, incorporated by reference to Exhibit 10.3
to the Company's Current Report on Form 8-K dated March 21,
2000.
21.1 Subsidiaries of the Registrant.
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.
Date: March 30, 2001 By: /s/ Robert M. Castello
------------------ ------------------------------
Robert M. Castello, Chairman
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/ Robert M. Castello Chairman and Chief March 30, 2001
- ------------------------ Executive Officer
Robert M. Castello (principal executive officer)
/s/ Joseph Musanti Vice President, Finance March 30, 2001
- ------------------------ and Materials; Chief
Joseph Musanti Financial Officer; and Assistant
Secretary (principal financial and
principal accounting officer)
/s/ Mark F. Callaghan Director March 30, 2001
- ------------------------
Mark F. Callaghan
/s/ David R. Smith Director March 30, 2001
- ------------------------
David R. Smith
/s/ Merrick G. Andlinger Director March 30, 2001
- ------------------------
Merrick G. Andlinger
/s/ Richard J. Giacco Director March 30, 2001
- ------------------------
Richard J. Giacco
/s/ Robert K. Prud'homme Director March 30, 2001
- ------------------------
Robert K. Prud'homme
Page 34 of 34