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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1995
COMMISSION FILE NUMBER: 0-18192
MEGAMATION INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3372947
(State of incorporation) (IRS Employer Identification Number)
51 Everett Drive, Building B #4 Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 609-799-7711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock $.01 Par Value per Share
(Title of Class)
Indicate by check mark whether the registrant (I) 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, and (2) has been subject to such filing
requirements for the past 90 days: [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average of the Bid and Asked price of the Common
Stock on July 31, 1995, as reported by the Over-the-Counter Bulletin Board, was
approximately $1,471,800, (assuming, but not admitting for any purpose, that all
directors and executive officers of the registrant are affiliates).
The number of shares of Common Stock, $0.01 par value, issued and
outstanding as of July 31, 1995 was: 14,358,666.
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 registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document, to the extent specified in this report, are
incorporated by reference in the indicated parts of this report.
Document Incorporated by reference in:
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Proxy Statement for 1995 Annual Meeting Part III, Items 10-13
of Shareholders
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PART I
ITEM 1. BUSINESS.
General
Megamation Inc. ("Megamation" or the "Company"), designs, develops,
manufactures, markets and services programmable, flexible, single and multiple
tool, automation work cells which help customers improve manufacturing and
materials handling processes by performing more work, in less space, more safely
than by traditional work methods. The Company's product offerings are intended
to improve productivity, increase product quality and decrease costs in the
manufacturing workplace.
The Company sells its automation workstations under the trade name MEGA
2(R). The MEGA 1 was the Company's first product line and the lower cost, less
complex MEGA 2 group of workstations, the single automatic tool version of which
was introduced in 1993, is the Company's current product line.
The automation workstations have been primarily sold to clinical
laboratories for test tube handling, the automotive industry for light
mechanical assembly and to the computer and telecommunications industries for
electronic circuit board assembly. For many customers, the Company has also
performed the additional custom manufacturing and engineering design to prepare
one or more automation workstations for a specific assembly application. Known
as "integration", this additional process involves design and fabrication of
gripper tools, layout and assembly of various third-party provided conveyors and
parts-feeders, and software modifications to permit the automation workstations
to control the additional equipment.
The Company has placed approximately 120 automation workstations using
approximately 330 automatic assembly tools since deliveries began in 1988.
The Company's business strategy is to offer the automation workstations as
specialized, integrated products that perform tasks demanding accuracy,
repeatability, speed, reliability and safety. The Company is focusing its
efforts on identifying and penetrating vertical market product applications,
like clinical laboratories, for automation workstations where there is a large
and continuous demand. Accordingly, the Company is creating systems which
incorporate proprietary software and hardware that minimizes the need for
customer application engineering or integration. This application software is
generally developed collaboratively with targeted customers in selected markets
to make sure the needs of the market are met. The Company's products in many
cases are used by production personnel in an in-line manufacturing environment.
The automation workstations are flexible and therefore re-configurable. The
automation workstations application software provide easy-to-use, intuitive,
graphical user interfaces operating under Microsoft Windows(R).
The Company, a Delaware corporation, was founded on July 8, 1985. The
Company's initial public offering was consummated September 21, 1989. The
Company operates on a fiscal year which ends on June 30th.
Products Overview
The automation workstation/work cell is comprised of a control unit that
includes a personal computer and power supplies, database and programming
software; a platen typically in sizes of 26.5" x 37.75", 53" x 37.75", "106. x
37.75" and 86" x 53"; a platen frame that suspends the platen over a conveyer or
work area; and from one to four automatic tools that each include a linear motor
and acceleration sensing and feedback circuitry. The automation workstations
use dual-axis linear stepper
2
motor electro-magnetic drive technology to move and position the automatic
tools. The linear motors are suspended from the platen magnetically and ride on
a frictionless air bearing permitting placement of the automatic tool anywhere
in the workspace with high accuracy. The Company's patented collision avoidance
software enables multiple automatic tools to move about and perform work within
the work cell without colliding. Each automatic tool is capable of the highly
accurate placement of objects of up to ten pounds in weight. The Company has
also designed and manufactured linear motors for its automation workstations
which are capable of handling payloads in excess of one hundred pounds.
The linear motors do not wear and therefore they do not lose precision over
time. Management of the Company ("management") believes that its automation
workstations can consistently achieve greater accuracy and repeatability
throughout their workspace than other automation systems within the price range
offered by the Company. The automation workstations can also incorporate a
visual parts-identification and verification option, which permits the system to
reject non-conforming parts prior to handling, assembly or insertion. All
automation workstations incorporate an automatic shutdown feature which is
activated when any moving automatic tool encounters an obstruction, making the
Company's products among the safest automation systems available. The automation
workstations can usually perform more work, in less space, more safely, than
traditional arm type robots.
Markets and Applications
The automation workstations are suited to a variety of applications in
various industries typically requiring precision handling, placement, or
positioning of various small parts, specialized tools, or sensors. Applications
for the Company's products have included: (1) test tube sorting and handling
applications in the clinical laboratory industry; (2) high speed non-contact
scanning applications for gathering dimensional data for high volume parts
manufacturing applications; (3) material handling applications in the
pharmaceutical industry; (4) applications involving the sequencing of RNA and
DNA material; (5) 'through-hole' and 'surface mount' printed circuit board
assembly for major computer, electronic, telecommunications, and automotive
companies; and (6) light electronic and mechanical part assembly for the major
domestic automakers and other manufacturers.
The Company's automation workstations provide the following capabilities:
Automation workstations. The Company's core product today is a programmable,
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flexible, multiple tool, automation workstation. The automation workstation can
employ from one to four automatic tools that perform identical or different
tasks within the work cell. Today the automation workstation can be supplied as
a "generalized" automation workstation or as a "specialized" automation
workstation for specific high volume applications. The Company's primary
strategy today is to focus on providing more specialized versus generalized
automation workstation applications.
Picking, conveying and placing. The automation workstation was initially
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designed to pick and place automotive light assembly parts and printed circuit
board components. Management believes there is a growing demand today for
automation workstations for picking, sorting, and placing test tubes in clinical
laboratories.
Clinical laboratories. The automation workstation serves as the platform
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for specialized workstations used for test tube unloading, sorting, and loading
tasks in clinical laboratories. Clinical laboratories require automation
solutions for processing ever increasing numbers of blood and other body fluid
and human tissue samples. Management believes today that automating the
handling and record keeping of these samples is deemed a strategic requirement
by the leading clinical laboratories.
High speed, non-contact scanning (automatic inspection). The Company's
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automation workstations serve as an integrated workstation for high speed non-
contact scanning applications for gathering dimensional data for high volume
parts manufacturing applications. The Company's automation
3
workstation is combined with scanners and related database and application
software to gather dimensional data of an object or surface to validate the
dimensions to the design intent. The automation workstation positions a scanner
employing laser radar technology that provides accurate three-dimensional
images. The captured images are then converted into dimensions by another
supplier's proprietary digital signal processing electronics and a sophisticated
rectification process. The automation workstation provides a high-speed means of
precisely addressing and positioning the scanners at designated data points in
defined planes and angles. This application can measure and analyze sources of
variation to enhance continuous process improvement which will enable customers
to reduce cost and increase both quality and throughput. This inspection and
measurement automation workstation provides customers with cost-effective
solutions for process control or reverse engineering applications. Management
believes that there is a substantial potential market for the inspection and
measurement of parts in high volume, repetitive manufacturing applications.
RNA and DNA sequencing. The Company's automation workstation serves as an
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integrated workstation for extremely accurate placement of RNA and DNA material
for a genetic engineering sequencing application. The Company has granted an
exclusive worldwide license to a company that provides specialized application
software that works in conjunction with an automation workstation to place and
record the location of the placement of RNA and DNA material within extremely
accurate specifications and tolerances. The Company provides an integrated,
standardized automation workstation in either single or multiple tool
configurations to the licensee. The licensee "customizes" the automation
workstation with its application software and specialized precision placement
tool for placing the RNA and DNA material. The licensee believes that its
"customized" automation workstation can be used to develop genetic engineering
models designed to facilitate the discovery of new drugs or improvement of
existing drugs.
Other applications. The Company has also designed a specialized automation
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workstation for titration applications for pharmaceutical companies. This
specialized automation workstation can engage one automatic tool to remove lids
from trays holding a number of pipettes while another automatic tool begins
dispensing precisely measured fluids into the pipettes. This application
utilizes the automation workstation's pick and place, and positioning
capabilities. This specialized automation workstation could easily dispense
powders rather than fluids or could even perform this function simultaneously
with the addition of a third automatic tool. Management believes that titration
applications for pharmaceutical companies may constitute a significant market
for the Company's products.
Management believes that the Company's technology has proven strengths as an
imbedded and integrated platform for picking, sorting, conveying and placing
objects within other devices such as blood analyzers. The Company's core
product offers advantages from such features as fewer moving parts,
programmability, expandability, upgradability and serviceability. Management
intends to seek OEM relationships with manufacturers of products that can
utilize and benefit from such features.
Proprietary Application Software
The nucleus of the Company's products are a number of sophisticated and
proprietary software modules which enable the Company to provide easy-to-use,
customer-configurable, application specific products. The Company's software
products run under Microsoft Windows(R). By using Windows as the base
environment, the Company's software customers are presented an "Open System".
Open system architecture enables the use of a variety of standard commercial
hardware platforms; based on a familiar, standard, commercial computer operating
system that is in widespread use (sixty million licensed Windows users according
to a recent prominent business publication); employs modular software with open
interfaces that permit the use of software products from multiple sources or
vendors
The Company has developed "Windows extensions" to provide an easy-to-use
customer configurable, software environment. The software modules are organized
as follows:
4
Level I. The highest level of software consists of a graphical interface
-------
allowing users to control the automatic tool and any external peripheral
hardware. Among the software modules that make up the interface the Company has
developed is a graphical programming environment called SPI (Simplified
Programming Interface). The SPI interpreter is started from the main screen
that the user sees when the automatic tool controller is brought up in Windows.
From this main screen, or "shell", the user can initiate SPI, examine the system
status, run diagnostics, "teach" points for the purpose of establishing the
automatic tool(s) task lists, or perform other common automatic tool controller
functions.
Level II. The next level of software consists of a set of real time
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extension routines that run on the personal computer ("PC") under Windows. This
level of software interacts with the automatic tool control hardware and any
other peripheral equipment integrated into the automation workstation. In
addition to supervisory control and communication, another function of this
level is to facilitate multiple-automatic tool operation by automatically
preventing collisions between automatic tools. The paths of all proposed
automatic tool moves are mathematically checked for potential collisions with
the active paths of other automatic tools before a new move is initiated. In
the event of a potential collision, a collision avoidance routine delays moves
until the path is cleared. Alternatively, a programmable table-driven routine
can perform any collision recovery actions the user prefers.
Level III. The lowest level of software is "microcode" which resides in the
---------
distributed intelligent automatic tool controllers. When a move is sequenced
and initiated by the PC, the individual microprocessor based robot controllers
take over and actually execute the move. When an automatic tool move ends, the
controller interrupts the PC so that it can sequence the next move.
Marketing Strategy
The Company intends to expand its customer base and markets. To do this,
the Company is attempting to develop the following programs:
Develop specialized integrated automation workstations. The Company's
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strategy is to develop specialized integrated automation workstations that are
designed and intended for a specific task. These specialized workstations will
enable the Company to deliver "turn-key" or "plug-and-play" systems that enable
customers to achieve desired levels of productivity faster than would have been
possible with a "customized" automation workstation. An additional benefit that
the company can realized by designing and selling a specialized integrated
automation workstation is a lower manufacturing cost per unit.
Develop smaller "table top" automation workstations. Driven by its
---------------------------------------------------
experience base, increased product performance and computing power, and
increased software capabilities, the Company has developed and will begin
marketing a table top automation workstation. Inquiries from customers and
prospects seeking such a product for use in research and development and
experimentation activities indicate that there may exist a significant market
for such a product.
Provide database and networking capabilities for the automation
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workstations. The ability to collect, compile, manipulate, and store data is a
- ------------
feature which a growing number of users of automation equipment requires.
Coincident with providing database capabilities, the ability to network
automation workstations is another feature the Company is working to include in
its automation workstations in order to meet the additional needs of customers.
Migrate existing and future automation workstations into new markets. The
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Company is increasing its activity with potential customers and evaluating
potential applications for automation workstations in specific industries such
as pharmaceuticals, medical devices, and health care. The high speed, non-
contact inspection and measurement automation workstation is applicable to both
process control and reverse engineering applications for a broad category of
industries.
5
To date, the Company has marketed its systems either directly to the end
users of the Company's automation workstations, to independent marketing
representatives or to system integrators who in turn sell to the same companies.
Additionally, the Company has also relied on trade publication advertising and
attendance at trade shows for marketing its product and services. During fiscal
1995 the Company eliminated two of its three marketing and sales positions in
order to reduce costs and in anticipation of focusing and redirecting the
Company's marketing and sales efforts in accordance with its current business
strategy. The Company intends to hire new salespeople to support its current
business strategy as soon as adequate funding is secured.
With respect to the high speed non-contact inspection and measurement
automation workstation, the Company's marketing strategy is focused initially on
sales to manufacturers and suppliers in the automotive industry. The Company is
also considering and evaluating an arrangement with the manufacturer of the
scanners, database and software used in the automatic inspection workstation for
that company to market, sell and service this product.
The customized automation workstations used for RNA and DNA sequencing are
marketed and sold by the licensee for this specific application. The Company's
marketing strategy for research and clinical laboratories is to focus initially
on sales to existing customers of the automation workstations. With respect to
the table top automation workstation, the Company's marketing strategy is
focused on marketing this product directly to the end user, to system
integrators, or to original equipment manufacturers ("OEM's") who will integrate
the Company's product into larger systems for sale to the same companies or to
companies that are not presently customers of the Company.
The Company's principal customers have historically been large companies
that the Company either sells to directly or through system integrators. The
Company's products are typically purchased for installation in connection with
production line introductions or changes, new product tooling or product re-
tooling automation programs undertaken by these companies. Because sales are
dependent on the timing of customers automation programs, sales by customer vary
significantly from year to year, as do the Company's largest customers. For the
year ended June 30, 1993, three customers accounted for 26%, 21%, and 18% of
total revenues. For the year ended June 30, 1994, five customers accounted for
15%, 15%, 12%, 11%, and 11% of total revenues. For the year ended June 30,
1995, five customers accounted for 31%, 15%, 9%, 9% and 8% of total revenues.
No other customer accounted for 5% or more of sales in any of these years. In
view of the Company's expanded customer base and the nature of its markets,
management does not believe that the failure of any of its customers to place
orders for delivery in any given year would necessarily have a material adverse
effect on the Company. However, the permanent loss of one or more of its
historically significant customers might have such an effect.
Competition
The Company believes that the principal competitive factors in the markets
it has entered are cost of ownership, product performance (features, benefits
and reliability), user-friendliness (ease-of-use, minimal specialized training
required and technical support), safety (worker and product), and service. The
Company believes that its products offer advantages in each of these areas.
Price competition among automation suppliers is intense. Accordingly, one of the
Company's strategic objectives is being the low cost supplier of specialized
automation work cells for the applications and markets it serves.
There are many robotics companies in the United States, certain of which
offer conventional single-arm robots to the electronic and light manufacturing
markets. These companies include Adept Technology, Inc., and Seiko U.S.A. The
Company also competes with manufacturers of dedicated assembly equipment
designed to perform specific assembly tasks. A multi-tool robot, similar in
construction to the MEGA 1 and advertised to employ automatic collision
avoidance, has recently been marketed by a competitor. There can be no
assurance that this or, in the future, any other competitor will not develop or
6
introduce products with price and performance characteristics comparable or
superior to those offered by the MEGA 2. Each of the Company's competitors has
substantially greater financial and other resources and capabilities than the
Company.
The Company monitors the introduction of new products for possible
infringement upon its patents or other proprietary rights and is currently
pursuing an inquiry into possible patent infringement by the newly-introduced
product referred to above. The Company considers the company which introduced
this product to be a potentially material competitor primarily in the electronic
and light manufacturing applications. (See Patents, Trademarks and Trade
Secrets below).
Customer Support
The Company's customer support program begins at the pre-sales phase with
customer consultation regarding application and project engineering
specifications. The outcome of this consultation is incorporated into the
Company's sales proposal regarding assembly and delivery of the proposed
automation workstation. The Company provides general and specialized class room
training to existing or new customers or to prospective customers. The Company
also provides on-site installation and set-up training upon delivery of an
automation workstation.
Ongoing hardware and software enhancements to the Company's installed
products are provided via service contracts or through individual purchase
orders.
Development and Engineering
The Company does not anticipate significant expenditures for pure research.
Instead, the Company will focus on evolving the fundamental linear motor
technology into new sizes and shapes for applications in new markets.
Accordingly, management plans to pursue the following linear motor and software
development projects to enhance its existing products and to develop new
products to meet new market opportunities:
Smaller and lighter. Management of the Company believes that there are
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significant market opportunities for a MEGA work cell whose controls fit inside
a pedestal style personal computer or are integrated into boards for use in a
personal computer which could operate in a desk top frame assembly. Such
systems require significantly lighter payloads than the Company's traditional
products. Accordingly, less complex and lighter automatic tools requiring
smaller and lighter linear motors can be used.
Vertical operation. The automotive and appliances automatic inspection
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markets have several high volume applications that require movement and
positioning on vertical platens. This configuration would require larger linear
motors to assure the same positioning and repeatability accuracy achieved with
horizontal platens.
Open system software. While the Company's core software contains patented
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proprietary collision avoidance algorithms, further market opportunities exist
in the area of open systems. The automation workstation operates under
Microsoft Windows(R) and the Company intends to assemble a suite of Windows
compatible data base, graphics, simulation, statistical quality control and
networking applications for factory or laboratory tasks. The Company has
already benefited from this open system strategy in the development of its
automatic inspection automation workstation. The Company's Windows based PC
operating software was readily installed on a different hardware platform to
work collaboratively with the operating software from another company.
Application development. The Company's strategy is to market its products
-----------------------
in vertical market and product segments as a specialized automation workstation
rather than as a generalized, flexible automation work cell. Each vertical
market or product segment requires some specialized product
7
development to complete the product offering so that it is a "plug-and-play"
device. One such application presently under development is a high-speed
titration automation workstation for research laboratories and pharmaceutical
companies.
As of June 30, 1995, four people of a total of thirty-three Company
employees are focused primarily on development and engineering in one of the
above areas. Since 1989 the Company has invested an aggregate of $2.1 million
in research, development and engineering.
Backlog and Terms of Sale
As of June 30, 1995, the Company had a backlog of approximately $2,400,000,
compared to $2,145,000, as of June 30, 1994. Most of the backlog may be
extended or cancelled by the customer subject to, in certain cases, any
extension or cancellation charges. The level of order backlog at any particular
time is not necessarily indicative of the future operating performance of the
Company. The Company expects to be able to fill substantially all of the orders
in backlog by the end of the current fiscal year.
During fiscal 1994 the Company negotiated a letter of intent with a major
healthcare supplier (the "healthcare supplier") for the Company to supply, for
approximately $4.5 million, one hundred MEGA 2 single tool systems for
automating operations in six regional clinical laboratories (approximately 16
MEGA 2 systems for each clinical laboratory). The letter of intent contemplated
delivery and installation of the one hundred MEGA 2 systems over a twenty-two
month period commencing February, 1995. During fiscal 1995 the potential value
of this order increased to approximately $9.5 million upon the customer's
request to provide engineering services and specialized versions for the
original one hundred MEGA 2 systems. The Company received a firm order for
delivery of sixteen units for the first laboratory. Fourteen MEGA 2 systems and
engineering services generated revenues of approximately $1.2 million in fiscal
1995 related to this order.
Pricing for this order for the first laboratory was based upon the
contemplated sale of one hundred MEGA 2 systems over the twenty-two month
period. The Company was recently informed by the healthcare supplier that they
will be unable to adhere to the original twenty-two month delivery and
installation schedule and that they are unable to commit to a firm delivery and
installation schedule for the additional five laboratories at the present time.
Under the parties agreement, the healthcare supplier is currently responsible
for additional charges related to the first sixteen MEGA 2 systems as a result
of the delay of future shipments.
The Company's product is customized capital equipment, for which the
standard payment terms are 30% with the order, 60% upon shipment, and 10% upon
acceptance at the customer's site. Other terms, including full payment at net
30 days, have been individually negotiated. The amount of customer deposits is
therefore not indicative of the potential revenue for the coming period.
Integrated automation workstations are customized to meet each customer's
specifications which must be demonstrated to the customer prior to shipment.
The Company guarantees performance with repair services, and support for six
months and, in some cases, warrants parts for twelve months. Customer orders
can be canceled or delayed subject to stated cancellation or extension fees.
Manufacturing and Suppliers
The Company's manufacturing operations consist primarily of integrating the
Company's software with individual components manufactured by third parties and
final assembly and test. With a low level of vertical integration, the Company
believes it gains significant manufacturing flexibility, while achieving the
lowest possible total product costs.
8
In certain cases, the Company requires specialized designs but the detailed
fabrication technology is best provided by third party manufacturers.
Subassemblies which fall into this category include platens for use in all
products and specialized control cabinets for use in individual market segments.
Certain select assemblies require that the Company is intimately involved
with third parties and their detailed manufacturing processes. This is the case
with linear motors where the Company has not discovered readily available
fabrication technology in the marketplace that suits its rigorous performance
requirements without its involvement.
Since its inception the Company has focused on improving the performance,
reliability, and delivery of its core technologies (linear motors and platens).
The Company has reemphasized this focus to prepare for growth and to reduce
manufacturing cycle time and inventory requirements. The Company purchases a
number of component parts and assemblies from single source suppliers and
alternate suppliers are being qualified for such component parts and assemblies.
Significant delays or interruptions in the delivery of components or assemblies
by suppliers, or difficulties or delays in shifting manufacturing capacity to
new suppliers could have a material adverse effect on the Company.
Financial Information Relating to Domestic and Foreign Sales
1995 1994 1993
---- ---- ----
Net revenues by country:
United States................. $3,063,308 $2,878,510 $5,099,688
Canada and North America...... 879,800 137,261 785,431
Europe, Singapore and Japan... 70,796 78,601 248,225
------ ------ -------
Totals................... $4,013,904 $3,094,372 $6,133,344
========== ========== ==========
All revenues and collections are in US dollars. The Company's entire
operation and all assets are based in the United States.
Technology Development and Licensing Program
The Company has entered into agreements whereby the Company's technology may
be licensed to customers for specific applications other than those directly
applicable to the Company's core business. While the agreements differ in
details, they each contain provisions whereby the Company's technology is
provided to the customer under a license for a very specific application and
provides for the payment of royalties based on future commercial utilization
under the license. To date, three licenses have been granted by the Company but
no royalties have been received thus far. During 1995, the Company received and
recorded $300,000 in licensing fee revenue from one customer for an application
specific technology license.
Patents, Trademarks, and Trade Secrets
The Company considers certain elements of its hardware and software to be
proprietary and seeks to protect its technology through a combination of
patents, copyrights, trade secrets, confidentiality and other agreements. The
Company deems it patents and patent applications to be materially important to
its business. However, the Company also believes that its success depends upon
its trade secrets and proprietary know-how, its innovative skills and technical
competence and marketing abilities of its employees. The Company believes that
the steps it has taken to protect this proprietary technology are of material
benefit in protecting its business. However, there can be no assurance that the
above measures will be adequate to protect this proprietary technology.
9
The Company has been issued fourteen U.S. patents one of which is a patent
that covers the features of a programmable, multiple-head, automation work cell
using collision avoidance to simultaneously pick and place an inventory of
elements; and one of which covers the collision avoidance for a multiple
automatic tool system. Six of the patents cover various design aspects of two-
dimensional linear motors, four of the patents cover various design aspects of
the automatic tools, and the remaining two patents cover various design aspects
of the platen. The Company has an application pending for one additional U.S.
patent, and has applications pending for thirteen foreign patents including six
patent applications in the European patent office (covering the United Kingdom,
France, Italy and Germany) and seven in Japan.
The Company deems its patents and patent applications to be materially
important to its business, but believes that trade secrets and other proprietary
know-how are of even greater importance. The Company's U.S. patents expire from
2006 through 2011.
The Company monitors the introduction of new products and has taken such
actions as it deems advisable and practicable when it believes that such new
products may infringe upon its patent or other proprietary rights. The Company
is pursuing discussions with the manufacturer of the software employed in a
recently-developed product advertised to employ anti-collision software to
determine whether the Company's proprietary rights are being infringed. Such
inquiry may lead to formal action by the Company, a licensing arrangement or no
action, depending upon the Company's evaluation.
The Company has registered several trade names, trademarks, and servicemarks
with the U.S. Patent and Trademark Office, including "Megamation", "MEGA 1",
"M1", and "MEGA 2". The Company's software products are copyrighted and
generally licensed to customers pursuant to a license agreement that restricts
the use of the products to the customer's own internal purposes on a designated
automation workstation.
Employees
As of June 30, 1995, the Company employed 33 persons on a all full-time
basis. Of these persons, 4 were in development and engineering, 3 in marketing,
sales, and support, 21 in manufacturing operations, applications and project
engineering, and 5 in general administration and finance. None of the employees
are covered by a collective bargaining agreement and the Company believes its
relations with its employees to be good.
Compliance with Environmental Regulations
The Company believes that it is in compliance with all local, state, and
federal environmental regulations, and further believes that such compliance has
no material impact on the Company's operating results or financial position.
ITEM 2. FACILITIES.
The Company's administrative, engineering, and manufacturing facilities
occupy approximately 10,000 square feet of space in a multi-tenet building in
West Windsor Township, NJ, under a lease currently expiring October 31, 1995 but
renewable until December 31, 1995. The annual base rent is approximately $93,000
per year plus janitorial costs and real estate taxes. The Company's facilities
are well maintained. The Company is currently conducting a search for a
facility that will accommodate an increase in the Company's manufacturing
requirements. Management of the Company does not anticipate encountering any
significant difficulty in finding a suitable facility and does not anticipate
that a relocation will have a material adverse impact on the Company's operating
results or financial position.
10
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF REGISTRANT
Name Age Title
- ---- --- -----
Gerald W. Klein............ 47 President and Chief Executive Officer,
Treasurer and Chief Financial Officer,
Director
Richard J. Kornblum........ 51 Vice President and Chief Operating Officer,
Director
Thomas D. Schmidt.......... 42 Vice President
Thomas W. Murphy........... 37 Controller and Chief Accounting Officer
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock is traded over the counter under the symbol
MEGI, with market-makers submitting quotations in the so-called "pink sheets",
and through National Association of Securities Dealers' automated Over-the-
Counter Bulletin Board. The prices represent quotations in the Over-the-Counter
market as compiled by the National Quotation Bureau, Inc. The quotations
reflect inter-dealer prices without retail markup, markdown, or commission and
may not necessarily represent actual transactions.
The following table shows the reported high and low bid prices of the
Company's Common Stock for each quarter of the prior two fiscal years beginning
on July 1 and ending on June 30:
Bid
--------------
High Low
------- -----
Fiscal 1994
- ----------------
First Quarter............................ $.344 $.063
Second Quarter........................... $.260 $.063
Third Quarter............................ $.270 $.010
Fourth Quarter........................... $.130 $.010
.......................................
Fiscal 1995
- -----------------
First Quarter............................ $.240 $.063
Second Quarter........................... $.220 $.010
Third Quarter............................ $.190 $.031
Fourth Quarter........................... $.375 $.050
(b) Holders
At June 30, 1995, the number of shares of Common Stock of the Company
issued and outstanding was 14,358,666, held by 421 record holders thereof.
(c) Dividends
No cash dividends or distribution on the Company's Common Stock has been
paid and it is not anticipated that any will be paid in the foreseeable future.
The Company is prohibited under the terms of its bank line of credit and other
credit instruments from the payment of cash dividends or from purchasing or
retiring any of its capital stock.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following is selected financial data for the Company for the five
years ended June 30, 1995. All per share calculations are based on the weighted
average number of common shares outstanding during the year.
Years ended June 30,
-----------------------------------------------------------------
(in thousands, except share and per share data)
Operating Data 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues............................ $4,014 $3,094 $6,133 $6,307 $2,962
Cost of revenues.................... 4,191 2,492 4,487 4,963 2,493
Research and development............ 352 381 295 165 124
Net loss............................ (1,991) (1,107) (155) (613) (1,629)
Net loss per common share........... $(.14) $(.08) $(.01) $(.07) $(.18)
Weighted average common shares
outstanding........................ 14,207,982 13,343,324 12,352,749 9,406,000 9,106,000
As of June 30,
-----------------------------------------------------------------
(in thousands)
Financial Position Data 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Current assets...................... $1,873 $1,712 $2,504 $2,074 $2,421
Working capital (deficiency)........ (2,833) (726) 522 427 856
Net plant and equipment............. 274 126 164 131 129
Total assets........................ 2,513 2,132 2,913 2,409 2,724
Current liabilities................. 4,706 2,439 1,982 1,647 1,565
Long-term debt...................... -0- -0- 230 1,700 1,750
Shareholders' equity (deficit)...... (2,193) (307) 701 (938) (591)
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
Working capital
The Company has experienced significant negative cash flows from
operations in fiscal 1995 and 1994 primarily due to insufficient revenues
relative to cost and expense levels; a declining gross profit margin; and a
larger percentage of the longer term large integrated projects accounted for on
the percentage of completion method versus shorter term projects. Additionally,
substantial costs have been incurred associated with the development of the MEGA
2 system (See "Results of Operations"). At June 30, 1995 and 1994, the current
liabilities exceeded the current assets of the Company by approximately
$2,833,000 and $726,000, respectively.
In July 1994, the Company estimated that it would require approximately
$800,000 of additional working capital to finance its fiscal 1995 operations and
in August 1994, the Company's Bank Line of Credit was increased from $1,000,000
to $1,700,000. The increase in the borrowing limit under the Bank Line of
Credit resulted from the Company's two principal stockholders increasing their
secured guarantees to the bank. In addition these stockholders each purchased
shares of common stock generating net proceeds of $105,000. The Company found
it necessary to borrow the entire $700,000 available on the Bank Line of Credit
and an additional $500,000 from the two principal stockholders in order to fund
operations through February 1995.
On March 3, 1995, the Company entered into an agreement with its
principal stockholders to provide an additional $800,000 in the form of short
term loans through June 30, 1995 provided there were no material changes in the
Company's cash flow from operations as forecast at March 3, 1995. In addition,
past due interest of approximately $125,000 under the existing Term Loans with
the stockholders was deferred until July 1, 1995. On May 12, 1995, the Company
obtained an agreement for the extension of its Term Loans and Bank Line of
Credit until January 1, 1996. Additionally, the May 12, 1995 agreement modified
the lending terms of the March 3, 1995 agreement whereby the principal
stockholders provided $700,000 in the form of short term loans and deferred
$100,000 of unpaid interest until January 1, 1996. Under the March 3, 1995
Agreement the parties stated their intention that the $800,000 of loans would be
converted to shares of the Company's capital stock on terms and conditions to be
agreed upon among the parties as soon as practicable. In addition, the Company
is considering possible means of equity financing to provide it with adequate
working capital to fund its efforts to increase revenues in fiscal 1996. The
Company also intends to seek an extension of its Term Loans and its Bank Line of
Credit beyond the January 1, 1996 maturity in conjunction with a conversion to
equity of the $800,000 of Loans from its principal stockholders. There are no
understandings or agreements with respect to any of the foregoing nor can there
be any assurance that any of the foregoing can be accomplished.
The Company believes that it will have adequate resources to fund
operations through January 1, 1996. However, the Company is in violation of
various covenants under the Term Loans and its Bank Line of Credit, and would
not be able to repay these loans on demand or at maturity. There can be no
assurance that even if the Term Loans and Bank Lines of Credit are extended the
Company will have adequate capital resources to fund operations beyond January
1, 1996.
Cash Used in Operations
The principal changes causing the $2,107,000 increase in the negative
working capital condition between June 30, 1994 and June 30, 1995 were increases
in borrowings under the Bank Line of Credit and Term Loans, accounts payable,
and customer deposits which were partially offset by increases in accounts
receivable and cash. The increases in the Bank Line of Credit and Term Loans and
the
14
decrease in inventory are discussed in the captions, "Cash Provided by Financing
Activities" and "Revenues and Cost of Revenues", respectively.
In 1993 the Company undertook the design and development of the MEGA 2.
Approximately $181,000 was expended on the development of the MEGA 2 during
fiscal 1994. Development of the MEGA 2 continued during fiscal 1995 adding
such features as multiple head capability previously available only in the MEGA
1. The Company incurred additional costs of approximately $75,000 during the
1995 fiscal year to complete development of the MEGA 2.
Cash Used for Investing Activities
The Company purchases property and equipment, mainly computers,
manufacturing tools and test gear, as required to support its manufacturing
operations and development efforts. Property and equipment purchases were
higher in fiscal 1995 than fiscal 1994 primarily as a result of the purchase of
an integrated computer system for a new management information and control
system. Additionally, six MEGA units with a book value of $183,000 were
reclassified from inventory to property and equipment. These systems are used
for development, testing and training. Expenditures for patents include the
legal and administrative costs of filing with the US and various foreign patent
offices. During fiscal 1995 the Company invested approximately $76,000 in a new
management information system. During 1996 an additional $75,000 will be
invested in additions to the management information system and a new phone
system. Otherwise the Company anticipates that fixed asset expenditures will
continue in the same areas and at the same average rate as in the past three
years.
Cash Provided by Financing Activities
Cash from financing activities was provided during fiscal 1995 through
the sale of common stock and from proceeds on debt instruments. At June 30,
1995, borrowings under the Term Loans were due to the two guarantors of the
Company's Bank Line of Credit with interest payable quarterly at prime plus 4%
to a maximum annual rate of 12%, with the principal due January 1, 1996. On
December 16, 1994 each lender provided an additional $125,000 in the form of
additional Term Loans. At the same time, the due dates of the previous Term
Loans were extended to June 30, 1995. As of May 12, 1995, the Company obtained
an agreement under which the Term Loans and Bank Line of Credit were extended to
January 1, 1996. In connection with the Term Loans, one of the lenders was
issued warrants to purchase a total of 960,000 shares of the Company's Common
Stock at $0.55 and $.50 per share. In addition, the subordinated security
interest in the Company's assets, then held by the other Term Loan lender, was
modified to include the Term Loans from both guarantors on a pari passu basis.
In consideration of the foregoing modification, the other lender was given a
warrant to purchase 72,000 shares of the Company's Common Stock for $0.55 per
share and, in consideration of the additional term loans, warrants to purchase
500,000 shares of the Company's Common Stock for $.50 per share.
On July 28, 1993, the Company sold 200,000 shares of Common Stock for
$100,000, pursuant to a Subscription Agreement with one of the Company's
principal stockholders. A total of 936,000 shares (including the 200,000 shares
sold in the current year) were sold during the period between September 4, 1992
and September 30, 1993, when the Subscription Agreement expired. In August 1994,
the Company's two principal stockholders each purchased 500,000 shares of Common
Stock. Net proceeds to the Company were $105,000.
On May 12, 1994, the Company entered into a Credit and Security Agreement
("Bank Line of Credit") with a New Jersey Bank with a borrowing limitation of
$1,000,000 to replace its previous credit facility. The guarantors of the
previous credit facility each agreed to guarantee one-half of the outstanding
balance, and executed a new Guarantee Agreement with the Company and the New
Jersey bank. The Bank Line of Credit currently has a renewal date of October 1,
1995 which date is expected to be extended to January 1, 1996 pursuant to an
agreement dated May 12, 1995. On May 12, 1994, the Company borrowed $755,453
and repaid and terminated the previous credit facility. Substantially all of
the Company's assets are pledged as collateral for the Company's obligations
under the Bank Line of Credit and the Term Loans
15
are subordinated to the Bank Line of Credit. On August 18, 1994, a further
agreement was made with the guarantors and the New Jersey Bank to increase the
maximum allowable borrowing to $1,700,000 subject to a borrowing formula that
limited borrowings to certain percentages of outstanding trade receivables and
customer purchase commitments, with a maximum allowable balance of $1,700,000.
At June 30, 1994, borrowings under the Bank Line of Credit and the Term
Loans were $1,000,000 and $460,000, respectively. At June 30, 1995, borrowings
under the Bank Line of Credit and the Term Loans were $1,700,000 and $1,760,000,
respectively. See Notes 5 and 12 of Notes to Financial Statements.
Results of Operations
Year Ended June 30, 1995 Compared to the Year Ended June 30, 1994
Revenues and Cost of Revenues
Revenues for the year ended June 30, 1995 (the "current year") were
$4,014,000 compared to $3,094,000 for the year ended June 30, 1994, (the "last
year"), an increase of 29.7%. Four MEGA 1 and nineteen MEGA 2 systems were
shipped to customers during the current year generating revenues of $2,482,000
versus seven MEGA 1 systems and one MEGA 2 system shipped during last year.
Revenues for the current year included $1,545,000 of revenue recognized from
percentage of completion of long-term projects, other revenues (primarily
service, spare parts, engineering and training) of $1,232,000; and a one-time,
application specific technology license fee of $300,000. Last year's revenues
included $1,694,000 of revenues recognized from percentage of completion of
long-term projects and $1,400,000 of other revenue.
Cost of revenues for the current year were 104.4% of revenues compared to
80.5% of revenues last year. During the fourth quarter of fiscal 1995 management
determined that it would cease marketing and selling the MEGA 1 product line.
Cost of revenues during the current year include a charge of $707,000 related
to the MEGA 1 product line. Four large, long term integration projects accounted
for using the percentage of completion method were delivered during the current
year on which cost of revenues exceeded revenues. In most cases, completion of
these projects had been substantially delayed from their originally scheduled
delivery dates. Management determined that extraordinary efforts would be made
to complete these projects and deliver them to customers and unbudgeted costs
were incurred as a result. During the previous fiscal year, the Company had
determined to undertake custom integration work which it believed would be a new
revenue source and provide a greater level of control over the ability of the
MEGA 1 to meet customer's needs. During the current fiscal year, the Company has
found that with its limited financial and human resources, it is difficult to
respond in a timely and cost effective way to the frequent changes in system
specifications which occur as customers refine and revise their requirements for
integrating the Company's systems and the associated equipment into the
customer's production facility.
Because of its experience during the current year and because the
Company's new MEGA 2 systems are significantly lower in cost and complexity than
the MEGA 1 - which factors ameliorate the Company's concerns about maintaining
control of integration projects - the Company currently intends to rely
primarily on independent systems integrators to implement the Company's systems
in large, long term integration projects. The exceptions to this guideline are
for large customers that offer the potential for significant repeat business and
thereby justify the engineering effort and risk associated with these large
projects. The Company is currently assembling two systems that are scheduled to
be completed and shipped during the first quarter of fiscal 1996 ending
September 30, 1995. These systems do not require integration into the customers
production facility but do require a degree of customization.
16
Operating Expenses
Operating expenses decreased 5.1% or $81,000 in the current year from
last year and represented 37.6% of revenues in the current year versus 51.4%
last year. The decrease in operating expenses was due to lower selling and
research and development expenses partially offset by an increase in general and
administrative expenses.
Selling expenses decreased 29.1% to $385,000 during the current year from
$543,000 during last year. The decrease in selling expenses was primarily the
result of lower commission expenses, salary related expenses, travel, and trade
show costs of $54,000, $60,000, $18,000, and $21,000, respectively.
Research and development expenses decreased 7.5% or $28,000 primarily due
to reductions in salaries and related expenses and outside contractor costs.
General and administrative expenses increased 15.8% or $105,000 primarily
due to salaries and related expenses and professional services fees increasing
$93,000 and $12,000, respectively. The increase in salaries resulted primarily
from additions to the Company's senior management and severance costs. The
increase in legal expenses resulted primarily from increased general counsel
consultations relating to general corporate matters in the current year.
Interest Expense
Interest expense increased by 155.7% or $185,000 during the current year
compared to last year. The change is due to increases in the Company's Bank
Line of Credit and Term Loan borrowings, (See Liquidity and Capital Resources-
Cash Provided by Financing Activities.)
Net Loss
The net loss for the current year of $1,991,000 compared to a net loss of
$1,107,000 for last year. The loss per share for the current year was $0.14
compared to a loss of $0.08 per share during last year. The reason for the
increase in the loss during the current year compared to last year was primarily
the decline in the gross profit resulting from the write-off of obsolete MEGA 1
inventory and large platen scrap charges; the recognition of higher than
expected costs and expenses on several large, long term integration projects
that were completed during the current year; and the increased interest and debt
expenses which were partially offset by the decrease in the operating expenses.
The increase in average common shares outstanding during the current year
resulted from the sale of 1,000,000 shares on August 25, 1994.
At June 30, 1995, the Company had approximately $6,867,000 in Federal
income tax loss carryforwards which expire through the year 2010. These losses
would generally be available to offset future taxable income, if any. The
utilization of Federal income tax loss carryforwards in any year is subject to
limitation if the Company experiences a certain level of changes in ownership
over any three year period. Management has recently determined that the effects
of changes in ownership through June 30, 1995 have not had a material effect on
the future utilization of the Company's operating loss carryforwards. However,
there have been substantial changes in ownership during the prior three year
period and future changes in ownership could result in a substantial limitation
on the amount of operating loss carryforwards which the Company would apply in
any one year to offset income.
17
Results of Operations
Year Ended June 30, 1994 Compared to the Year Ended June 30, 1993
Revenues and Cost of Revenues
For the fiscal year ended June 30, 1994, revenues were $3,094,000, a 50%
decline from the $6,133,000 in 1993. A total of seven MEGA 1 systems were
shipped during fiscal 1994 as opposed to twenty-two in fiscal 1993.
Additionally, there were five longer term contracts which were accounted for by
the percentage-of-completion method ranging from approximately 1.8% to 43.5%
complete, contributing $306,000 to revenue and $62,000 of operating income. Of
the seven units shipped in fiscal 1994 one was to an existing customer and 6
were initial sales to new customers. One MEGA 2 system was shipped in fiscal
1994 to a new customer in a new market and application. Revenues and units
shipped declined during fiscal 1994 primarily due to the loss of anticipated
business from a customer which suspended a substantial automation project for
business reasons and from another customer due to difficulties which arose in
the implementation of the first phase of a project involving the Company and a
third party systems integrator. In addition, revenues were adversely affected
by delays in completing a number of projects involving substantial
customization.
In fiscal 1994, costs of revenues were $2,491,000, or 80.5% of revenues,
against $4,487,000, or 73.2% in fiscal 1993. The 7.3% decline in the gross
profit percentage resulted primarily from the fixed overhead costs being
absorbed by the fewer number of finished systems being shipped in 1994 versus
1993, (seven versus twenty-two, respectively). Additionally, one large
integration project achieved a 5% gross margin because it was for a new
application.
Operating Expenses
Selling expenses decreased by approximately 10%, $543,000 in fiscal 1994
from $600,000 in fiscal 1993. This was due to lower commissions resulting from
lower net sales.
Research and development ("R&D") expenses increased $86,000 or 29.2%
during 1994. This increase was almost entirely due to the development of the
next generation (the MEGA 2) automated single and multiple automatic tool
assembly systems.
General and administrative expenses decreased approximately 6%, $668,000
in fiscal 1994, from $708,000 in fiscal 1993. The change was caused primarily by
a decrease in salaries and professional fees of $115,000 and $10,000,
respectively. These decreases were partially offset by an increase in bad debt
expense of $52,000.
The Company's agreement with the guarantors of the Bank Line of Credit
requires the Company to stay within certain general and administrative expense
limits. Expenses in fiscal 1994 were within the required limits set forth in
the Guarantee Agreement.
Interest Expense
Interest and debt expenses for fiscal 1994 were $119,000, which includes
$109,000 of interest expense, $2,000 of interest income, and $11,000 of debt
restructuring costs. Interest and debt expenses for fiscal 1993 were $199,000,
which includes $131,000 of interest expense, $3,000 of interest income, and
$71,000 of debt restructuring costs. The decrease in interest expense from
fiscal 1993 to fiscal 1994 was due to savings associated with a Debt Reduction.
Debt restructuring costs refers to the amortization of costs incurred as part of
a restructuring on April 11, 1991, the greatest portion of which was amortized
during fiscal 1992. In fiscal 1993, the $43,000 remainder was amortized, along
with the additional costs of
18
the Debt Reduction. During 1994, $11,000 was amortized arising from additional
costs related to the new line and term loan financing.
Net Loss
Net loss for fiscal 1994 was $1,107,000, compared to $155,000 in 1993.
The net loss per common share was $0.08 for fiscal 1994, and $0.01 for 1993,
calculated on the weighted average shares outstanding of 13,343,324 and
12,352,749, respectively.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Reports of Independent Public
Accountants:
KPMG Peat Marwick LLP.................. 21
Deloitte & Touche LLP.................. 22
Financial Statements:
Statements of Financial Position -
June 30, 1995 and 1994................ 23
Statements of Operations for the
years ended June 30, 1995,
1994, and 1993........................ 24
Statements of Cash Flows for the
years ended June 30, 1995, 1994,
and 1993.............................. 25
Statements of Shareholders' Deficit
for the years ended June 30, 1995,
1994, and 1993......................... 26
Notes to Financial Statements.......... 27
Financial Statement Schedule:
Schedule II Valuation Accounts......... 36
20
Independent Auditor's Report
The Board of Directors and Shareholders
Megamation Inc.:
We have audited the accompanying statement of financial position of Megamation
Inc. as of June 30, 1995, and the related statements of operations, cash flows
and shareholders' deficit for the year then ended. In connection with our audit
of the financial statements, we have also audited the financial statement
schedule, for the year ended June 30, 1995, as listed in the accompanying index.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Megamation Inc. as of June 30,
1995, and the results of its operations and its cash flows for the year ended
June 30, 1995, in conformity with generally accepted accounting principles. Also
in our opinion, the related 1995 financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
The accompanying financial statements and financial statement schedule have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 12 to the financial statements, the Company has incurred
significant net losses, is in default under certain borrowing agreements, is in
a negative working capital position and has a net shareholders' deficit at
June 30, 1995, all of which raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 12. The financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
August 11, 1995
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Megamation Inc.
Princeton, New Jersey
We have audited the statement of financial position of Megamation
Inc. as of June 30, 1994, and the related statements of operations, cash flows
and shareholders' deficit for each of the two years in the period ended June 30,
1994. Our audits also included the financial statement schedule listed in the
accompanying index. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Megamation Inc. as of June 30, 1994, and the
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1994 in conformity with generally accepted accounting
principles. Also in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Megamation Inc. will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company's losses and negative cash flows from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
December 29, 1994 (March 3, 1995 as to Notes 5 and 12)
New York, New York
Statements of Financial Position
June 30,
-------------------------
1995 1994
----------- -----------
ASSETS
Current assets:
Cash................................ $264,225 $7,417
Trade receivables, net of allowance
for doubtful accounts of $40,544
and $65,658...................... 700,191 259,129
Costs and estimated earnings on
uncompleted contracts, net of
customer deposits (Note 3)....... -0- 178,056
Inventories (Note 2)................ 886,896 1,215,890
Prepaid expenses and other current
assets............................. 21,614 51,892
------ ------
Total current assets............. 1,872,926 1,712,384
Property and equipment, net (Note 4).... 273,933 125,639
Other assets:
Patents, net (Note 1)............... 306,960 258,424
Other assets........................ 59,066 35,632
------ ------
Total assets............ $2,512,885 $2,132,079
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving bank line of credit
(Note 5)............................ $1,700,000 $1,000,000
Term loans, related parties (Note 5) 1,760,000 460,000
Accounts payable.................... 805,039 580,508
Accrued warranty costs.............. 89,927 90,585
Accrued interest payable (Note 5)... 21,222 55,313
Customer deposits on uncompleted
contracts, net of costs and
estimated earnings (Note 3)...... -0- 147,079
Other customer deposits............. 253,937 1,260
Accrued payroll and related expenses 75,644 103,942
------ -------
Total current liabilities........ 4,705,769 2,438,687
Commitments (Note 6)....................
Shareholders' deficit, (Notes 7, 8 and 12):
Preferred stock, $0.01 par value;
1,000,000 shares authorized
no shares issued or outstanding.. -0- -0-
Common stock, $0.01 par value;
25,000,000 shares authorized,
14,358,666 and 13,358,666 shares
issued and outstanding,
respectively..................... 143,587 133,587
Additional paid in capital......... 5,756,744 5,661,744
Accumulated deficit................ (8,093,215) (6,101,939)
---------- ----------
Total shareholders' deficit...... (2,192,884) (306,608)
---------- --------
Total liabilities and
and shareholders'
deficit................. $2,512,885 $2,132,079
========== ==========
The accompanying notes are an integral part of the financial statements.
23
Statements of Operations
Years ended June 30,
-----------------------------------------
1995 1994 1993
------------- ----------- -----------
Revenues (Note 1)....................... $4,013,904 $3,094,372 $6,133,344
Cost of revenues........................ 3,484,032 2,491,838 4,487,104
---------- ---------- ----------
Inventory write-off relating to
discontinued products (Note 2)......... 707,404 -0- -0-
---------- ---------- ----------
Gross profit/(loss)............... (177,532) 602,534 1,646,240
Selling expenses........................ 384,595 542,585 600,224
Research and development expenses....... 352,226 380,659 294,573
General and administrative expenses..... 773,296 667,862 707,901
------- ------- -------
Total operating expenses............ 1,510,117 1,591,106 1,602,698
--------- --------- ---------
Operating income (loss)........ (1,687,649) (988,572) 43,542
Interest expense........................ 300,755 109,470 130,781
Interest income......................... (7,995) (2,108) (2,971)
Debt restructuring costs................ 10,867 11,373 70,692
------ ------ ------
Net loss............................ $(1,991,276) $(1,107,307) $(154,960)
=========== =========== ===========
Net loss per common share............... $(0.14) $(0.08) $(0.01)
====== ====== ======
Weighted average common shares 14,207,982 13,343,324 12,352,749
outstanding............................ ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
24
Statements of Cash Flows
Years ended June 30,
----------------------------------------
1995 1994 1993
----------------------------------------
FROM OPERATING ACTIVITIES:
Net loss........................................................................... (1,991,276) (1,107,307) (154,960)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization...................................................... 135,644 83,609 148,622
Decrease/(increase) in:
Trade receivables.............................................................. (441,062) 720,149 129,817
Costs and estimated earnings on uncompleted
contracts net of customer deposits........................................... 178,056 (82,795) (95,261)
Inventories.................................................................... 145,598 55,640 (403,785)
Prepaid expenses and other current assets...................................... 30,278 25,021 (38,037)
Other assets................................................................... (23,434) (2,342) (18,667)
Increase/(decrease) in:
Accounts payable............................................................... 224,531 (393,143) 485,141
Accrued warranty costs......................................................... (658) (6,593) 14,170
Accrued interest payable....................................................... 65,909 39,317 (45,558)
Customer deposits on uncompleted contracts, net
of costs and estimated earnings............................................... (147,079) 147,079 -0-
Other customer deposits........................................................ 252,677 (6,450) (130,399)
Accrued payroll and related expenses........................................... (28,298) (33,650) 16,660
----------- ----------- ----------
Cash used in operating activities.................................................. (1,599,114) (561,465) (92,257)
FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................................ (75,925) (30,549) (102,806)
Costs of patents................................................................... (73,153) (51,890) (29,911)
----------- ----------- ----------
Cash used in investing activities.................................................. (149,078) (82,439) (132,717)
FROM FINANCING ACTIVITIES:
Payments on the revolving bank line
of credit and debentures.......................................................... (24,979) (750,000) (600,000)
Advances from the revolving bank line of credit.................................... 724,979 1,000,000 595,000
Debt restructuring costs........................................................... -0- (10,098) (27,503)
Proceeds from term loans........................................................... 1,200,000 230,000 - 0 -
Proceeds from subscription agreement and warrants.................................. 105,000 100,000 323,334
----------- ----------- ----------
Cash from financing activities..................................................... 2,005,000 569,902 290,831
----------- ----------- ----------
(DECREASE)/INCREASE IN CASH........................................................... 256,808 (74,002) 65,857
Cash beginning of period........................................................... 7,417 81,419 15,562
----------- ----------- ----------
Cash end of period................................................................. $ 264,225 $ 7,417 $ 81,419
=========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period.................................................... $ 227,585 $ 70,153 $ 176,339
=========== =========== ==========
Non-cash investing and financing activities:
Inventory reclassified to property and equipment................................ $ 183,396 $ -0- $ -0-
=========== =========== ==========
Accrued interest converted to term loans........................................ $ 100,000 $ -0- $ -0-
=========== =========== ==========
Reduction of indebtedness resulting
from a debt reduction agreement.................................................. $ -0- $ -0- $1,470,000
=========== =========== ==========
The accompanying notes are an integral part of the financial statements.
25
Statements of Shareholders' Deficit
Common Stock Additional
Par value $0.01 Paid in
-----------------------
Shares Amount Capital Deficit Total
------------ --------- ------------- ------------ -----------
As of June 30, 1992..................... 9,506,000 $ 95,060 $3,806,937 $(4,839,672) $ (937,675)
Debt Reduction Agreement................ 2,916,666 29,167 1,464,167 -0- 1,493,334
Proceeds from the Subscription
Agreement, (Note 7).................... 736,000 7,360 292,640 -0- 300,000
Net loss................................ -0- -0- -0- (154,960) (154,960)
------------ -------- -------------- ------------ -----------
As of June 30, 1993..................... 13,158,666 $131,587 $5,563,744 $(4,994,632) $ 700,699
Sale of stock pursuant to the Stock
Subscription Agreement (Note 7)........ 200,000 2,000 98,000 -0- 100,000
Net loss................................ -0- -0- -0- (1,107,307) (1,107,307)
------------ -------- -------------- ------------ -----------
As of June 30, 1994..................... 13,358,666 $133,587 $5,661,744 $(6,101,939) $ (306,608)
Sale of stock (Note 7).................. 1,000,000 10,000 95,000 -0- 105,000
Net loss................................ -0- -0- -0- (1,991,276) (1,991,276)
------------ -------- -------------- ------------ -----------
As of June 30, 1995..................... 14,358,666 $143,587 $5,756,744 $(8,093,215) $(2,192,884)
========== ======== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
26
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
a. Organization
------------
The Company's principal activities are the design, marketing, and
manufacture of programmable, flexible, single and multiple tool, automation work
cells for the clinical laboratory, pharmaceutical, automotive,
telecommunication, and computer industries.
b. Revenue Recognition and Contract Costs
--------------------------------------
The Company generally recognizes revenue upon the completion of one of
the following: (1) the performance of a service, (2) the shipment of product, or
(3) upon customer acceptance of completed units. The percentage of completion
method is used for long term contracts generally involving the integration of
the Company's products into a customer's production facility. Sales and
operating income are recognized as work is performed, based on the relationship
between actual labor cost incurred and the total labor cost estimated to be
required. At June 30, 1995, there were no long term contracts in process. At
June 30, 1994, five long term contracts were in process (completed during fiscal
1995), for which the Company recorded $306,000 in revenue and $67,000 of
operating income in fiscal 1995. At June 30, 1993, one long term contract
(completed during fiscal 1994) was in process for which the Company recorded
$323,000 in revenue and $79,000 of operating income in fiscal 1993.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
Less than ten percent of the Company's sales are derived from the performance of
services.
c. Inventories
-----------
Inventories consist of parts and subassemblies, work-in-process, and
completed units which are valued at the lower of cost (first-in/first-out) or
market value.
d. Depreciation and amortization
-----------------------------
Depreciation on property and equipment is computed using various methods
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the length of the related lease, or the estimated
useful life of the improvement.
Patent application costs are deferred until a patent is granted, or until
the application is abandoned. No patent applications have been abandoned to
date. Once a patent is granted the associated costs are amortized using the
straight-line method over fifteen years. The Company's patents serve to define
the uniqueness of the Company's product and are all believed to have a
technological life at least equal to the amortization period. Accumulated
amortization of patents at June 30, 1995 and 1994 was $53,040 and $28,423,
respectively.
e. Research and development expenses
---------------------------------
Research and development expenses, net of related reimbursements, are
charged to operations as incurred.
27
f. Product warranty costs
----------------------
Estimated warranty costs are accrued at the time a sale is recorded. The
Company extends a labor warranty of six months, and a parts warranty for twelve
months. Reserves for future warranty costs were $89,927, $90,585 and $97,178
for the years ended June 30, 1995, 1994, and 1993, respectively.
g. Net loss per common share
-------------------------
Net losses per common share have been computed using the weighted average
number of common shares outstanding during the respective periods. Common stock
options and warrants outstanding were not included in the computation as the
effect would have been anti-dilutive.
2. INVENTORIES
-----------
Inventories are comprised of the following:
June 30
----------------------
1995 1994
---------- ----------
Parts and subassemblies............... $786,575 $ 872,991
Work in process....................... 100,321 127,263
Finished goods........................ -0- 215,636
-------- ----------
$886,896 $1,215,890
======== ==========
During the third and fourth quarter of the current fiscal year, charges of
$56,660 and $650,744, respectively, were made to cost of revenues for inventory
related to the discontinued MEGA 1 product line. Additionally, during fiscal
1995, $183,396 of Mega 1 and Mega 2 inventory was reclassified to property and
equipment as these units were allocated for use in Mega 1 training and Mega 2
training, demonstration and development.
3. LONG-TERM CONTRACTS
-------------------
Details of long-term contracts consist of the following:
June 30
-------------------
1995 1994
-------- ---------
Costs incurred on uncompleted contracts........ $ -0- $ 312,322
Estimated earnings............................. -0- 62,681
----- ---------
-0- 375,003
Less: Deposits received....................... -0- (344,026)
----- ---------
$ -0- $ 30,977
===== =========
Such amounts are included in the balance
sheets under the following captions:
Costs and estimated earnings on uncompleted
contracts, net of customer deposits......... $ -0- $ 178,056
===== =========
Customer deposits on uncompleted contracts,
net of costs and estimated earnings......... $ -0- $ 147,079
===== =========
28
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following:
June 30
-------------------------
1995 1994
------------- ----------
Factory equipment....................... $ 263,480 $ 260,310
Training, demonstration and development
systems................................. 183,396 -0-
Office equipment........................ 56,311 58,427
Leasehold improvements.................. 34,479 34,479
Computers and software.................. 190,433 115,562
---------- ----------
728,099 468,778
Less accumulated depreciation........... (454,166) (343,139)
---------- ----------
$ 273,933 $ 125,639
========== ==========
5. DEBT
----
The Company's debt consists of the following:
June 30
-------------------------
1995 1994
------------ ----------
Revolving bank line of credit........... $1,700,000 $1,000,000
Term loans.............................. 1,760,000 460,000
---------- ----------
$3,460,000 $1,460,000
========== ==========
Under Agreements entered into on May 12, 1994, and amended on August 18,
1994, the Company entered into a Credit and Security Agreement (the "Line") with
a New Jersey bank secured by trade receivables and guaranteed by two principal
stockholders and directors (the "Guarantors") pursuant to a Guarantee Agreement
("Agreement"). The Line provides for maximum borrowings of $1,700,000. Under
the terms of the Agreement, the Guarantors each guarantee one-half of the
outstanding balance of the Line. The Line imposes borrowing formula limitations
of the sum of 85% of trade receivables and 40% of the qualifying open order
backlog. At June 30, 1995, the Company was not in compliance with the borrowing
limitation requirements under the Line. Borrowings under the Line bear interest
at the prime rate (9% and 7.25% at June 30, 1995 and 1994, respectively).
Additionally, the Guarantors each receive quarterly fees calculated at a 1.5%
annual rate on the average outstanding balance of the Line. The Guarantee fee
expense which is included in interest expense was $45,187 and $23,116 for the
years ended June 30, 1995 and 1994, respectively. The line expires on January
1, 1996.
At June 30, 1994, the Term Loan (originally granted on December 21, 1988)
was owed to an entity controlled by one of the Guarantors and was scheduled to
mature on March 31, 1995. On February 11, 1994, the other Guarantor provided the
Company with an additional $230,000 in the form of a New Term Loan, also due on
March 31, 1995. In connection with the New Term Loan, the Guarantor was issued
a warrant to purchase 460,000 shares of the Common Stock of the Company at $.55
per share. In consideration of extending the due date of the original Term Loan
and modifying the security interest in the Company's assets to recognize the co-
priority of the New Term Loan, the entity holding the original Term Loan was
issued a warrant to purchase 72,000 shares of the Common Stock of the Company
exercisable at $.55 per share. No value was assigned to these warrants as the
amount was not material. On December 16, 1994, the original Term Loan and the
New Term Loan were amended to provide for an additional $500,000
29
in borrowings from the Guarantors. Additionally, the due dates of both Term
Loans were extended to June 30, 1995. Coincident with these amendments, the
Company borrowed an additional $250,000. In consideration of the December 1994
amendments, the Guarantors were each issued warrants to purchase 500,000 shares
of the Common Stock of the Company at $.50 per share. No value was recorded for
these warrants as the amount was not material. In February 1995 the Company
borrowed the remaining available $250,000 under the Term Loans.
The annual interest rate on both Term Loans is prime plus 4% with a
maximum annual rate of 12%, payable quarterly in arrears. Substantially all of
the Company's assets are pledged as collateral for the Company's obligations
under the Term Loans, however the Term Loans have been subordinated to the Line.
Provisions of the Line and both Term Loans prohibit the Company from paying cash
dividends until these obligations are repaid. The interest rate on the Term
Loans at June 30, 1995 was 12%.
On March 3, 1995, the Company entered into an agreement with its
principal stockholders to provide an additional $800,000 in the form of short
term loans through June 30, 1995 and the Company borrowed this amount during
fiscal 1995. In addition, past due interest of approximately $120,000 under the
existing Term Loans with the stockholders was deferred until July 1, 1995. On
May 12, 1995, the Company obtained an agreement for the extension of its Term
Loans and the Line until January 1, 1996. Additionally, the May 12, 1995
agreement modified the lending terms of the March 3, 1995 agreement whereby the
principal stockholders provided $700,000 in the form of short term loans and
deferred $100,000 of past due interest on the Term Loans to January 1, 1996. The
May 12, 1995 agreement sets forth the parties intention to convert the $700,000
of loans and the $100,000 of deferred past due interest to shares of the
Company's capital stock on terms and conditions to be agreed upon among the
parties as soon as is practicable. The principal stockholders have indicated
their willingness to accomplish such a conversion in connection with a rights
offering of common stock to the Company's stockholders. It is management's
current intention to pursue such a transaction, however no assurance can be
provided that the transaction will be successfully consummated.
At June 30, 1994 and 1995, the Company was not in compliance with several
covenants under the Line and the Term Loans. As of August 11, 1995 such non-
compliance was continuing and the agreements entered into on March 3 and May 12,
1995 do not cure the defaults.
6. COMMITMENTS
-----------
Under various licensing agreements, the Company is required to pay
royalties on the sales of certain products that incorporate licensed technology.
Total royalty expense under such agreements, which is recorded in cost of sales,
was approximately $14,800 and $4,500 for the years ended June 30, 1995 and 1994,
respectively.
The Company has an operating lease which expires on December 31, 1995, at
an annual base rental of approximately $93,000 plus additional amounts for taxes
and maintenance. The Company also has certain operating equipment leases
expiring through July 2000.
Approximate aggregate minimum annual rental commitments (exclusive of
real estate taxes and maintenance costs) for fiscal 1996 are approximately
$47,000 for space rentals and $6,000 for equipment rentals.
Rent expense (including taxes and maintenance) aggregated $95,000,
$106,000, and $109,000 for the years ended June 30, 1995, 1994, and 1993,
respectively.
30
7. CAPITAL STOCK
-------------
a. Preferred Stock
---------------
The Company is authorized to issue 1,000,000 shares of preferred stock
with a par value of $0.01 per share. The preferred stock may be issued in one or
more series by the Board of Directors at terms and designations as the Board may
fix, including dividend rates, redemption rights, conversion rights, liquidation
preferences, and voting rights. No preferred stock has been issued to date.
b. Common Stock
------------
On September 21, 1989, the Company consummated a public offering of
690,000 units: each unit consisting of five shares of common stock and four
Redeemable Common Stock Purchase Warrants. On September 20, 1993, the warrants
expired without any having been exercised.
On September 4, 1992, the Company's principal stockholders executed
a Stock Subscription Agreement to purchase up to an additional 1,136,000 shares
of Common Stock for an aggregate of $500,000, subject to certain limitations. As
of September 30, 1993, the expiration of the Stock Subscription Agreement,
936,000 shares of Common Stock had been sold for a total of $400,000.
In August 1994, the Company's two principal stockholders each purchased
500,000 shares of Common Stock. Net proceeds to the Company were $105,000.
8. STOCK OPTIONS AND WARRANTS
--------------------------
a. Stock options
-------------
Prior to June 30, 1989, the Company granted individual options to
purchase an aggregate of 730,000 shares of Common Stock. Of these, 722,000 have
expired as of June 30, 1995.
On May 10, 1989, the Company adopted the 1989 Joint Incentive and Non-
Qualified Stock Option Plan ("the 1989 Plan"). Incentive or non-qualified
options may be granted to employees and other key persons. In November 1991, an
amendment to the 1989 Plan was approved, increasing from 400,000 to 550,000 the
total number of shares of Common stock for which options may be granted.
Under the 1989 Plan, Incentive Stock Options must be granted at not less
than 100 percent of the fair value of the Company's Common Stock on the date of
the grant, and Non-Qualified Stock Options may be granted at a price determined
at the discretion of the Board of Directors, provided that such exercise price
may not be less than the par value of the Common Stock. Options granted
terminate no later than ten years after the grant date, and subject to certain
exceptions, if granted to an employee, are exercisable only during the
individual's employment.
On June 22, 1992, the Board of Directors adopted the 1992 Joint Incentive
and Non-Qualified Stock Option Plan ("the 1992 Plan"). The 1992 Plan authorizes
the issuance of options to purchase up to 1,000,000 shares of Common Stock under
provisions similar to those in the 1989 Plan.
31
On May 5, 1995, the Board of Directors adopted, subject to stockholder's
approval, the 1995 Joint Incentive and Non-Qualified Stock Option Plan ("the
1995 Plan"). The 1995 Plan authorizes the issuance of options to purchase up to
4,500,000 shares of common stock under provisions similar to those in the 1989
Plan.
On May 5, 1995, the Company granted options under the new 1995 Plan,
subject to approval by stockholders, to purchase a total of 3,452,829 shares to
four executives at an option price of $.15 per share vesting in installments of
10%, 20%, 10%, 35%, and 25% from 1995 through 1999. On June 15, 1995 an
option for 800,000 shares, previously granted to one of the above executives at
$.50 per share, was canceled. The effectiveness of the options granted under
the 1995 Plan are subject to approval of the 1995 Plan by stockholders.
However, these options are reflected as "granted" in the summary appearing
below.
The following is a summary of stock option activity for the three years ended
June 30, 1995:
Number of Exercise price
Shares per share Total Price
----------- -------------- ------------
Balance, June 30, 1992.......... 981,500 $ 674,770
Expired....................... (163,000) $0.667 - $1.00 (110,550)
Forfeited..................... (17,200) $0.35 - $0.375 (6,120)
Granted....................... 900,000 $0.50 - $0.667 466,700
---------- -----------
Balance, June 30, 1993.......... 1,701,300 $ 0.33 - $1.00 1,024,800
Expired....................... (177,800) $ 0.35 - $1.00 (135,900)
Granted....................... 200,000 $.50 100,000
---------- -----------
Balance, June 30, 1994.......... 1,723,500 988,900
Expired....................... (595,500) $ .33 - $1.00 (355,900)
Granted....................... 3,452,829 $.15 517,924
Canceled...................... (800,000) $.50 (400,000)
---------- -----------
Balance, June 30, 1995.......... 3,780,829 $ 750,924
========== ===========
Exercisable at June 30, 1995.... 657,283
==========
Future number of shares for which options may be
granted under the 1989 Plan................................ 230,000
===========
Future number of shares for which options may be
granted under the 1992 Plan................................ 1,000,000
===========
Future number of shares for which options may be
granted under the 1995 Plan, (subject to stockholder
approval noted above)...................................... 1,047,171
===========
b. Common stock warrants
---------------------
The following is a summary of common stock warrant activity for the three years
ended June 30, 1995:
Exercise
Number of Price
Warrants per Share
--------- ---------
Balance, June 30, 1992........... 4,727,500
Warrants exercised in $0.05 and
connection with a debt
reduction agreement............. (1,866,666) $0.55
Expiration of
pre-public warrants............. (67,500) $1.00
Expiration of Series C
Warrant......................... (33,334) $0.05
32
Additional shares issuable pursuant to
anti-dilution provisions of warrants
issued in connection with the Company's
initial public offering....................... 256,680 $1.83
----------
Balance, June 30, 1993......................... 3,016,680
Expiration of warrants issued in connection
with the Company's initial public offering.... (3,016,680) $1.83
Warrants issued in connection with Term
Loans (Note 5)................................ 532,000 $0.55
----------
Balance, June 30, 1994......................... 532,000
Warrants issued in connection with Term
Loans (Note 5)................................ 1,000,000 $0.50
----------
Balance, June 30, 1995......................... 1,532,000
==========
9. INCOME TAXES
------------
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109 "Accounting for Income Taxes", effective July 1, 1993. The cumulative
effect of adopting SFAS No. 109 had no impact on the Company's financial
statements.
SFAS No. 109 provides for, among other things, the recognition of
deferred tax assets subject to a valuation allowance. At July 1, 1994, the
Company recorded a deferred tax asset of approximately $2,276,000 primarily
relating to net operating loss carryforwards ("NOL") which amounted to
$5,113,000 at June 30, 1994. Also at July 1, 1994, the Company established a
valuation allowance equal to the full amount of the deferred tax asset.
For the years ended June 30, 1995 and 1994, no income tax expense or
benefit was recorded. The Company increased its deferred tax asset by
approximately $783,000 and $687,000, for the years ended June 30, 1995 and 1994
respectively, with corresponding increases in the valuation allowance.
The difference between the NOL for tax purposes of $6,867,000 and the NOL
for book purposes of $8,093,000 primarily reflects the net effect of timing
differences between the treatment of research and development costs for tax and
book purposes. The NOL's expire at various times and in varying amounts through
the year 2010.
These losses would generally be available to offset future taxable
income, if any. The utilization of Federal income tax loss carryforwards in any
year is subject to limitation if the Company experiences a certain level of
changes in ownership over any three year period. Management has recently
determined that the effects of changes in ownership through June 30, 1995 have
not had a material effect on the future utilization of the Company's operating
loss carryforwards. However, there have been substantial changes in ownership
during the prior three year period and future changes in ownership could result
in a substantial limitation on the amount of operating loss carryforwards which
the Company would apply in any one year to offset income.
10. MAJOR CUSTOMERS AND EXPORTS
---------------------------
For the years ended June 30, 1995, 1994, and 1993, five, five, and three
customers accounted for 72%, 64%, and 65% of net sales, respectively. The
percentages of net sales represented by each customer approximated 31%, 15%, 9%,
9% and 8% in fiscal 1995; 15%, 15%, 12%, 11%, and 11% in fiscal 1994; and, 26%,
21%, and 18% in fiscal 1993.
33
Export shipments in the year ended June 30, 1995 were approximately 24% of
net sales, of which 93% were to Canada and 7% were to Singapore. Export
shipments in the year ended June 30, 1994 were approximately 7% of net sales, of
which 63% were to Canada, 25% were to Japan, and 12% were to Europe. In fiscal
1993 export shipments were approximately 17% of net sales, of which 75% were to
Canada and 23% were to Germany.
11. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
--------------------------------------------
Selected unaudited quarterly financial data for the years ended June 30,
1995 and 1994, are as follows ($000's omitted except share and earnings per
share):
Quarter ended
-------------------------------------------------------
Q1 Q2 Q3 Q4
9-30 12-31 3-31 6-30
---- ----- ---- ----
1995
----
Net sales $1,009 $958 $949 $1,097
Gross profit (loss) 430 175 (193) (589)
Net income (loss) 52 (206) (666) (1,170)
Loss per share -0- (.01) (.05) (.08)
Weighted average shares 13,760,840 14,358,666 14,358,666 14,358,666
1994
----
Net sales $1,048 $841 $810 $395
Gross profit (loss) 307 202 157 (64)
Net loss (71) (197) (242) (598)
Loss per share (.01) (.01) (.02) (.04)
Weighted average shares 13,299,270 13,358,666 13,358,666 13,358,666
12. GOING CONCERN
-------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the years ended June 30, 1995 and 1994, the Company incurred
net losses of $1,991,000 and $1,107,000, respectively, and, as of June 30, 1995,
the Company's current liabilities exceeded its current assets by $2,833,000, and
its total liabilities exceeded its total assets by $2,193,000. In addition, as
discussed in Note 5, the Company is in default under certain borrowing
agreements as of June 30, 1995. These factors among others indicated that at
June 30, 1995 there is substantial doubt about whether the Company would be able
to continue as a going concern for a reasonable period of time absent additional
financing.
Additions to the Company's Line of Credit and Term Loans, extensions of
their respective due dates and the proceeds from the sale of capital stock
described in Notes 5 and 7 provided the additional financing necessary for the
continued operation of the Company through June 1995.
Management believes that with the additional financing arrangements
entered into on March 3 and May 12, 1995 as described in Note 5, and its
projected cash flow from operations, the Company will be able to finance its
operations through December 31, 1995, provided that the holders of the Line and
Term Loans do not exercise their rights to elect to accelerate the due dates
thereof. Management will attempt to obtain additional financing, including the
conversion of $700,000 of term loans and $100,000 of deferred interest to
equity, and negotiate further extensions of the Line and various Term Loans
beyond the current January 1, 1996 maturity date. However, there can be no
assurance that such efforts will be successful.
34
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
35
SCHEDULE II VALUATION ACCOUNTS
Beginning Charged to Ending
Description Balance Expense Charge-offs Balance
- ----------- ------- ------- ------------ --------
June 30, 1993:
Allowance for doubtful accounts.. $ 28,314 $ 8,135 $ (28,314) $ 8,135
======== ======== ========= ========
Inventory reserve................ $ 25,000 $ 40,672 -0- $ 65,672
======== ======== ========= ========
June 30, 1994:
Allowance for doubtful accounts.. $ 8,135 $ 61,641 $ (4,118) $ 65,658
======== ======== ========= ========
Inventory reserve................ $ 65,672 $115,100 -0- $180,772
======== ======== ========= ========
June 30, 1995:
Allowance for doubtful accounts.. $ 65,658 $ 14,165 $ (39,279) $ 40,544
======== ======== ========= ========
Inventory reserve (1)............ $180,772 $-0- $(180,772) $-0-
======== ======== ========= ========
(1) Does not include the direct write-off of inventory aggregating $707,404.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 20, 1995, the Registrant terminated the engagement of Deloitte &
Touche LLP as the principal accountant to audit the Registrant's financial
statements.
The principal accountant's report on the Registrant's financial statements
for each of the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to audit scope or
accounting principles. The accountant's report for each of the past two fiscal
years was modified as to an uncertainty as to whether the Registrant will
continue as a going concern.
The decision to terminate the principal accountant was approved by the
Registrant's Board of Directors since the Registrant has no audit or similar
committee of its Board of Directors.
During the Registrant's past two fiscal years and the interim period
subsequent to the Registrant's latest fiscal year through the date of
termination of the engagement of the principal independent acountant, there were
no disagreements with the principal independent accountant on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject matter thereof
in connection with its report.
On April 20, 1995, the Registrant engaged KPMG Peat Marwick LLP as the
principal accountant to audit the Registrant's financial statements.
A Form 8-K was previously filed on April 24, 1995 reporting the foregoing
change in accountants.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Directors, Executive Officers
and Compensation - Directors and Executive Officers," "Proposal 1 - Election of
Directors," in the registrant's proxy statement for its 1995 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Further Information -
"Directors, Executive Officers and Compensation," "Proposal 1 - Election of
Directors - Meetings; Committees; Director Compensation" and "Certain
Relationships and Related Party Transactions" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the captions "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
Voting Agreement
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Party Transactions" in the Proxy Statement is incorporated herein by
reference.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Documents Filed
1. Financial Statements - See Index to Financial Statements and
Schedules appearing at the beginning of Item 8 of this Report.
2. Financial Statement Schedules - See Index to Financial Statements
and Schedules appearing at the beginning of Item 8 of this Report.
3. Exhibits - See the Index to Exhibits filed with this Report.
(b) Reports on Form 8-K:
During the quarter ended June 30, 1995 the Company filed one report
on Form 8-K. The report, dated April 24, 1995, reported a change in
the Company's Certifying Accountants pursuant to Item 4 of Form 8-K.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Megamation Inc.
(Registrant)
By: /s/ Gerald W. Klein
--------------------------
Gerald W. Klein, President and
Chief Executive Officer
Date: September 13, 1995
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.
Signatures Title Date
- ---------- ----- ----
/s/ Gerald W. Klein President, Chief Executive Officer,
- -------------------------- Treasurer, Chief Financial Officer, September 13, 1995
Gerald W. Klein and Director
/s/ Richard J. Komblum Vice President, Chief Operating
- -------------------------- Officer and Director September 13, 1995
Richard J. Komblum
/s/ Thomas W. Murphy Controller, Principal Accounting
- ------------------------- Officer, and Assistant Secretary September 13, 1995
Thomas W. Murphy
/s/ Tristram C. Colker Director
- ------------------------- September 13, 1995
Tristram C. Colker
/s/ Max Cooper Director
- -------------------------
Max Cooper September 13, 1995
/s/ Alan R. Leiderman Director
- -------------------------
Alan R. Leiderman September 13, 1995
40
EXHIBIT INDEX
Exhibits denoted with an asterick relate to Management Compensation Plans and
Arrangements:
(a) Exhibits
--------
Exhibit
No. Description
- ------------ ----------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, incorporated herein
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992.
3.2 ByLaws, incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1991.
*10.1 1989 Joint Incentive and Non-Qualified Stock Option Plan, as
amended, incorporated herein by reference to Exhibit 10.2
to the Company's Annual Report on Form 10-K for the year
ended June 30, 1992.
*10.2 1992 Joint Incentive and Non-Qualified Stock Option Plan,
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-1 (File No. 33 49068).
*10.3 1995 Joint Incentive and Non-Qualified Stock Option Plan,
subject to Stockholder approval.
*10.4 Stock Option Agreement between the Company and Brian D.
Hoffman ("Hoffman"), dated January 3, 1989, incorporated
herein by reference to Exhibit 10f to the Company's
Registration Statement on Form S-1 (File no. 33-28935).
*10.5 Stock Option Agreement between the Company and Steven H.
Pollack ("Pollack"), dated January 3, 1989, incorporated
herein by reference to Exhibit 10f to the Company's
Registration Statement on Form S-1 (File no. 33-28935).
*10.6 Stock Option Agreement between the Company and Thomas D.
Schmidt ("Schmidt"), dated November 26, 1990, incorporated
herein by reference to Exhibit 10.6B to the Company's Annual
Report on Form 10-K for the year ended June 30, 1991.
*10.7 Stock Option Agreement between the Company and Schmidt, dated
as of August 23, 1990, incorporated herein by reference to
Exhibit 10.6F to the Company's Annual Report on Form 10-K for
the year ended June 30, 1991.
*10.8 Stock Option Agreement between the Company and Schmidt, dated
as of September 4, 1992, incorporated herein by reference to
Exhibit 10.4I to the Company's Annual Report on Form 10-K for
the year ended June 30, 1992.
*10.9 Letter dated June 15, 1995 Terminating Stock Option Agreement
dated September 4, 1992 between the Company and Schmidt.
*10.10 Stock Option Agreement between the Company and Schmidt, dated
as of May 5, 1995.
*10.11 Stock Option Agreement between the Company and Hoffman, dated
as of August 3, 1992, incorporated herein by reference to
Exhibit 10.4J to the Company's Annual Report on Form 10-K for
the year ended June 30, 1992.
41
*10.12 Stock Option Agreement between the Company and Pollack dated as of
August 3, 1992, incorporated herein by reference to Exhibit 10.4K to
the Company's Annual Report on Form 10-K for year ended June
30, 1992.
*10.13 Stock Option Agreement between the Company and Hoffman, dated as of
March 29, 1994, incorporated herein by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended June 30,
1994.
*10.14 Stock Option Agreement between the Company and Pollack, dated as of
March 29, 1994, incorporated herein by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the period ended June 30,
1994.
*10.15 Stock Option Agreement between the Company and Gerald W. Klein, dated
as of May 5, 1995.
*10.16 Stock Option Agreement between the Company and Richard J. Kornblum,
dated as of May 5, 1995.
*10.17 Stock Option Agreement between the Company and Thomas W. Murphy, dated
as of May 5, 1995.
*10.18 Employment Agreement between the Company and Schmidt dated as of
September 4, 1992, incorporated herein by reference to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the year ended June 30,
1992.
10.19 Warrant to Purchase Common Stock dated February 10, 1994, issued to
Cooper, incorporated herein by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1994.
10.20 Warrant to Purchase Common Stock dated February 10, 1994, issued to
Colket, incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1994.
10.21 Warrant to Purchase Common Stock dated December 16, 1994, issued to
Colket, incorporated herein by reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1994.
10.22 Warrant to Purchase Common Stock dated December 16, 1994, issued to
Cooper Investments, incorporated herein by reference to Exhibit 10.18
to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1994.
10.23 Credit Agreement between the Company and Cooper Investments dated
December 21, 1988 ("Cooper Credit Agreement"), incorporated herein by
reference to Exhibit 10i to the Company's Registration Statement on
Form S-1 (File no. 33-28935).
10.24 Security Agreement between the Company and Cooper Investments dated
December 21, 1988 ("Cooper Credit Agreement"), incorporated herein by
reference to Exhibit 10i to the Company's Registration Statement on
Form S-1 (File no. 33-28935).
10.25 $1,000,000 Term Note to Cooper Investments dated December 21, 1988
("Cooper Credit Agreement"), incorporated herein by reference to
Exhibit 10i to the Company's Registration Statement on Form S-1 (File
no. 33-28915).
10.26 Amendment to Cooper Credit Agreement dated as of April 11, 1991,
incorporated herein by
42
reference to Exhibit 10(d) to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1991.
10.27 Second Amendment to Cooper Credit Agreement dated as of September 4,
1992, incorporated herein by reference to Exhibit 10.8C to the
Company's Annual Report on Form 10-K for the year ended June 30, 1992.
10.28 Third Amendment to Cooper Credit Agreement, dated as of October 12,
1993 incorporated herein by reference to Exhibit 10.8D to the
Company's Annual Report on Form 10-K for the Year ended June 30, 1993.
10.29 Amendment to Cooper Credit Agreement and Security Agreement, dated as
of February 10, 1994, incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1994.
10.30 Term Loan Agreement between Colket and the Company dated February 11,
1994, incorporated herein by reference to Exhibit 10.1A to the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1994.
10.31 Amendment to Credit Agreement and Security Agreement dated December
16, 1994, incorporated herein by reference to Exhibit 10.7F to the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1994.
10.32 Term Note from the Company to Colket dated February 11, 1994,
incorporated herein by reference to Exhibit 10.IB to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1994.
10.33 Term Note from the Company to Colket dated December 16, 1994,
incorporated herein by reference to Exhibit 10.7H to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1994.
10.34 Amendment to Term Note from the Company to Colket dated December 16,
1994, incorporated herein by reference to Exhibit 10.7G to the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1994.
10.35 Amendment to Term Loan Agreement and Security Agreement with Colket
dated December 16, 1994, incorporated herein by reference to
Exhibit 10.8B to the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1994.
10.36 Term Note from the Company to Cooper dated December 19, 1994,
incorporated herein by reference to Exhibit 10.8C to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1994.
10.37 Letter of Credit Security Agreement dated December 16, 1994 between
the Company and Colket, incorporated herein by reference to
Exhibit 10.12C to the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1994.
10.38 Letter of Credit Security Agreement dated December 16, 1994 between
the Company and Cooper Investments, incorporated herein by reference
to Exhibit 10.12D to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1994.
10.39 Term Note from the Company to Colket dated February 8, 1995.
10.40 Term Note from the Company to Cooper dated February 27, 1995.
43
10.41 Term Note from the Company to Colket dated March 6, 1995, incorporated
herein by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1995.
10.42 Term Note from the Company to Colket dated March 30, 1995,
incorporated herein by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1995.
10.43 Term Note from the Company to Colket dated April 28, 1995,
incorporated herein by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1995.
10.44 Term Note from the Company to Colket dated June 1, 1995.
10.45 Term Note from the Company to Cooper dated June 1, 1995.
10.46 Term Note from the Company to Cooper dated June 1, 1995.
10.47 Debt Restructuring Agreement dated March 3, 1995, incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1995.
10.48 Amended and Restated Debt Restructuring Agreement executed May 12,
1995, incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1995.
10.49 Lease dated June 28, 1990 between Princeton Windsor Group II and the
Company for the premises at 51 Everett Drive, Lawrenceville, New
Jersey, incorporated herein by reference to Exhibit 10n to the
Company's Annual Report on Form 10-K for the year ended June 30, 1990.
10.50 Letter Agreement dated April 18, 1991 between Commercial Property
Network, agents for Princeton Windsor Group II, and the Company,
incorporated herein by reference to Exhibit 10.11B to the Company's
Annual Report on Form 10-K for the year ended June 30, 1991.
10.51 Lease Extension dated April 10, 1995 between Princeton Windsor Group
II and the Company for the premises at 51 Everett Drive,
Lawrenceville, New Jersey.
10.52 Revolving Loan and Security Agreement and Commercial Promissory Note
with CoreStates New Jersey National Bank ("CoreStates") signed as of
May 12, 1994, incorporated herein by reference to Exhibit 10.3A to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1994.
10.53 First Amendment to Note and Revolving Loan and Security Agreement with
CoreStates, dated as of August 18, 1994, incorporated herein by
reference to Exhibit 10.12B to the Company's Annual Report on Form 10-
K for the period ended June 30, 1994.
10.54 Second Amendment to Note and Revolving Loan and Security Agreement
with CoreStates, dated as of April 28, 1995.
10.55 Third Amendment to Note and Revolving Loan and Security Agreement with
CoreStates, dated as of July 11, 1995.
10.56 Guarantors Contribution Agreement signed as of May 12, 1994 between
Cooper, Colket and
44
the Company, incorporated herein by reference to Exhibit 10.3D to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1994.
10.57 First Amendment to Guarantors Contribution Agreement executed August 18,
1994 incorporated herein by reference to Exhibit 10.13B to the Company's
Annual Report on Form 10-K for the period ended June 30, 1994.
10.58 Registration Rights Agreement dated as of September 4, 1992 by and
between the Company, Max Cooper, Cooper Investments, and Tristram C.
Colket Jr., incorporated herein by reference to Exhibit 28.4 to the
Company's Current Report on Form 8-K for September 4, 1992.
23.1 Consent of Deloite & Touche LLP.
23.2 Consent of KPMG Peat Marwick LLP.
45