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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 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1997
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from_____________________ to _______________________
Commission file number 0-3905
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TRANSMATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 16-0874418
- ----------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Vantage Point Drive, Rochester, NY 14624
- ----------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 716-352-7777
----------------------------
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
------------------- -----------------------------------------
------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
Common Stock $0.50 Par Value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark (X) 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 [ ]
TOTAL PAGES - 58
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Indicate by check mark (X) 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 non-affiliates of the
registrant is $28,392,705 as of the close of business June 10, 1997. Market
value is determined by reference to the final NASDAQ quotation of the price paid
for Transmation stock as of that date.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the close of business on June 16, 1997.
Class Number of Shares Outstanding
Common 2,847,362
------ ----------------------------
Documents incorporated by reference and the part of Form 10-K into which they
are incorporated are listed hereunder.
Part of Form 10-K Document Incorporated
----------------- ---------------------
Part III Registrant's definitive Proxy Statement
for Annual Meeting of Shareholders to
be held on August 19, 1997
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Part I
------
Item 1. Business
---------
The registrant, Transmation, Inc. ("Transmation" or the "Company"),
which was organized in 1964 and incorporated in the State of Ohio, is primarily
engaged in a single industry: the sale and distribution, development,
manufacture and service of electronic monitoring instrumentation used
principally for measurement, indication and transmission of information to
automation control equipment or in conjunction with computers. The principal
products sold by Transmation fall within two general categories: a) test,
measurement and calibration equipment; and b) process monitoring
instrumentation.
(i) Test, measurement and calibration equipment - Instruments used
for calibrating, measuring and testing most physical parameters in
industry and science. These products are manufactured by Transmation
and by other manufacturers and sold by Transmation.
(ii) Process monitoring instrumentation - A line of instrumentation
which measures low energy signals, such as temperature, and then
amplifies the measurement to permit transmission to a receiving device
which may also actuate a relay at a pre-determined measurement value.
Certain of these products may be used to monitor one or more points of
a process by multiplexing information into one or more digital
devices. These products are manufactured by Transmation.
These products and services range in price from approximately $100 for
a single calibration service, to more than $200,000 for a large multiplexing
system.
The principal market for these products is within the process industry
and is primarily directed to the petroleum refining and chemical manufacturing
industries. Transmation's sales are accomplished through one catalog
distribution division, Transcat/EIL, and one sales division, the Instrument
Division and four subsidiaries, Altek Industries Corp., Transmation (Canada)
Inc., Transmation Australia Pty. Ltd., and Transmation Singapore Pte., Ltd.
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Transmation operates sales offices for its products and services in
several states, Canada, and Australia. Transmation's Canadian office was
separately incorporated under the laws of the Province of Ontario and Canada
during 1979. In 1990, Transmation, Inc. incorporated Transcat, F.S.C. (Foreign
Sales Corporation) under the laws of St. Thomas, the U.S. Virgin Islands. The
purpose of this corporation is to facilitate sales of U.S. manufactured products
in foreign countries. Transmation's Singapore operation was separately
incorporated under the laws of Singapore during fiscal 1991. Transmation closed
its office in Singapore during 1996; however, it continues to maintain one
regional sales manager in Singapore. Transmation's Australian office was
separately incorporated under the laws of Australia during fiscal 1994. The
combined results of their operations are disclosed in Notes 2 and 3 of the
consolidated financial statements of Transmation, Inc. which are included in
this report. In addition, the Company has arrangements with approximately 80
sales representative and distributor organizations, each employing one or more
sales engineers, located in other areas of concentrated demand for these
products in the U.S., Australia, the Far East, Europe and Canada to promote such
products on a commission basis or by reselling such products to end users at a
gross price having first purchased those products from Transmation at a
discount.
Sales of test, measurement and calibration equipment and service are
principally made through Transmation's Transcat/EIL division. This division
sells through a catalog which is distributed to present and prospective
customers and through direct salesmen in selected locations in the U.S. and
Canada. Transcat/EIL sells Transmation products and resells the products of
approximately 200 other manufacturers through the catalog. More than 1,000,000
catalogs have been distributed through this part of Transmation's sales and
marketing effort.
The Company's Transcat/EIL CalXPress operations provide periodic
calibration services for customers owning Transmation instrumentation and
instruments manufactured by others. At March 31, 1997, there are Transcat
CalXPress offices in Rochester, New York, Bridgeport, New Jersey, Houston,
Texas, Chicago, Illinois, Baton Rouge, Louisiana, Toronto, Ontario and Edmonton,
Alberta.
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After the close of fiscal 1997, the Company acquired certain assets of
E.I.L. Instruments, Inc., a distributor and servicer of calibration
instrumentation. Note 13 to the consolidated financial statements included in
this report is incorporated herein by reference.
The following information is set forth as it is deemed material to an
understanding of the business of the registrant.
Competition
-----------
Transmation sells products primarily to the process industries and
therefore, while there are many manufacturers and distributors in its general
line of business, Transmation regards as its principal competition only those
companies which compete with it for process industry instrumentation and service
business. Within this framework, the principal methods of competition are price,
product performance, inventory availability and the Company's record for
post-sales follow-up with its customers to assure proper performance and
customer satisfaction. Transmation believes that the negative elements of its
competitive position are price competition from other service providers and
manufacturers of lower price range products. Certain of its manufacturing
competitors, particularly John Fluke company, have greater financial and
marketing resources than Transmation. Competitors for distribution and service
business are principally smaller regional or local operators which do not
compete against the Company on a national basis.
Transmation believes that it has substantial competition in each
product category which it distributes, manufactures, or services products.
Significant Customers
---------------------
There were no sales to any customer or controlled group which amounted
to 10 percent or more of the Company's consolidated net sales during the years
1997-1995, nor is the Company dependent on a single customer or a few customers,
the loss of any one or more of which would have a material adverse effect on the
Company.
Backlog
-------
At the close of the fiscal year ended March 31, 1997, Transmation had a
firm order backlog of approximately $1,460,000 as compared to $1,347,000 in 1996
and $1,519,000 in 1995.
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It is anticipated that 100 percent of Transmation's backlog existing on
March 31, 1997 will be filled by shipments in fiscal year 1998. Transmation's
cycle of sales to delivery at the present time is 1 day to 12 weeks on all
product categories except for process monitoring systems, where the cycle is
10-40 weeks. However, backlog has generally not been a significant factor in
Transmation's business.
Seasonality
-----------
Transmation does not believe that its line of business has any
significant seasonal factor.
Raw Materials
-------------
Finished products required for the Transcat division's catalog sales
are generally available from only one source per product. Additionally, while
the raw materials and components essential to Transmation's manufacturing
business are available from a number of sources of supply, in certain instances,
important parts and components are available through fewer suppliers than
Transmation deems suitable. If such suppliers should fail in deliveries, delays
in Transmation's production could result. Periodically, Transmation has
experienced delays in obtaining certain parts and components or finished
products. Such delays are primarily attributable to demand for parts or products
and long lead times. In order to minimize such delays, Transmation has placed
scheduled blanket purchase orders, has sought out alternate sources of supply,
has provided vendors with greater lead time in filling such orders and has
placed certain finished product in its inventory. Transmation believes that such
delays have not had a material adverse effect on its business to date, although
it cannot predict what effect such delays may have in the future.
Patents
-------
It is the opinion of management that the obtaining of patent protection
is not essential to the conduct of Transmation's business. Transmation has,
however, sought patent protection for its manufactured products in certain
instances and presently holds several United States patents, the most recent of
which was granted in 1994; patents expire at various dates through 2012.
Transmation believes that the patents obtained provide a short-term marketing
benefit, particularly when marketing products against similar products produced
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by competitors. However, Transmation does not believe that the patents have a
significant impact on its business.
Transmation has registered numerous trademarks in the United States
Patent and Trademark Office, including Transcat(R), Quick-Cal(R), CalXpress(R)
and Shop Access(R).
Research and Development
------------------------
During the fiscal year ended March 31, 1997, Transmation expended
approximately $1,560,974 in research and development as compared with an
approximate expenditure of $1,099,508 in 1996 and $1,209,156 in 1995. The
research and development costs in fiscal 1997 reflected the Company's efforts in
all of its product lines in its Instrument Division and Altek subsidiary.
Research and Development is Company sponsored. Approximately 21 of its
employees and several consultants are engaged in product development. All such
employees hold technical degrees.
Employees
---------
Transmation employed 250 persons (including 2 part-time employees) as
of March 31, 1997 in all aspects of its business. The EIL acquisition on April
4, 1997 increased Transmation's number of employees to 496. At March 31, 1996,
Transmation employed 211 persons of which 3 were part-time and at March 31,
1995, 204 persons of which 5 were part-time. None of Transmation's employees is
subject to collective bargaining agreements.
Environmental Matters
---------------------
Registrant does not believe that compliance with Federal, State or
local provisions relating to the protection of the environment have any material
effect on its capital expenditures, earnings or competitive position.
Information as to classes of similar products:
----------------------------------------------
Percent of Net Sales
--------------------
1997 1996 1995
---- ---- ----
Test, Measurement & Calibration Equipment
and Service 94.2 93.3 91.7
Process Monitoring Instrumentation
and Service 5.8 6.7 8.3
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The change in sales mix from 1996 to 1997 and from 1995 to 1996 is primarily the
result of increased sales of resale product and service of test, measurement and
calibration equipment to the U.S. marketplace resulting from increases in the
number of company employed sales personnel in the Company's Transcat division
and from significant catalog mailings to customers and prospective customers
during fiscal 1997-1995 in the Company's Transcat division. Additionally, all
sales resulting from the Company's Altek Industries Corp. subsidiary, acquired
on April 3, 1996, were of calibration products.
Approximately 27.8 percent of Transmation's sales in 1997 resulted from
sales in foreign countries. This compares with 20.7 percent of sales in 1996 and
22.7 percent of sales in 1995. The increase is primarily the result of increased
sales in the international marketplace of products distributed through the
Company's Transcat division. Sales in foreign countries generate relatively the
same profit margins as domestic sales. Management believes that the relative
lower value of the dollar compared to foreign currencies that has existed for
several years has a positive effect on international sales. All sales are
shipped F.O.B. Company locations. To the extent the export laws change or the
cost of doing business abroad increases, sales in foreign countries may be
curtailed or become less profitable.
The information contained in Notes 2 and 3 to the Financial Statements
of this report is incorporated herein by reference.
Item 2. Properties
- -------------------
Transmation's manufacturing operation is housed in owned facilities
located at 977 Mt. Read Boulevard, Rochester, New York comprising 26,800 square
feet of plant, storage and office space.
In addition, Transmation has leased an additional 16,700 square feet of
space in Rochester. This space is being used for certain executive,
administrative, sales, service and manufacturing purposes. The lease for this
space will expire in February, 2000.
Transmation also leases an additional 9,500 square feet which houses
the operations of its Altek subsidiary. This lease will expire in fiscal 2000.
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Various sales office and CalXpress space is leased by the Company and
its subsidiaries, Transmation (Canada), Inc., and Transmation Australia Pty.
Ltd. and is considered adequate to meet both present and future needs in those
locations. (See Note 7 to the Financial Statements.)
Effective April 4, 1997, additional space was leased under contracts
assumed when the Company acquired certain assets of E.I.L. Instruments, Inc.
This space houses service operations of the former EIL and leases expire at
various times through fiscal 2003.
Generally, Transmation's present facilities are being fully utilized
and are considered suitable for its current needs and there is no present
requirement for significant additional space. Any expansion of business
facilities as the result of a relocation of the entire manufacturing operation
or a portion of it from Mt. Read Boulevard will be made in the future if
necessary.
Item 3. Legal Proceedings
- --------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
- ----------------------------------------------------------------------
Matters
-------
The Company's Common Stock is traded in the NASDAQ National Market System. A
record of actual transactions in Transmation's stock is reflected in the table
below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997 High 10.625 9.250 10.750 16.000
Low 5.500 6.625 7.500 9.125
1996 High 7.125 6.625 6.500 6.625
Low 5.000 6.000 5.875 5.750
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At May 27, 1997 there were approximately 850 shareholders.
The Company has paid no cash dividends since its inception, and under terms of a
revolving credit agreement with a bank may not pay such dividends without prior
bank approval.
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Item 6.
TRANSMATION, INC.
SELECTED FINANCIAL DATA
Year Ended March 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Net Sales $47,311,224 $38,449,758 $37,293,872 $33,984,430 $28,867,974
----------------- ----------------- ----------------- ----------------- -----------------
Operating Income (Loss) $3,435,961 $2,165,037 $915,481 ($523,129) $1,064,168
----------------- ----------------- ----------------- ----------------- -----------------
Net Income (Loss) $2,059,736 $1,234,723 $381,785 ($586,234) $523,270
----------------- ----------------- ----------------- ----------------- -----------------
Income (Loss) Per Share $.67 $.49 $.16 ($.25) $.22
----------------- ----------------- ----------------- ----------------- -----------------
Total Assets $25,858,358 $15,701,727 $16,293,407 $17,525,838 $16,226,457
----------------- ----------------- ----------------- ----------------- -----------------
Long-Term Debt $6,000,000 $2,050,800 $4,064,426 $5,100,000 $3,800,000
----------------- ----------------- ----------------- ----------------- -----------------
The Company has paid no cash dividends since its inception.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of operations
- ---------------------
Increases(Decreases) in Consolidated Operating Results Over Prior Year
$000
----
1997 1996
----------- -----------
Amount % Amount %
------ -- ------ --
Net Sales $8,861 23 $1,156 3
----------- -----------
Costs and Expenses:
Cost of Product Sold 4,375 18 834 4
Selling & Admin. Expenses 2,754 25 (817) (7)
Research and Develop. Costs 461 42 (110) (9)
Interest Expense 300 90 (97) (22)
----------- -----------
Income from Operations 971 53 1,346 277
Other Income 479
----------
Income Before Income Taxes 1,450 79 1,346 277
Provision for Income Taxes 625 104 493 475
----------- -----------
Net Income $825 67 $853 223
=========== ===========
Net Income Per Share $.18 37 $.33 206
=========== ===========
Net Sales
---------
The 23% sales increase in 1997 was attributable to the Company's
acquisition of Altek Industries Corp in April 1996 and to increased sales of
products and services by the Company's Transcat division in fiscal 1997. During
1997, the full effect of having added salesmen in areas of significant market
concentration in Transcat during fiscal 1996, together with improved customer
mail list techniques, resulted in improved market penetration and increased
sales in 1997 compared to 1996.
The sales increase in 1996 of 3% is the result of initiating additional
coverage using direct salesmen in areas of significant market penetration in the
Company's Transcat division.
Cost of Product Sold
--------------------
Cost of Product Sold increased by 18% but as a percentage of sales
decreased by 2.7% of sales in 1997 compared to 1996. The improvement in 1997 is
the result of the addition of high margin Altek products to Transmation's sales
and of improvements in gross margins of both resale and service billings in the
Company's Transcat division.
In 1996, cost of product sold as a percentage of sales increased by .3%
of sales compared to 1995. This increase resulted from proportionately greater
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sales through the Company's Transcat division in 1996 compared to 1995. Gross
margins are lower in the Transcat division than they are in the Company's
manufacturing division.
Selling and Administrative Expenses
-----------------------------------
Selling and administrative expenses increased by 25% in 1997 compared
to 1996; however, as a percentage of sales, the increase is .6%. Increased
spending represents the full year effect of direct salespeople added in the
Company's Transcat division in areas of significant market potential.
Additionally, amortization of goodwill totaling $313,600 resulting from
Transmation's April 1996 acquisition of Altek Industries Corp. is included in
1997 costs and there were no similar costs in 1996.
Selling and administrative expenses in 1996 decreased by 7% compared to
1995 and as a percentage of sales fell to 28.2% from 31.2%. The reduction in
1996 compared to 1995 was the result of a company effort in 1996 to reduce
expenses and return to strong profitability.
Research and Development Costs
------------------------------
Research and development costs increased by 42% in 1997 compared to
1996. This increase is the result of the acquisition of Altek Industries Corp.
by the Company in April 1996.
Research and development costs decreased by 9% in 1996 compared to
1995. This decrease was necessary to bring Company spending in the research area
into line with industry averages and to help the Company in its effort to return
to strong profitability.
Interest Expense
----------------
Interest expense increased by 90% in 1997 compared to 1996. This
increase is the result of financing the Company's acquisition of Altek
Industries Corp. in April 1996.
Interest expense decreased by 22% in 1996 compared to 1995. This
reduction was made possible as the result of the Company's strong management of
its balance sheet which enabled significant debt reductions in 1996 compared to
debt balances outstanding at the end of 1995.
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Other Income
------------
Other Income is comprised primarily of the sale of land. In 1997 the
Company sold a parcel of land it formerly owned in a Rochester suburb which did
not have a part in the Company's future plans, resulting in a one-time net gain
of $479,000.
Income Taxes
------------
The Company's combined tax rate was 37.2% of profits in 1997 compared
to 32.6% of profits in 1996. In 1997 and 1996 the Company used tax benefits from
foreign subsidiaries which will become available against future tax liabilities
in the determination of its income tax expense. No such benefits remain at the
end of 1997.
The Company's combined tax rate was 32.6% of profits in 1996 compared
to 21.4% of profits in 1995. The 1995 tax rate was lower than might otherwise
have been determined because the Company was able to reverse the effects of a
valuation allowance previously established for purposes of utilizing net
operating loss carryforwards.
Impact of Inflation
-------------------
The effects of inflation have not been significant to Transmation
during 1997-1995 because inflation rates have been relatively low.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Cash Flows
- ----------
$000's
---------------------------
1997 1996 1995
---- ---- ----
Cash Provided (used) by:
Operating Activities $1,561 $2,249 $1,901
Investing Activities ($5,088) ($966) ($446)
Financing Activities $4,118 ($1,703) ($1,018)
Operating Activities
--------------------
Net cash from operations totaled $1,561,000 in 1997 which was down by
approximately $689,000 from cash which was generated from operations in 1996.
Net Income in 1997 increased by $825,000 compared to 1996 and depreciation and
amortization increased by $521,000 in 1997 versus 1996. The effect of these
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cash generators was offset in 1997 by an increase in accounts receivable of
$776,000 and in inventories of $457,000 which were the result of increased
business through the Company's Transcat division and of its purchase in April
1996 of the stock of Altek Industries Corp.
Net cash from operations totaled $2,249,000 in 1996 compared to
$1,901,000 in 1995. Net income in 1996 totaled $1,235,000 compared to $382,000
in 1995. Deferred charges and prepaid expenses were reduced by $297,000 in 1997
compared to a reduction of $585,000 in similar charges when comparing 1996 to
1995. This reduction in deferred charges and prepaid expenses in 1996 compared
to 1995 was enabled by a much improved and more strongly focused catalog mailing
program introduced in 1996 compared to that used in 1995.
Investing Activities
--------------------
Cash used in investing activities totaled $5,087,600 in 1997 compared
to $966,000 in 1996. The Company invested $6,637,500 in its purchase of Altek
Industries Corp in April, 1996. Capital assets acquired totaled $815,000 in 1997
compared to $966,000 in 1996.
All cash used in investing activities in both 1996 and 1995 was used to
acquire capital assets and totaled $966,000 in 1996 and $446,000 in 1995.
Financing Activities
--------------------
Financing activities generated $4,118,000 more cash in 1997 than in
1996. In addition, $1,838,000 worth of Company stock was issued as partial
payment for the stock of Altek Industries Corp., an additional $36,000 of stock
was sold to employees and directors under various stock option and warrant plans
in 1997 versus 1996, and $5,184,000 of additional bank and other debt was added
in 1997 compared to 1996 to finance the Company's operations and to acquire the
stock of Altek Industries Corp.
In 1996, $292,000 more Company stock was sold to employees and
directors through the exercise of certain options and warrants than was the
result in 1995. Also in 1996, the Company reduced its bank debt by $978,000 more
than it did in 1995.
In April 1997 the Company acquired certain assets of the former
E.I.L. Instruments, Inc. for $22,000,000 subject to certain adjustments as
defined by
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the Asset Purchase Agreement dated March 4, 1997 between the Company and
E.I.L. Instruments, Inc.
This acquisition was financed under a $32,000,000 financing package
provided by the Company's lenders. The financing package is a combination of
revolving and term debt extending through August 1, 1999 and January 1, 2003,
respectively, which is based on the prime rate or on LIBOR at the Company's
option and provided financial resources for the acquisition as well as for
general corporate operating needs. See Notes 6 and 13 to the Consolidated
Financial Statements.
Forward-Looking Statements
--------------------------
Certain statements contained in Management's Discussion and Analysis
are forward-looking statements. The forward-looking statements are subject to
risks and uncertainties, including, but not limited to, competitive pressures,
inflation, currency exchange fluctuations, trade restrictions, changes in
freight and postal rates, capital market conditions and other risks indicated in
this Report. Actual results may materially differ from anticipated results
described in these statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
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Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
TRANSMATION, INC.
INDEX TO FINANCIAL STATEMENTS
Document Page
- -------- ----
Report of Independent Accountants 18
Consolidated Balance Sheet - March 31, 1997, 1996 19
Consolidated Statement of Income - March 31, 1997, 1996, 1995 20
Consolidated Statement of Cash Flows - March 31, 1997, 1996, 1995 21
Consolidated Statement of Stockholders' Equity -
March 31, 1997, 1996, 1995 22
Notes to Consolidated Financial Statements 23-39
Schedule VIII - Valuation and Qualifying Accounts -
March 31, 1997, 1996, 1995 40
All other schedules have been omitted because they are not applicable or the
required information is shown in the Financial Statements or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
May 14, 1997
To the Stockholders of
Transmation, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Transmation, Inc. and its subsidiaries at March 31, 1997, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Rochester, NY
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TRANSMATION, INC.
CONSOLIDATED BALANCE SHEET
March 31, March 31,
ASSETS: 1997 1996
----------------- -----------------
Current Assets:
Cash $758,215 $204,046
Accounts Receivable, less allowance
for doubtful accounts of $404,000 in 1997
and $436,000 in 1996 6,773,669 5,320,996
Inventories 7,790,166 6,491,127
Prepaid Expenses and Deferred Charges 956,235 947,209
Deferred Tax Assets 394,402 310,294
----------------- -----------------
Current Assets 16,672,687 13,273,672
Properties, at cost, less accumulated
depreciation 2,355,757 1,976,679
Goodwill, less accum. amortization of $313,600 5,947,558
Deferred Charges 118,214 172,713
Deferred Income Taxes 226,352 54,366
Other Assets 537,790 224,297
----------------- -----------------
$25,858,358 $15,701,727
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Notes Payable $600,000
Accounts Payable 3,596,365 $3,049,880
Accrued Payrolls, Commissions & Other 2,008,698 1,345,499
Income Taxes Payable 689,461 410,566
----------------- -----------------
Current Liabilities 6,894,524 4,805,945
Long-Term Debt 6,000,000 2,050,800
Deferred Compensation 594,026 682,593
----------------- -----------------
13,488,550 7,539,338
----------------- -----------------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock, par value $.50 per share -
Authorized - 15,000,000 shares - issued
and outstanding - 2,826,412 in 1997
and 2,451,946 in 1996 1,413,206 1,225,973
Capital in Excess of Par Value 3,121,746 1,124,583
Accumulated Translation Adjustment (130,532) (93,819)
Retained Earnings 7,965,388 5,905,652
----------------- -----------------
12,369,808 8,162,389
----------------- -----------------
$25,858,358 $15,701,727
================= =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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TRANSMATION, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ending March 31,
----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Net Sales $47,311,224 $38,449,758 $37,293,872
----------------- ----------------- -----------------
Costs and Expenses:
Cost of Product Sold 28,733,887 24,358,437 23,525,472
Selling & Administrative Expenses 13,580,402 10,826,776 11,643,763
Research & Development Costs 1,560,974 1,099,508 1,209,156
Interest Expense 633,638 333,414 429,946
----------------- ----------------- -----------------
44,508,901 36,618,135 36,808,337
----------------- ----------------- -----------------
Income From Operations 2,802,323 1,831,623 485,535
Other Income 479,013
----------------- ----------------- -----------------
Income Before Income Taxes 3,281,336 1,831,623 485,535
Provision for Income Taxes 1,221,600 596,900 103,750
----------------- ----------------- -----------------
Net Income $2,059,736 $1,234,723 $381,785
================= ================= =================
Primary Earnings Per Share $0.69 $0.49 $0.16
================= ================= =================
Fully Diluted Earnings Per Share $0.67 $0.49 $0.16
================= ================= =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
21
TRANSMATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
March 31, March 31, March 31,
1997 1996 1995
----------------- ------------------ -----------------
Cash Flows from Operating Activities
Net Income $2,059,736 $1,234,723 $381,785
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and Amortization 1,010,656 489,462 415,425
(Increase)Decrease in CSV of
Life Insurance Policies 21,728 (14,377) 119,369
Provision for Losses on Accounts Receivable (32,000) (37,000) 38,000
Deferred Income Taxes (205,094) (77,708) (57,275)
Gain on Sale of Land, Net (479,013)
Changes in Assets and Liabilities
Accounts Receivable (776,027) 240,248 383,373
Inventories (457,470) 255,909 165,873
Prepaid Expenses & Deferred Charges 23,475 297,072 881,504
Other Assets (286,473)
Accounts Payable 122,865 (606,054) (564,371)
Other Liabilities 358,216 157,507 (3,101)
Income Taxes Payable 288,895 407,956 158,142
Deferred Compensation (88,567) (98,287) (18,207)
----------------- ------------------ -----------------
Net Cash Provided by Operating Activities 1,560,927 2,249,451 1,900,517
----------------- ------------------ -----------------
Cash Flows from Investing Activities:
Proceeds from Sale of Land, Net 527,749
Purchase of Altek Industries Corp. (4,800,000)
Purchase of Properties (815,349) (965,643) (446,413)
----------------- ------------------ -----------------
Net Cash used in Investing Activities (5,087,600) (965,643) (446,413)
----------------- ------------------ -----------------
Cash Flows from Financing Activities:
Increase in Notes Payable 600,000
Issuance of Common Stock 346,896 310,407 18,000
Borrowings (Repayments) of Long Term Debt 3,170,659 (2,013,626) (1,035,547)
----------------- ------------------ -----------------
Net Cash Provided by(used by) Financing Activities 4,117,555 (1,703,219) (1,017,574)
----------------- ------------------ -----------------
Effect of Exchange Rates on Cash (36,713) 15,694 (13,573)
----------------- ------------------ -----------------
Net Increase(Decrease) in Cash 554,169 (403,717) 422,957
Cash at Beginning of Period 204,046 607,763 184,806
----------------- ------------------ -----------------
Cash at End of Period $758,215 $204,046 $607,763
================= ================== =================
Cash Paid for Interest and Income Taxes is as follows:
Interest Paid $555,069 $367,739 $419,278
Taxes Paid $1,043,883 $124,750 None
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
22
TRANSMATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Number of
Shares of $.50
Par Value Common Stock Capital Accumulated
Common Stock Issued and in Excess of Retained Translation
Outstanding Outstanding Par Value Earnings Adjustment
------------------ ----------------- ----------------- ------------------ ------------
Balance, March 31, 1994 2,374,240 $1,187,120 $835,029 $4,289,144 $(95,940)
Issuance of Stock 6,400 3,200 14,800
Currency Translation Activity (13,573)
Net Income 381,785
------------------ ----------------- ----------------- ------------------ ------------
Balance, March 31, 1995 2,380,640 1,190,320 849,829 4,670,929 (109,513)
Issuance of Stock 71,306 35,653 274,754
Currency Translation Activity 15,694
Net Income 1,234,723
------------------ ----------------- ----------------- ------------------ ------------
Balance, March 31, 1996 2,451,946 1,225,973 1,124,583 5,905,652 (93,819)
Issuance of Stock 374,466 187,233 1,997,163
Currency Translation Activity (36,713)
Net Income 2,059,736
------------------ ----------------- ----------------- ------------------ ------------
Balance, March 31, 1997 2,826,412 $1,413,206 $3,121,746 $7,965,388 ($130,532)
================== ================= ================= ================== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
23
TRANSMATION, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1997, 1996, AND 1995
---------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. 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
net assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of Consolidation
- ---------------------------
The financial statements include the accounts of wholly-owned
subsidiaries. All intercompany transactions have been eliminated.
Foreign Operations
- ------------------
The accounts of Transmation's foreign subsidiaries are maintained in
the local currency of the countries in which they operate and have been
translated to U.S. dollars in accordance with the Statement of Financial
Accounting Standards No. 52. Accordingly, accounts representing assets and
liabilities, except for long-term intercompany and equity accounts, have been
translated at the year-end rates of exchange and related revenue and expense
accounts have been translated at average rates of exchange during the year.
Gains and losses arising from translation of subsidiaries' balance sheets into
U.S. dollars are recorded directly to the accumulated translation adjustment
component of stockholders' equity. Currency gains and losses on business
transactions are included in net income. In 1997, transaction gains totaled
$1,336, in 1996, transaction gains totaled $20,652, and in 1995, transaction
losses totaled $169,611.
Inventories
- -----------
Inventories are valued at the lower of standard cost or market.
Standard costs approximate the average cost method of inventory valuation.
23
24
Depreciation and Amortization
- -----------------------------
The cost of properties is depreciated over the estimated useful lives
of the assets. Depreciation is determined on a straight-line basis. For income
tax purposes, depreciation is determined by accelerated methods as permitted
under tax regulations. Additions and betterments are capitalized; maintenance
and repairs are charged to income. The cost and accumulated depreciation of
assets retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income. Leasehold improvements
are amortized over the terms of the related leases.
Income Taxes
- ------------
The Company accounts for certain income and expense items differently
for financial reporting purposes than for income tax reporting purposes.
Deferred income taxes are provided in recognition of these temporary
differences.
Deferred Catalog Costs
- ----------------------
Costs relating to mail order catalogs are amortized over a two-year
period beginning in the month of distribution. Such amortization periods
approximate the estimated productive life of a catalog. Prepaid expenses and
deferred charges at March 31, 1997, 1996 and 1995 consist principally of the
unamortized balance of costs associated with the catalogs. Catalog costs
expensed in 1997, 1996 and 1995 were $1,040,716, $1,240,752, and $1,917,480
respectively.
Fiscal Year
- -----------
The Company operates within a conventional 52 week accounting fiscal
year ending on March 31 of each year.
Revenue Recognition
- -------------------
The Company recognizes revenue from product sales at the time of
shipment. The Company has established programs which, under specified
conditions, provide price protection rights and/or enable its customers to
return product. The effect of these programs is estimated and current period
sales and cost of sales are reduced accordingly.
24
25
Goodwill
- --------
Goodwill is amortized over its estimated period of benefit which is 20
years on a straight-line basis. Goodwill in excess of associated expected
operating cash flows is considered to be impaired and is written down to fair
value.
Stock Options
- -------------
The Company follows the provision of Accounting Principals Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its
stock option activity in the financial statements. The Company granted all
options currently outstanding at an exercise price equal to the market price at
the date of grant and, therefore, under APB 25, no compensation expense is
recorded. The Company follows the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation."
Commitments and Contingent Liabilities
- --------------------------------------
Management is unaware of any litigation that is likely to result in any
material adverse impact on the Company.
25
26
Note 2 - Business Segments
- ------------------------------------------
The Company and its subsidiaries sell in one basic industry, instrumentation
products for the process industry. Sales are made by the Company and its
subsidiaries to end users and engineering contractors in the United States and
other countries. The Company's domestic operations include manufacturing,
sales and service; the Company's foreign operations are limited to sales and
service.
A summary of 1997, 1996 and 1995 operating data relating to the Company and
its subsidiaries is as follows:
Adjustments
and
1997 United States Canada Other Eliminations Consolidated
- ---------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Revenue from
Unaffiliated
Customers $42,518,794 $4,792,430 $47,311,224
Intercompany
Sales and
Credits 2,876,997 $1,445,577 ($4,322,574)
----------------- ------------------ ----------------- ----------------- ------------------
Total Revenue $45,395,791 $4,792,430 $1,445,577 ($4,322,574) $47,311,224
================= ================== ================= ================= ==================
Net Income $1,469,298 $265,790 $323,526 $1,122 $2,059,736
================= ================== ================= ================= ==================
Identifiable
Assets $24,341,603 $1,338,863 $875,650 ($697,758) $25,858,358
================= ================== ================= ================= ==================
26
27
Adjustments
and
1996 United States Canada Other Eliminations Consolidated
- ---------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Revenue from
Unaffiliated
Customers $32,071,157 $3,839,411 $2,539,190 $38,449,758
Intercompany
Sales and
Credits 1,208,369 544,321 ($1,752,690)
----------------- ------------------ ----------------- ----------------- ------------------
Total Revenue $33,279,526 $3,839,411 $3,083,511 ($1,752,690) $38,449,758
- ---------------------- ================= ================== ================= ================= ==================
Net Income (Loss) $1,063,362 $318,813 ($168,104) $20,652 $1,234,723
- ---------------------- ================= ================== ================= ================= ==================
Identifiable
Assets $14,483,246 $939,003 $848,474 ($568,996) $15,701,727
- ---------------------- ================= ================== ================= ================= ==================
Adjustments
and
1995 United States Canada Other Eliminations Consolidated
- ---------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Revenue from
Unaffiliated
Customers $31,070,117 $3,441,978 $2,781,777 $37,293,872
Intercompany
Sales and
Credits 2,885,473 407,647 ($3,293,120)
----------------- ------------------ ----------------- ----------------- ------------------
Total Revenue $33,955,590 $3,441,978 $3,189,424 ($3,293,120) $37,293,872
- ---------------------- ================= ================== ================= ================= ==================
Net Income (Loss) $263,769 $59,122 ($107,714) $166,608 $381,785
- ---------------------- ================= ================== ================= ================= ==================
Identifiable
Assets $14,869,430 $1,077,377 $1,310,167 ($963,567) $16,293,407
- ---------------------- ================= ================== ================= ================= ==================
Sales and transfers among the United States, Canada and Other are made on a formula basis.
Net income is revenue less costs and operating expenses.
Total consolidated sales to additional separate foreign geographic areas except Canada, as defined by the Company, did not
aggregate more than 10 percent of total consolidated sales during any of the years 1997-1995. Sales in foreign countries,
including Canada, represented 27.8 percent of sales in 1997, 20.7 percent of sales in 1996, and 22.7 percent of sales in 1995.
27
28
Note 3 - Foreign Net Assets
- ---------------------------
The consolidated balance sheet includes net assets of Transmation's
foreign subsidiaries of $983,401 in 1997, $700,877 in 1996, and $587,615 in
1995.
Note 4 - Inventories
- --------------------
The major classifications of inventory are as follows:
March 31,
1997 1996 1995
---- ---- ----
Raw Materials and Purchased Parts $2,088,533 $1,755,828 $1,712,189
Work in Process 519,280 569,317 692,119
Finished Products 5,710,854 4,731,757 4,763,470
--------- --------- ---------
8,318,667 7,056,902 7,167,778
Less Inventory Reserves (528,501) (565,775) (420,742)
--------- --------- --------
$7,790,166 $6,491,127 $6,747,036
========== ========== ==========
Note 5 - Properties
- -------------------
The major classifications of properties are as follows:
March 31,
1997 1996 1995
---- ---- ----
Land and Improvements $ 118,445 $ 167,380 $160,726
Buildings 317,411 319,629 314,875
Machinery, Equipment & Software 4,799,721 4,164,312 3,431,679
Tools, Dies and Molds 449,325 405,048 328,118
Furniture and Fixtures 828,241 623,209 568,501
Vehicles 135,174 139,040 113,158
Leasehold Improvements 110,193 37,061 43,827
------- ------- ------
6,758,510 5,855,679 4,960,884
Less - Accumulated Depreciation and
Amortization 4,402,753 3,879,000 3,460,386
--------- --------- ---------
$2,355,757 $1,976,679 $1,500,498
========== ========== ==========
Useful lives are estimated to be 15 to 30 years for buildings, 5 to
10 years for machinery, equipment and software, 3 years for tools, dies and
molds, 5 to 10 years for furniture and fixtures, and 3 years for vehicles.
Leasehold improvements are amortized over the terms of the related leases.
Note 6 - Borrowings
- -------------------
Notes payable consists of amounts payable to the former owners of Altek
Industries Corp. resulting from the purchase of Altek by the Company in April
1996. Interest on this note is payable at the rate of 8%.
28
29
Long-term debt at March 31, 1997 consists of the following: (i)
$2,500,000 payable to the former owners of Altek Industries Corp. resulting from
the purchase of Altek by the Company in April 1996. Interest on this debt is
payable at the rate of 8%; (ii) $3,500,000 payable under a secured revolving
credit agreement with a bank which extends through August 1,1999. Maximum funds
under this credit agreement total $10,000,000 and are based on a formula. The
interest rate is, at the Company's option, at the bank's prime lending rate or
225 basis points over LIBOR. At March 31, 1997, interest was payable at the rate
of 7.8125%.
The revolving credit agreement contains, among other provisions,
restrictions on payment of dividends, the annual amount of capital expenditures,
restrictions on the annual amount of expenditures made for the purpose of
printing and distributing catalogs and requirements for minimum amounts of
tangible net worth.
Additionally, the Company has pledged its personal property and
fixtures, including inventory and equipment, and its accounts receivable as
collateral security for the loan. Further, the Company has agreed to pay to the
lender an amount equal to 1/4% of the unused portion of the total credit
available. The fee is payable quarterly and total commitment fees paid on any
unused lines of credit under revolving credit agreements were immaterial in all
years 1995-1997.
The Company is in compliance with provisions of its loan agreement or
has received a waiver as of March 31,1997.
See Note 14.
Note 7 - Leases
- ---------------
The Company has leases under renewable agreements covering sales office
and manufacturing space. At March 31, 1997, minimum future rental payments due
under operating leases for such space that had an initial non-cancelable term in
excess of one year were $876,810 due in monthly installments. Amounts due under
these leases are as follows:
1998 - $291,698
1999 - $270,577
2000 - $222,277
2001 - $76,580
2002 - $8,180
29
30
Total rental expense under these leases was $350,076 in 1997, $325,857
in 1996, and $294,378 in 1995.
Note 8 - Stockholders' Equity
- -----------------------------
In August 1993, an incentive Stock Option plan was adopted. This plan
was amended and restated in August 1995 and August 1996. Options are available
to be granted to employees under the 1993 Plan at prices not less than fair
market value at the date of grant and are exercisable in annual installments
beginning at the date of grant and expiring up to ten years later. A plan
adopted in August 1981 has now expired; however, certain options under that plan
were exercised during the year.
The following table summarizes the transactions under the plans during
1997, 1996 and 1995:
1 9 9 7 1 9 9 6 1 9 9 5
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
No. of Exercise No. of Exercise No. of Exercise
Shares Price Shares Price Shares Price
-------------------------- -------------------------- --------------------------
Beginning of Year 402,550 $4.43 243,600 $3.67 97,300 $2.43
Add (Deduct)
Granted 204,260 $9.37 194,450 $5.12 163,600 $4.25
Exercised (47,230) $2.48 (24,400) $2.25 (5,200) $2.25
Canceled (47,895) $4.57 (11,100) $4.63 (12,100) $2.25
-------------------------- -------------------------- --------------------------
End of Year 511,685 $6.55 402,550 $4.43 243,600 $3.67
========================== ========================== ==========================
Exercisable, End of Year 126,717 $6.56 48,900 $2.46 97,300 $2.43
========================== ========================== ==========================
Available, End of Year 88,315 - - - 156,400
============== ============== =============
30
31
The following options were outstanding or exercisable as of March 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Remain. Average Average
No. of Contract- Exercise No. of Exercise
Shares ual Life Price Shares Price
------------------------------------------ --------------------------
Range of Exercise Prices
$4.25 - $6.25 304,575 2.91 yrs $4.66 75,000 $4.65
$6.50 - $6.625 58,130 4.10 yrs $6.51 14,472 $6.51
$8.375 - $10.50 148,980 4.78 yrs $10.43 37,245 $10.43
On August 21, 1984, shareholders approved the Directors' Warrant Plan.
This Plan was amended and restated in August 1995. The Plan provides that
warrants may be granted to non-employee directors of Transmation to purchase in
the aggregate not more than 100,000 shares of the Company's common stock. The
purchase price for shares issued under the Directors' Warrant Plan shall be
equal to the fair market value of the stock on the date of the grant of the
warrant. A summary of activity under the 1984 Directors' Warrant Plan is as
follows:
Shares Warrant Price
------ -------------
Balance, 3/31/95 32,500 $3.00-$3.875
------ ------------
Exercised During 1996 (14,500) 3.00-3.875
Expired During 1996 (2,000) 3.875
Granted During 1996 14,000 6.50
------ ----
Balance, 3/31/96 30,000 3.00-6.50
------ ---------
Granted During 1997 12,000 8.375
Exercised During 1997 (4,200) 3.00-8.375
Canceled During 1997 (4,800) 6.50-8.375
------ -----------
Balance, 3/31/97 33,000 $3.00-$8.375
====== ============
On March 11, 1993, the Board of Directors granted the former President
of the Company's Instrument Division a non-qualified stock option to purchase
25,000 shares of the Company's common stock at $3.00 per share, the fair market
value at the date of the grant. In January 1996, the former President of the
Company's Instrument Division exercised his right to purchase 15,000 of such
shares. The remainder of this grant was canceled.
31
32
On August 15, 1995, the Board of Directors granted the then President
of the Company's Transcat Division a non-qualified stock option to purchase
23,950 shares of the Company's common stock at $6.25 per share, the fair market
value at the date of the grant. These shares are exercisable in equal annual
installments beginning at the date of the grant and expiring five years later.
During 1997, the Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS introduced a fair value method
of accounting for stock-based compensation. To calculate the fair value of the
options awarded, the Company elected to use the Black-Scholes pricing model
which produced a weighted average fair value of options granted in 1997 of $6.80
and $4.70 in 1996.
The following assumptions were used to derive the ratio: a five-year
option term; an annualized volatility rate of .899 for 1997 and .933 for 1996; a
weighted average risk-free rate of return of 6.31% in 1997 and 6.37% for 1996;
and no dividends in either year. The Company elected to account for terminations
when they occur rather than include an attrition factor into its model.
If compensation cost had been measured based on the fair-value based
accounting method under SFAS 123, the following would have been disclosed for
March 31:
1997 1996
---- ----
Pro Forma
Net Income $1,291,722 $1,054,427
Earnings Per Share
Primary $.43 $.42
Fully Diluted $.42 $.42
The effect of applying SFAS 123 in the current year is not
representative of the effect on income for future years since each subsequent
year will reflect expense for additional year's vesting.
Note 9 - Net Income Per Share
- -----------------------------
The net income per share amounts in 1997, 1996 and 1995 were computed
by dividing the net income by the average number of shares actually outstanding
32
33
plus common equivalent shares resulting from the assumed conversion of the
dilutive stock options and warrants. Common and common equivalent shares
averaged 3,073,820 in 1997, 2,534,674 in 1996, and 2,430,329 in 1995.
Note 10 - Income Taxes
- ----------------------
The provisions for income tax determined in accordance with FAS 109 for
the years ended March 31, 1997, 1996, and 1995 are comprised of:
1997 Current Deferred Total
---- ------- -------- -----
Federal $1,085,400 ($201,400) $ 884,000
State 81,454 (3,694) 77,760
Foreign 259,840 259,840
------- -------- --------
$1,426,694 ($205,094) $1,221,600
========== ========== ==========
1996 Current Deferred Total
---- ------- -------- -----
Federal $ 405,100 $112,000 $ 517,100
State 24,000 (4,000) 20,000
Foreign 245,508 (185,708) 59,800
------- -------- -------
$ 674,608 ($77,708) $ 596,900
========= ========= ==========
1995 Current Deferred Total
---- ------- -------- -----
Federal $ 60,935 ($15,185) $ 45,750
State 10,900 (5,900) 5,000
Foreign 89,190 (36,190) 53,000
------ -------- -------
$ 161,025 ($57,275) $ 103,750
========= ========= ==========
The following is a reconciliation of the "expected" federal income tax
provision computed by applying the statutory U.S. federal income tax rate and
the income tax provision reflected in the statement of income.
1997 1996 1995
---- ---- ----
Computed "Expected"
Federal Income Tax $1,115,650 $622,750 $165,100
State Income Taxes 56,100 13,200 5,000
Foreign Sales Corporation (69,400) (11,225) (20,100)
Book Expense not
Deductible for taxes 106,600 43,500
Foreign Taxes 50,800 23,000 14,900
Valuation Allowance, Domestic (144,500)
Valuation Allowance, Foreign (14,200) (45,100) 67,700
R&D Credit (12,300) (42,900)
Other, Net (23,950) 6,575 15,050
----------- -------- -------
$1,221,600 $596,900 $103,750
========== ======== ========
A domestic valuation allowance established in 1994 relating to domestic
net operating loss carryforwards reversed in 1995 due to the utilization of such
credits. During 1997 and 1996, $14,200 and $45,100, respectively, of a foreign
33
34
valuation allowance was recognized due to the increase in the likelihood
benefits will be recognized. Management believes net deferred tax assets are
more likely than not to be recognized.
The components of net deferred tax assets are as follows:
1997 1996 1995
---- ---- ----
Deferred Tax Assets:
Net Operating Loss Carryforward $154,857 $171,620 $ 90,100
Deferred Compensation 226,749 265,938 304,543
Accrued Vacation Pay 150,474 132,805 150,190
Allowance for Doubtful
Accounts and Warranties 134,865 137,190 162,766
Reserves for Inventory Obsolescence 201,737 52,015 52,069
Amortizations of Leaseholds 53,293
Valuation Allowance (30,800) (45,000) (90,100)
------- ------- --------
Gross Deferred Tax Assets 891,175 714,568 669,568
------- ------- -------
Deferred Tax Liabilities:
Depreciation $177,747 $146,561 $111,685
Accelerated Catalog & Postage
Write-Offs 92,674 203,347 270,931
------- ------- -------
Gross Deferred Tax Liabilities 270,421 349,908 382,616
------- ------- -------
Net Deferred Tax Assets $620,754 $364,660 $286,952
======== ======== ========
The Company has available foreign net operating loss carryforwards
totaling approximately $400,000. These carryforwards have an unlimited
expiration period and their use is limited to the Company's future taxable
income.
Note 11 - Other Income
- ----------------------
Other income is comprised primarily of the gain on the sale of land.
Note 12 - Consulting Agreement
- ------------------------------
On February 28, 1995, William J. Berk, former President of Transmation,
Inc. retired. In accordance with terms of a post-retirement consulting agreement
between the Company and Mr. Berk, payments due under this agreement commenced on
March 1, 1995. Mr. Berk is entitled to annual payments amounting to $96,456 for
life. His wife will receive 60% of the annual benefit for her lifetime should
she survive him. This deferred compensation agreement was not funded and the
estimated present value of the future benefits was recorded as an expense and a
liability over the term of Mr. Berk's actual employment. There
34
35
were no charges to expense for retirement benefits to be paid to Mr. Berk
under the now expired employment contract during 1995-1997.
Upon the death of Mr. Berk, and at the request of his legal
representative, the Company will redeem at market price from his estate a
certain number of shares of Transmation common stock as is permitted by Section
303 of the Internal Revenue Code.
Note 13 - Deferred Profit Sharing
- ---------------------------------
Effective April 1, 1981, the Transmation, Inc. Deferred Profit Sharing
Plan was adopted. Effective April 1, 1987, this plan was amended from a
non-contributory to a contributory defined contribution plan and renamed the
Transmation, Inc. Long-Term Savings and Deferred Profit Sharing Plan. All United
States employees of Transmation, Inc. are eligible to participate in the plan
providing certain qualifications are met. Employer contributions are made to the
plan at the discretion of the Board of Directors of the Company. Payments of
benefits accrued for plan participants will be made upon retirement or upon
termination of employment prior to retirement providing certain conditions have
been met by the employee prior to termination. There were no profit sharing
contributions made under this plan in any of the periods 1995-1997.
Note 14 - Subsequent Event - Acquisition of Certain Assets of E.I.L.
- --------------------------------------------------------------------
Instruments, Inc.
- -----------------
On April 4, 1997, the Company completed the acquisition of certain
assets of E.I.L. Instruments, Inc. for $22,000,000 cash and the value of certain
defined assumed liabilities, all subject to adjustment based on amounts
determined as the result of an audit of EIL's closing balance sheet to be
performed.
EIL Instruments, Inc. was a distributor and servicer of electronic
test, measurement and calibration instrumentation. The acquisition will be
accounted for by the purchase method of accounting. Accordingly, the operating
results of this acquisition will be included in the Company's financial
statements from the date of acquisition forward. The Company is in the process
of allocating the purchase price to the fair value of the assets acquired.
Unaudited pro forma results of operations as if the acquisition had occurred on
January 1, 1997 are as follows:
35
36
Unaudited
---------
Net Sales $89,268,035
-----------
Income before provision
for Income Taxes $ 1,558,672
-----------
Net Income $ 935,082
-----------
Net Income Per Share $.32
====
Cash required for the transaction was provided under a $32,000,000
Revolving Credit and Term Loan Agreement with banks dated April 4, 1997. Funds
are available under this agreement as follows:
Term Loan - Maximum Funds:
$15,000,000
Term:
April 4, 1997 - January 1, 2003
Amortizations:
21 equal consecutive quarterly installments commencing on
January 1, 1998.
Interest:
Payable on a formula basis at the Company's option, based on
an amount above the bank's prime lending rate or above LIBOR.
Rates paid above prime or above LIBOR are determined on the
basis of Company performance as determined by its leverage
ratio. On April 4, 1997 interest to be paid on the Term Loan
was at 2.50% above LIBOR or 1.00% above the bank's prime
lending rate.
Revolving Credit - Maximum Funds:
$17,000,000
Term:
April 1, 1997 - January 4, 2001
Interest:
Payable on a formula basis, at the Company's option, based on
an amount above the bank's prime lending rate or above LIBOR.
Rates paid above prime or above LIBOR are determined on the
basis of Company performance as determined by its leverage
ratio. On April 4, 1997 interest to be paid on the Revolving
Credit was at 2.25% above LIBOR or .75% above the bank's prime
lending rate.
The Revolving Credit and Term Loan agreement contains, among other
provisions, restrictions on capital expenditures, cash catalog expenditures,
prohibitions against dividend payments and fiscal quarterly losses, and a
requirement to maintain adjusted leverage ratios as defined.
Additionally, the Company has pledged its personal property and
fixtures, including inventory and equipment, and its accounts receivable as
collateral
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security for the loan. Further, the Company has agreed to pay to the lenders a
fee in the amount equal to 1/4% of the unused portion of the total revolving
credit available. The fee is payable quarterly. The Company also agreed to pay
a closing fee in the amount of $80,000 and an agency fee in the amount of
$45,000 in conjunction with the Revolving Credit and Term Loan facility.
Note 15 - Fair Value of Financial Instruments
- ---------------------------------------------
The Company has determined the fair value of its debt and other
financial instruments using available market information and appropriate
valuation methodologies as follows:
Cash and accounts receivable: The carrying amounts reported in the
balance sheet for cash and receivables approximate their fair value.
Long-term debt: The carrying amount of debt under the Company's
floating rate revolving credit agreement with a bank approximates its fair
value.
Note 16 - New Accounting Standards
- ----------------------------------
The Company will adopt the provisions of Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share" effective for financial statements issued
for periods ending after December 15, 1997; earlier application is not
permitted. FAS 128 requires dual presentation of basic and diluted EPS on the
face of the income statement and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes the effect of common stock
equivalents and is computed by dividing income available to common shareowners
by the weighted average common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could result if securities or other
instruments to issue common stock were exercised or converted into common stock.
Proforma earnings per share computed in accordance with FAS 128 is
presented below:
For the years ended
-------------------
3/31/97 3/31/96 3/31/95
------- ------- -------
Basic earnings per share $.73 $.51 $.16
Diluted earnings per share $.69 $.49 $.16
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Note 17 - Supplemental Information
- ----------------------------------
Supplemental cash flow information and non-cash investing and financing
activities are as follows:
Acquisitions: 1997
----
Fair value of assets acquired $1,905,003
Liabilities assumed $1,528,617
Fair value of assets exchanged $4,800,000
Stock issued $1,837,500
Note 18 - Acquisitions
- ----------------------
On April 3, 1996 the Company acquired all of the common stock of Altek
Industries Corp. (Altek), a manufacturer of electronic calibration equipment,
for a purchase price of $4,800,000 in cash and notes plus 300,000 of
Transmation, Inc. common stock. The transaction was accounted for under the
purchase method of accounting, and accordingly, the results of operations of
Altek for the period April 3, 1996 through March 31, 1997 are included in the
accompanying consolidated financial statements. The purchase price has been
allocated to assets acquired and liabilities assumed based on fair market value
at the date of the acquisition.
The following unaudited pro-forma financial information for the Company
gives effect to the Altek acquisition had it occurred on April 1, 1995. These
proforma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have
resulted if the acquisition had occurred on the date indicated, or which may
result in the future.
Year Ended March 31,
--------------------
1997 1996
---- ----
Net Sales $47,311,224 $42,487,000
Income before provision for Taxes 3,281,336 1,759,500
Net Income 2,059,736 1,144,000
Net Income per Share .67 .40
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Note 19 - Quarterly Financial Information (Unaudited)
- -----------------------------------------------------
Income
1997 Net Sales Gross Profit Net Income Per Share
--------- ------------ ---------- ---------
Fourth Quarter $12,840,734 $5,022,125 $1,012,542 $.33
Third Quarter $12,210,882 $4,833,515 $427,538 $.15
Second Quarter $11,211,991 $4,407,536 $315,782 $.11
First Quarter $11,047,617 $4,314,161 $303,874 $.11
Income
1996 Net Sales Gross Profit Net Income Per Share
---------- ------------ ---------- ---------
Fourth Quarter $ 9,864,945 $3,551,972 $366,678 $.14
Third Quarter $ 9,918,064 $3,633,395 $476,636 $.19
Second Quarter $ 9,100,252 $3,373,421 $188,584 $.07
First Quarter $ 9,566,497 $3,532,533 $202,825 $.08
NOTE: 1997 and 1996 Quarterly EPS amounts do not total to the annual
EPS amount due to rounding.
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TRANSMATION, INC.
-----------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
Y E A R E N D E D M A R C H 3 1,
---------------------------------------
Additions
Balance at Charged to Write-Off Balance at
Beginning of Profit and Charged To End of
Year Loss Reserve Year
---- ---- ------- ----
1997
----
Allowance for
Doubtful Accounts $436,000 ($33,000) $404,000
======== ========= ========
1996
----
Allowance for
Doubtful Accounts $473,000 ($37,000) $436,000
======== ======== ========
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
--------------------
None
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Part III
--------
The information required by each of the following items is presented in
the definitive proxy statement to be filed pursuant to Regulation 14A which
Transmation will file within the period prescribed in connection with the annual
meeting of shareholders to be held on August 19, 1997 and which is incorporated
herein by reference.
Item 10. Directors and Executive Officers of the Registrant
-------------------------------------------------
Item 11. Executive Compensation
----------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet - March 31, 1997, 1996
Consolidated Statement of Income - March 31, 1997, 1996, 1995
Consolidated Statement of Cash Flows - March 31, 1997, 1996, 1995
Consolidated Statement of Stockholders' Equity - March 31, 1997, 1996,
1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts -
March 31, 1997, 1996
All other schedules have been omitted because they are not applicable
or the required information is shown in the Financial Statements or
notes thereto.
3. Index to Exhibits
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
NOT APPLICABLE
(3) Articles of Incorporation and By-Laws
(i) The Articles of Incorporation, as amended, are
incorporated herein by reference to Exhibit 4(a) to
the Registrant's Registration Statement on Form S-8
(Registration No. 33-61665) filed on August 8,
1995. Certificate of Amendment thereto is
incorporated herein
41
42
by reference to Exhibit I to the Registrant's Form
10-Q for the quarter ended September 30, 1996.
(ii) Bylaws, as amended through August 18, 1987, are
incorporated herein by reference to Exhibit (3) to
the Registrant's Form 10-K for the year ended March
31, 1988.
(4) Instruments defining the rights of security holders,
including indentures.
Revolving Credit Agreement between the Registrant and
Manufacturers and Traders Trust Company is incorporated
herein by reference to Exhibit 1 to the Registrant's Form
10-Q for the fiscal quarter ended September 30, 1994.
Agreement and Amendment No. 1 thereto is incorporated herein
by reference to Exhibit 4(c) to the Registrant's Form 10Q
for the fiscal quarter ended September 30, 1995. Agreement
and Amendment No. 2 thereto is incorporated herein by
reference to Exhibit 4(d) to the Registrant's Form 10Q-A for
the fiscal quarter ended December 31, 1995. Agreement and
Amendment No. 3 thereto is incorporated herein by reference
to Exhibit 4(e) to the Registrant's Form 10Q for the fiscal
quarter ended December 31, 1996.
Revolving Credit and Term Loan Agreement dated April 4, 1997
among Transmation, Inc. and Manufacturer's and Traders Trust
Company and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 4(c) to the
Registrant's Form 8-K dated April 18, 1997.
(9) Voting Trust Agreements
NOT APPLICABLE
(10) Material Contracts
The documents listed under (4) are incorporated herein by
reference.
Amendment No. 1 to Transmation, Inc. Amended and Restated
Directors' Warrant Plan is incorporated herein by reference
to Exhibit II to the Registrant's Form 10-Q for the quarter
ended September 30, 1996.
Amendments No. 1 and No. 2 to the Transmation, Inc. Amended
and Restated 1993 Stock Option Plan is incorporated herein
by reference to Exhibits III and IV to the Registrant's Form
10-Q for the quarter ended September 30, 1996.
Amendment No. 2 to the Transmation, Inc. Employee's Stock
Purchase Plan is incorporated herein by reference to Exhibit
V to the Registrant's Form 10-Q for the quarter ended
September 30, 1996.
Stock Purchase Agreement dated March 28, 1996 among the
Registrant, E. Lee Garelick and James N. Wurtz is
incorporated
42
43
herein by reference to Exhibit 2(a) to the Registrant's Form
8-K dated April 3, 1996.
Asset Purchase Agreement dated April 4, 1997 between
Transmation, Inc. and E.I.L. Instruments, Inc. is
incorporated herein by reference to Exhibit 2(a) to the
Registrant's Form 8-K dated April 18, 1997.
(a) Amendment No. 3 to the Transmation, Inc. Directors'
Stock Plan is included herein as Exhibit 10(a).
(b) Amendment No. 1 to Stock Purchase Agreement dated
February 5, 1997 among the Registrant, E. Lee Garelick and
James N. Wurtz is included herein as Exhibit 10(b).
(11) Statement re Computation of Per Share Earnings
Computation can be clearly determined from Note 9 to the
Financial Statements included herein at Item 8.
(12) Statements re Computation of Ratios
NOT APPLICABLE
(13) Annual Report to Security Holders
NOT APPLICABLE
(16) Letter re Change in Certifying Accountant
NOT APPLICABLE
(18) Letter re Change in Accounting Principles
NOT APPLICABLE
(21) Subsidiaries of Registrant
Subsidiaries of the Registrant are included herein as
Exhibit 21.
(22) Published Report Regarding Matters Submitted to Vote of
Security Holders
NOT APPLICABLE
(23) Consents of Experts and Counsel
Consent of Price Waterhouse LLP is included herein as
Exhibit 23.
(24) Power of Attorney
NOT APPLICABLE
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44
(27) Financial Data Schedule
Financial Data Schedule is included herein as Exhibit 27.
(99) Additional Exhibits
NOT APPLICABLE
(b) The Registrant filed a report on Form 8-K dated March 4, 1997,
reporting the issuance of a press release under Item 5 thereof.
(c) See (a) 3. above.
(d) (1) NOT APPLICABLE
(2) NOT APPLICABLE
(3) NOT APPLICABLE
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45
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSMATION, INC.
By: /s/ Robert G. Klimasewski By: /s/ Cornelius J. Murphy
- --------------------------------------- -----------------------------------
Robert G. Klimasewski Cornelius J. Murphy
President & Chief Executive Officer Chairman of the Board of Directors
(Principal Executive Officer)
Date: June 19, 1997 Date: June 19, 1997
- --------------------------------------- -----------------------------------
By: /s/ Angelo J. Chiarella By: /s/ Harvey J. Palmer
- --------------------------------------- -----------------------------------
Angelo J. Chiarella, Director Dr. Harvey J. Palmer, Director
Date: June 19, 1997 Date: June 19, 1997
- --------------------------------------- -----------------------------------
By: /s/ E. Lee Garelick By: /s/ Arthur M. Richardson
- --------------------------------------- -----------------------------------
E. Lee Garelick, Director Arthur M. Richardson, Director
Date: June 19, 1997 Date: June 19, 1997
- --------------------------------------- -----------------------------------
By: /s/ Nancy D. Hessler By: /s/ Philip P. Schulp
- --------------------------------------- -----------------------------------
Nancy D. Hessler, Director Philip P. Schulp, Director
Date: June 19, 1997 Date: June 19, 1997
- --------------------------------------- -----------------------------------
By: /s/ John W. Oberlies By: /s/ John A. Misiaszek
- --------------------------------------- -----------------------------------
John W. Oberlies, Director John A. Misiaszek
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
Date: June 19, 1997 Date: June 19, 1997
- --------------------------------------- -----------------------------------
45