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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 May 31, 1997 Commission File Number-0-16101
INOTEK TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1986151
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11212 INDIAN TRAIL, DALLAS, TEXAS 75229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 243-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NASDAQ
.01 PAR VALUE
(Title of Class) (Name of each exchange on which registered)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 18, 1997 was $2,523,888.
Shares of Common Stock outstanding at August 18, 1997 were 4,354,088.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into the
indicated part of this report: Proxy statement for annual meeting of
shareholders to be held October 13, 1997 which will be filed with the
Securities and Exchange Commission on September 9, 1997----Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
INOTEK Technologies Corp. (the Company), previously known as Entronics
Corporation, was incorporated in Texas in June 1984 and began operations in
October 1984. In October 1991, the Company merged with and assumed the name of
its wholly-owned subsidiary, INOTEK Technologies Corp. In June 1987, the
Company entered into an Agreement and Plan of Reorganization whereby the
Company was dissolved as a Texas corporation and incorporated as a Delaware
corporation. The Texas corporation transferred substantially all of its assets
and liabilities to the Delaware corporation in exchange for 3,806,250 shares of
the Delaware corporation's common stock which was distributed to shareholders
of the Texas corporation. In addition, 10,000,000 shares of $.01 par value
common stock were authorized and a three-for-two split of the Company's common
stock was effected. In August 1987, the Company consummated its initial public
offering with the registration of 1,000,000 shares of common stock with the
Securities and Exchange Commission. The offering consisted of 400,000 shares
sold by the Company and 600,000 shares sold by officers/shareholders.
In June 1989, the Company acquired INOTEK Corporation, a privately-held Texas
corporation, through the merger with the Company's wholly-owned subsidiary,
Entronics INOTEK Acquisition Corporation which later changed its name to INOTEK
Technologies Corp. In fiscal year 1990, INOTEK Technologies Corp. acquired
three distribution and sales representative companies which provide the same
basic services as INOTEK Technologies Corp.
The Company had two principal operating divisions: (1) INOTEK, a marketing and
service company for instrumentation, process controls, information management,
and test and measurement equipment; and (2) Entronics, which designs,
manufactures, and markets a line of Automatic Money Order Dispensers (AMOD's).
The Entronics division was sold on March 16, 1995 as a result of an unsolicited
offer from one of the division's largest customers. The Company's principal
executive offices are located at 11212 Indian Trail, Dallas, Texas 75229.
DISTRIBUTION/REPRESENTATIVE SALES AND SERVICE
PRODUCTS AND OPERATIONS
INOTEK's role as a high technology marketing and service company is a function
of meeting the needs of two constituencies: (1) the customers (end users) of
its products and services; and (2) the product vendors that it represents.
INOTEK's base distribution business covers a broad range of product lines from
highly-engineered, technically-advanced items to commodity-oriented components
where customers purchase single or multiple quantities of specific products.
Representative product lines are shipped by the manufacturer to the end
customer with INOTEK receiving a commission for its marketing and support
effort. The industrial marketplace includes: (1) Process controls and
instrumentation - products utilized in the manipulation of pressures,
temperatures, and flows and the measurement of their physical properties; (2)
Test equipment - portable instrumentation used in diagnostic evaluation of
electronic, process, or automation equipment; and (3) Information management -
the computer hardware and software, the programmable logic controller, sensors,
and final control devices responsible for the master control of a factory
process. Among INOTEK's major product lines are IBM industrial computers,
Action and OPTO 22 process instrumentation I/O, Fluke electronic test equipment
and Tektronix oscilloscopes.
INOTEK operates a technical services business which involves the repair and
calibration of customer-owned factory equipment. Technical services also are
provided for products manufactured in a semi-finished state (i.e. process
control/information management products) which require final configuration to
meet customer's specification. Many of these services are provided at an
additional charge to the customer.
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ITEM 1. BUSINESS (CONTINUED)
PATENTS AND TRADEMARKS
INOTEK believes that its corporate name and logo has significant recognition
throughout the industry and has registered it as a trademark.
MAJOR CUSTOMERS
INOTEK, through the purchase of Mill-Power Technologies in April 1990, has been
able to develop its marketing of service contracts on office and industrial
equipment. Pursuant to this acquisition, the Company has one major customer for
this service, Duke Energy Co. Sales to this customer for fiscal 1997 for
industrial equipment and service contracts were $3,045,941.
MARKETING
At May 31, 1997, INOTEK had a sales force of 39 employees marketing in 21
southern and midwestern states. INOTEK's success as a high profile
distributor/representative of medium-to-high technological products has been
made possible through the establishment and cultivation of relationships with
well known product vendors. Already well established in the southwest, INOTEK
expanded into the midwest through the purchase of Pacific Indicator Company in
August 1989; into the south and southeast in November 1989, through the
acquisition of the Sesco Division of Austin-based Quinstar, Inc. and in April
1990, into Virginia, and North and South Carolina through the acquisition of
Mill-Power Technologies, an affiliate of Charlotte-based Duke Power Company. In
addition, INOTEK publishes a catalogue that is distributed widely to current
and potential customers.
COMPETITION
Competition in the high-technology, product distribution/representative market
is based on product features, customer service, quality distribution channels,
technical sales force, and consumer brand preferences. INOTEK competes with a
large number of other distributors on primarily a local or regional basis.
There are few national competitors. The ability to handle a broad range of
products and services for those products has allowed INOTEK to compete in the
existing market. In the process control and test equipment product lines,
vendors and manufacturers are shifting their marketing direction to make
greater use of the high tech sales and service channel. This channel continues
to develop as manufacturers recognize the value that distributors with service
capabilities have to offer, both to themselves and to their end user.
EMPLOYEES
At May 31, 1997, INOTEK had 89 full time employees. INOTEK's employees are not
covered by collective bargaining agreements and management believes that its
employee relations are good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 24,000 square foot facility in Dallas, Texas at a base
rent of $5,775 per month or $69,300 per year. Management believes that this
facility, which houses the Company's corporate personnel and certain INOTEK
operations, sales, and service personnel, will be adequate for the foreseeable
future; however, the Company's future facilities requirements will depend upon
the success of the Company's business.
INOTEK also has branch offices in the following locations:
Houston, Texas Chicago, Illinois
Tulsa, Oklahoma Charlotte, North Carolina
ITEM 3. LEGAL PROCEEDINGS
None pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended May 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market in the
United States and is quoted on the National Association of Security Dealer's,
Inc. Automatic Quotation System (NASDAQ) Small Cap Market under the symbol
INTK. The following table sets forth the quarterly high and low prices reported
on the NASDAQ Small Cap Market for the years ended May 31, 1997 and 1996.
QUARTERLY STOCK PRICES
FISCAL YEARS ENDED MAY 31
1997 1996
------------------------------------------------------------
High Low High Low
------------------------------------------------------------
June - Aug 1-5/32 19/32 1-5/16 5/8
Sep - Nov 7/8 1/2 1-1/8 1/2
Dec - Feb 7/8 1/2 25/32 7/16
Mar - May 1-1/32 21/32 1-3/16 17/32
At August 18, 1997, 4,354,088 shares of the Company's Common Stock were issued
and outstanding to 982 holders of record.
DIVIDENDS
The Company has not declared cash dividends since inception and has no
intention to do so in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and notes thereto, and Item 7--"Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. The following selected financial data is not covered by the
"Report of Independent Certified Public Accountants" included elsewhere herein.
See Note 2 to the financial statements for information regarding business
acquisitions and divestitures.
Fiscal Year Ended May 31
(000's except per share data)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $ 24,758 $ 24,534 $ 24,892 $ 27,997 $ 25,738
Gross profit 7,099 6,761 6,570 8,278 8,002
Earnings (loss) from continuing operations
before income taxes, extraordinary credit
and cumulative effect of accounting change 917 345 (656) 525 229
Earnings (loss) from continuing operations
before extraordinary credit and cumulative
effect of accounting change 527 156 (468) 282 74
Net earnings (loss) 527 156 (66) 815 196
PER SHARE:
Earnings (loss) from continuing operations
before extraordinary credit and cumulative
effect of accounting change .12 .04 (.10) .06 .02
Net earnings (loss) .12 .04 (.01) .17 .04
BALANCE SHEET DATA:
Total assets 9,183 8,050 8,602 10,509 9,764
Long-term obligations (including redeemable
common stock) 60 -- 387 635 902
Shareholders' equity 6,068 5,541 5,385 5,456 4,652
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1997 VS. 1996
Sales increased by 1% to $24,757,619 in 1997 from $24,533,727 in 1996, due
primarily to higher service revenues from higher unit volume. Service revenues
increased by 5% to $2,815,111 in 1997 from $2,688,625 in 1996 while product
sales increased by less than 1% to $21,942,508 in 1997 from $21,845,102 in
1996. Gross margins from the Company's distribution operations increased from
25% to 26% from 1996 to 1997 while service gross margins declined from 47% to
46%.
Sales and marketing expenses decreased by 5% to $3,288,072 in 1997 from
$3,466,482 in 1996 due to lower compensation costs and greater cost controls.
General and administrative costs decreased by 2% to $2,866,477 in 1997 from
$2,915,663 in 1996 due primarily to the collection of insurance proceeds
totaling $175,000, net of related expenses of which $150,000 is included in
general and administrative expenses. The insurance recovery primarily
reimbursed expenses incurred prior to fiscal year 1997. In addition, certain
compensation expenses and other administrative expense increased slightly
during 1997. At each balance sheet date, the Company evaluates the
realizability of goodwill based on nondiscounted cash flows and operating
income. Based upon its most recent analysis, the Company believes that no
material impairment of goodwill exists at May 31, 1997.
Interest expense decreased from $33,815 in 1996 to $27,309 in 1997 due to lower
average borrowings during the year.
Tax expense amounted to $390,318 in 1997 as compared with tax expense of
$188,648 in 1996. The effective tax rates for 1997 and 1996 are 43% and 55%,
respectively. The lower effective tax rate in 1997 is due to the effect of
certain expenses, not deductible for income tax purposes, which were lower in
1997 as a percent of pretax income. The realization of deferred tax assets is
based on available taxable income during the carryback period.
1996 VS. 1995
Sales decreased 1% to $24,533,727 in 1996 from $24,891,783 in 1995, due
primarily to lower sales volumes experienced in the Company's distribution
operations. Service revenues increased by 14% to $2,688,625 in 1996 from
$2,366,221 in 1995 due to increased service and repair levels. Gross margins
from the distribution of process controls, instrumentation, factory automation
and test and measurement equipment remained steady at 25% while margins from
INOTEK's service operations improved from 39% in 1995 to 47% in 1996 due to
productivity improvements.
Sales and marketing expenses decreased 26% or $1,205,136 from 1995 to 1996 as a
result of an effort, beginning in December 1994, to reduce headcount while
maintaining support for customers and product lines. General and administrative
expenses increased 19% or $462,940 due to somewhat higher compensation costs.
Overall operating expenses decreased 10% from $7,124,341 in 1995 to $6,382,145
in 1996. At each balance sheet date, the Company evaluates the realizability of
goodwill based on nondiscounted cash flows and operating income. Based upon its
most recent analysis, the Company believes that no material impairment of
goodwill exists at May 31, 1996.
Interest expenses decreased from $101,166 in 1995 to $33,815 in 1996 due to
lower outstanding borrowings. Proceeds from the sale of the Company's Entronics
division in March 1995 were substantially used to reduce debt incurred under
INOTEK's revolving credit agreement.
Tax expense amounted to $188,648 in 1996 as compared with a benefit of $187,632
in 1995. The effective tax rates for 1996 and 1995 are 55% and 29%,
respectively. The higher effective tax rate in 1996 is due to the effect of
goodwill amortization and other expenses which are not deductible for income
tax purposes. The realization of deferred tax assets is based on available
taxable income during the carryback period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INFLATION
The impact of inflation or changing prices has not had a material economic
effect (other than normal industry trends) on past business operations or
projected future activity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash amounted to $376,145 and $460,855, at May 31, 1997 and 1996,
respectively. Cash provided by or used in operations during the years ended May
31, 1997, 1996, and 1995 amounted to $(33,873), $335,371, and $823,049,
respectively.
In September 1996, the Company renewed its agreement with Texas Commerce Bank
of Dallas to provide a one-year revolving credit facility of up to $3 million,
depending on the value of the borrowing base, as defined in the agreement.
Borrowings under the agreement bear interest at either a Eurodollar-based rate
plus 250 basis points or the bank's prime rate and are secured by the Company's
accounts receivable and inventory. The agreement includes certain covenants
specifying the maximum ratio of debt to tangible net worth and the minimum
tangible net worth that the Company must maintain. As of May 31, 1997, the
balance due under the revolving credit facility totaled $400,000 while the
maximum available borrowings amounted to $2,955,700.
During 1996, the Company elected to purchase all the remaining shares of the
Company's common stock held by a shareholder and former officer under an
agreement allowing the shareholder to resell the stock to the Company at a
price of $3.125 per share. The total cost of the transaction was $378,466 and
allowed the Company to avoid certain expenses which would have exceeded the
cost of funding the stock purchase. There are no other commitments on behalf of
the Company to acquire its stock.
On March 16, 1995, the Company sold its Entronics division for $958,302 as a
result of an unsolicited offer received from one of the division's largest
customers. Income from the Entronics division net of related taxes amounted to
$187,357 and $395,187 in 1995 and 1994, respectively and was estimated to
diminish further in future years. The divestiture allows the Company to focus
further on its core distribution operations. Cash proceeds from the sale were
used substantially to reduce borrowings under the Company's bank revolving
credit agreement.
In February 1991, two officer/shareholders agreed to make available to the
Company an unsecured, ten-year, standby line of credit of $500,000, available
on demand and renewable annually. During 1992, $94,000 was advanced to the
Company under the line of credit with an agreement to repay the amount over a
five-year period. In 1997, an additional $80,000 was advanced to the Company
under the line of credit with an agreement to repay the amount over a five-year
period. During 1997, $12,402 was repaid to the officer/shareholders leaving
$73,543 outstanding at May 31, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Other than that previously mentioned, the Company has not identified any matter
out of the normal course of operations that may have an impact on the Company's
future operations and has no material commitments of capital resources other
than normal business operations. Expenditures for working capital and property
and equipment should remain consistent with previous operating requirements and
with the size of a company in our industry.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting earnings
per share. The provisions of the statement are effective for fiscal years
ending after December 15, 1997. If the provisions of SFAS No. 128 had been
adopted in 1997 basic and diluted earnings per share would not have been
materially different from primary and fully diluted earnings per share,
respectively, as calculated in accordance with Accounting Principles Board
Opinion No. 15.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual financial statements
and requires that selected information be reported about the operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997.
FORWARD LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis are
forward-looking statements. The forward-looking statements are subject to risks
and uncertainties, including, but not limited to, competitive pressures,
inflation, currency exchange fluctuations, trade restrictions, changes in
freight and postal rates, capital market conditions and other risks indicated
in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page 10.
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INOTEK TECHNOLOGIES CORP.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants .......................................... 11
Financial Statements and Notes:
Balance Sheets as of May 31, 1997 and 1996 .............................................. 12
Statements of Operations for the Years Ended May 31, 1997, 1996, and 1995................ 13
Statements of Shareholders' Equity for the Years Ended May 31, 1997, 1996, and 1995 ..... 14
Statements of Cash Flows for the Years Ended May 31, 1997, 1996, and 1995 ............... 15
Notes to Financial Statements ........................................................... 16
Schedule II-Valuation and Qualifying Accounts................................................ 25
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
INOTEK Technologies Corp.
We have audited the accompanying balance sheets of INOTEK Technologies Corp. as
of May 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. 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 our audits
provide 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 INOTEK Technologies Corp. as
of May 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended May 31, 1997, in conformity
with generally accepted accounting principles.
We have also audited Schedule II of INOTEK Technologies Corp. for each of the
three years in the period ended May 31, 1997. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Dallas, Texas
July 25, 1997
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INOTEK TECHNOLOGIES CORP.
BALANCE SHEETS
MAY 31
1997 1996
------------ ------------
ASSETS
Current assets:
Cash $ 376,145 $ 460,855
Trade receivables, net of allowance for doubtful accounts
of $45,182 in 1997 and $77,809 in 1996 3,619,039 2,644,022
Inventories 2,178,744 2,002,231
Deferred tax asset 77,953 75,572
Prepaid income tax 13,660 --
Prepaid expenses and other assets 165,240 96,588
------------ ------------
Total current assets 6,430,781 5,279,268
Property and equipment, net 370,837 351,958
Goodwill, net of accumulated amortization of $518,417 in 1997
and $452,509 in 1996 2,123,534 2,189,442
Other assets 64,590 65,238
Deferred tax asset 193,395 164,538
------------ ------------
Total assets $ 9,183,137 $ 8,050,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 1,865,089 $ 1,423,116
Accrued expenses 776,153 669,126
Income taxes payable -- 110,777
Current portion of notes payable, including indebtedness
to shareholders of $13,833 in 1997 and $5,945 in 1996 413,833 305,945
------------ ------------
Total current liabilities 3,055,075 2,508,964
Notes payable to shareholders 59,710 --
Shareholders' equity:
Common shares, $.01 par value:
Authorized shares - 10,000,000
Issued shares - 4,354,088 in 1997 and 1996
Outstanding shares - 4,354,088 in 1997 and 1996 43,541 43,541
Additional paid-in capital 3,299,546 3,299,546
Retained earnings 2,725,265 2,198,393
------------ ------------
Total shareholders' equity 6,068,352 5,541,480
------------ ------------
Total liabilities and shareholders' equity $ 9,183,137 $ 8,050,444
============ ============
The accompanying notes are an integral
part of these financial statements.
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INOTEK TECHNOLOGIES CORP.
STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31
1997 1996 1995
------------ ------------ ------------
Net sales
Products $ 21,942,508 $ 21,845,102 $ 22,476,840
Services 2,815,111 2,688,625 2,366,221
Other -- -- 48,722
------------ ------------ ------------
24,757,619 24,533,727 24,891,783
Cost of sales
Products 16,144,730 16,343,500 16,878,393
Services 1,513,841 1,429,353 1,432,275
Other -- -- 11,171
------------ ------------ ------------
17,658,571 17,772,853 18,321,839
------------ ------------ ------------
Gross margin 7,099,048 6,760,874 6,569,944
Operating expenses
Sales and marketing 3,288,072 3,466,482 4,671,618
General and administrative 2,866,477 2,915,663 2,452,723
------------ ------------ ------------
6,154,549 6,382,145 7,124,341
------------ ------------ ------------
Operating income (loss) 944,499 378,729 (554,397)
Interest expense (27,309) (33,815) (101,166)
------------ ------------ ------------
Earnings (loss) from continuing operations
before income taxes 917,190 344,914 (655,563)
Income tax provision (benefit) 390,318 188,648 (187,632)
------------ ------------ ------------
Earnings (loss) from continuing operations 526,872 156,266 (467,931)
Discontinued operation
Income from discontinued operation
(less income taxes of $123,174) -- -- 187,357
Gain on sale of discontinued operation
(less income taxes of $141,768) -- -- 214,911
------------ ------------ ------------
Net earnings (loss) $ 526,872 $ 156,266 $ (65,663)
============ ============ ============
Per share:
Earnings (loss) from continuing operations $ .12 $ .04 $ (.10)
Discontinued operation -- -- .09
------------ ------------ ------------
Net earnings (loss) $ .12 $ .04 $ (.01)
============ ============ ============
The accompanying notes are an integral
part of these financial statements.
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INOTEK TECHNOLOGIES CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
Common Shares Additional Treasury Shares
------------------------- Paid-in Retained -------------------------
Shares Amount Capital Earnings Shares Amount Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1994 4,388,588 $ 43,886 $ 3,399,204 $ 2,107,790 (30,000) $ (94,469) $ 5,456,411
Stock options exercised 14,500 145 13,340 -- -- -- 13,485
Cancellation of treasury shares (30,000) (300) (94,169) -- 30,000 94,469 --
Acquisition of common shares (19,000) (190) (18,829) -- -- -- (19,019)
Net loss -- -- -- (65,663) -- -- (65,663)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1995 4,354,088 43,541 3,299,546 2,042,127 -- -- 5,385,214
Net earnings -- -- -- 156,266 -- -- 156,266
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1996 4,354,088 43,541 3,299,546 2,198,393 -- -- 5,541,480
Net earnings -- -- -- 526,872 -- -- 526,872
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1997 4,354,088 $ 43,541 $ 3,299,546 $ 2,725,265 -- $ -- $ 6,068,352
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral
part of this financial statement.
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INOTEK TECHNOLOGIES CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES
Net earnings (loss) $ 526,872 $ 156,266 $ (65,663)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Gain on sale of discontinued operation -- -- (356,679)
Depreciation and amortization 266,112 290,418 334,241
Deferred taxes (31,238) (28,110) (25,000)
Provision for losses on accounts receivable 67,890 55,101 --
Provision for inventory obsolescence 94,439 36,670 47,841
Net changes in operating assets and liabilities:
Trade receivables (1,042,907) (34,727) 421,570
Inventories (270,952) 245,505 348,718
Prepaid expenses and other assets (68,652) 18,805 (32,310)
Accounts payable 441,973 (451,644) 195,890
Income taxes payable (124,437) 105,562 (313,649)
Accrued expenses 107,027 (58,475) 57,766
Discontinued operation -- -- 210,324
------------ ------------ ------------
Net cash provided by (used in) operating activities (33,873) 335,371 823,049
INVESTING ACTIVITIES
Purchases of property and equipment (317,868) (87,755) (161,584)
Decrease (increase) in capitalized service inventory 98,785 (38,738) (74,164)
Change in other assets 648 (21,248) 20,290
Proceeds from asset sales -- -- 22,129
Proceeds from sale of discontinued operation -- -- 958,302
Investing activities of discontinued operation -- -- 40,832
------------ ------------ ------------
Net cash provided by (used in) investing activities (218,435) (147,741) 805,805
FINANCING ACTIVITIES
Increase (decrease) in bank borrowings 100,000 100,000 (1,507,767)
Exercise of stock options -- -- 13,485
Increase (reduction) in notes payable 67,598 (22,298) (42,791)
Purchase of treasury shares -- -- (19,019)
Purchase of redeemable common shares -- (381,276) (225,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 167,598 (303,574) (1,781,092)
------------ ------------ ------------
Decrease in cash (84,710) (115,944) (152,238)
Cash at beginning of year 460,855 576,799 729,037
------------ ------------ ------------
Cash at end of year $ 376,145 $ 460,855 $ 576,799
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 27,313 $ 28,737 $ 100,913
Income taxes $ 546,372 $ 111,178 $ 338,242
The accompanying notes are an integral
part of these financial statements.
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INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1997, 1996, AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
INOTEK Technologies Corp. (the Company) sells and services process
controls and instrumentation, information management products, and
test and measurement equipment. The Company's Entronics division,
which was sold in March, 1995, designs, manufactures, markets, and
repairs a line of Automatic Money Order Dispensers (AMODs).
Inventories
Inventories consist of finished goods and are valued at the lower of
average cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
on a straight-line basis over the estimated lives of the individual
assets, ranging from three to seven years.
Goodwill and Intangible Assets
The Company has classified as goodwill the cost in excess of fair
value of the net assets of acquired companies. Goodwill is being
amortized on a straight-line basis over 40 years. At each balance
sheet date, the Company evaluates the realizability of goodwill based
on non-discounted cash flows and operating income. Based upon its
most recent analysis, the Company believes that no material
impairment of goodwill exists at May 31, 1997. Noncompete agreements
and other intangible assets are being amortized on a straight-line
basis over the estimated lives of the individual assets, ranging from
one to seven years. Accumulated amortization of noncompete agreements
and other intangible assets was $665,398 at May 31, 1997 and 1996.
Revenue Recognition
Sales of products and services are recorded as products are shipped
or services are rendered. Revenue earned on systems engineering
contracts is reported using the percentage-of-completion method. The
percentage of completion is based primarily on contract costs
incurred to date as a percentage of the total estimated costs on an
individual contract. Where there is a change in the estimated cost to
complete a project, the Company recognizes the effect of the change
in the period in which it becomes known. Charges are made to
operations for any losses anticipated on individual contracts. Sales
to one customer, Duke Energy Co., totaled approximately $3,045,941,
$2,463,425, and $2,333,000 in 1997, 1996, and 1995, respectively.
16
17
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
Earnings (loss) per share are computed by dividing net earnings
(loss) by the weighted average number of shares of common stock
outstanding and, where the effect is dilutive, common stock
equivalents during the year. The weighted average number of shares of
common stock outstanding and dilutive common stock equivalents for
the years ended May 31, 1997, 1996 and 1995, were 4,543,121,
4,430,084, and 4,521,218, respectively.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which
is effective for financial statements issued after December 15, 1997.
Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption
of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
Concentrations of Credit Risk
The Company markets its products and services to a diverse group of
manufacturing companies. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral. Credit losses are provided for in the financial
statements.
The Company has cash deposits consisting primarily of demand deposits
and time deposits with various banks. These deposits have maturities
of less than three months and bear minimal risk. The Company has not
experienced any losses on its cash deposits.
Financial Instruments
The carrying amounts for cash, accounts receivable, and accounts
payable approximate fair value because of the short-term nature of
these financial instruments. The carrying amount reported for notes
payable approximates fair value because substantially all of the
instruments have variable interest rates which re-price frequently.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation" encourages, but does not
require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and provides the
required pro forma disclosures prescribed by SFAS 123.
17
18
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards Not Yet Adopted
In June, 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments in annual
financial statements and requires that selected information be
reported about the operating segments in interim financial reports
issued to the shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997.
2. DIVESTITURES AND ACQUISITIONS
On March 16, 1995, the Company sold its Entronics division for cash
proceeds of $958,302. The identifiable revenues and expenses related
to the Entronics division have been reclassified on the accompanying
statements of operations from their historical classification to
separately identify them as net results from discontinued operations.
Revenues of the Entronics division amounted to $809,113 in 1995.
During 1990, the Company acquired INOTEK Corporation (INOTEK), a
marketing and service company for instrumentation, process controls,
information management, and systems engineering for approximately
$3,000,000 in cash and common stock over a three-year period based
upon INOTEK's future performance. During 1994, 61,538 additional
shares of common stock valued at $50,000 were issued under the terms
of the purchase agreement and were accounted for as an adjustment to
the original purchase price. In addition, the purchase agreement
provided that all shares issued in the acquisition could be resold to
the Company at a price of $3.125 at a rate not to exceed 6,000 shares
per month through January 1, 1997. During 1996, the Company elected
to repurchase all remaining shares of stock subject to the repurchase
option for a total cost of $378,466.
3. PROPERTY AND EQUIPMENT
Property and equipment at May 31 consist of:
1997 1996
------------ ------------
Furniture and fixtures $ 800,186 $ 802,125
Service inventory 709,058 811,187
Machinery and equipment 977,136 675,223
Leasehold improvements 63,659 60,118
Vehicles 51,263 83,101
------------ ------------
2,601,302 2,431,754
Accumulated depreciation and amortization (2,230,465) (2,079,796)
------------ ------------
$ 370,837 $ 351,958
============ ============
4. ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996, include accrued
compensation costs of $376,572 and $312,476, respectively.
18
19
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Notes payable at May 31 consist of:
1997 1996
------------ ------------
Bank revolving credit agreement $ 400,000 $ 300,000
Notes payable to officer/shareholders 73,543 5,945
------------ ------------
473,543 305,945
Less current portion 413,833 305,945
------------ ------------
$ 59,710 $ -
============ ============
The bank revolving credit agreement provides for borrowings up to
$3,000,000, depending on the amount of the borrowing base, as defined
($2,955,700 maximum available borrowings at May 31, 1997), and bears
interest at the bank's prime rate (8.75% at May 31, 1997).
Alternatively, the Company may elect borrowings to bear interest at a
Eurodollar-based rate plus 250 basis points; however, no borrowings
are outstanding at May 31, 1997 at this rate. Borrowings are secured
by all accounts receivable and inventory. The revolving credit
agreement contains covenants specifying the maximum ratio of debt to
tangible net worth and the minimum tangible net worth that the
Company must maintain. The agreement expires on September 30, 1997.
The notes payable to officers/shareholders are subordinated to the
bank revolving credit agreement, bear interest at 9.25% annually, and
are payable in quarterly installments of $5,041 through October 2001.
The notes were drawn under an annually renewable ten-year standby
line of credit of $500,000, provided by the officers/shareholders.
During 1997, 1996, and 1995, the Company made payments under notes
payable to shareholders totaling $12,402, $22,298, and $20,103,
respectively.
6. LEASE COMMITMENTS
The Company leases office and manufacturing space and equipment under
various noncancelable lease agreements. Several of the space leases
contain options for renewal or early termination. Total rent expense
was $240,556, $315,719, and $322,089 for the years ended May 31,
1997, 1996 and 1995, respectively. As of May 31, 1997, the future
minimum rental payments are as follows:
Year ending May 31
------------------
1998 $ 273,597
1999 158,392
2000 106,973
2001 17,312
------------
$ 556,274
============
7. EMPLOYEE BENEFIT PLANS
In 1987, the Company established the INOTEK Technologies Corp. 401(k)
Savings Plan & Trust (the Plan) to provide eligible employees with a
retirement savings plan. On January 1, 1993, the Plan was amended to
allow employees to defer up to 15% of their compensation and provide
for a matching contribution by the Company of up to 3% of each
eligible employee's compensation. A vesting schedule was also adopted
providing for participant's vesting in Company contributions over
seven years with forfeitures allocated to remaining participants. All
employees are eligible to participate in the Plan upon completing six
months of service. The Company expensed $82,168, $80,852, and $75,312
for Plan contributions for the years ended May 31, 1997, 1996, and
1995, respectively.
19
20
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities as of May 31, 1997 and 1996 are as follows:
1997 1996
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 15,400 $ 26,000
Allowance for obsolete inventory 39,600 36,000
Property and equipment 257,300 213,000
Accrued expenses 29,400 13,000
Inventory 8,700 13,000
----------- ----------
Total deferred tax assets 350,400 301,000
Valuation allowance for deferred tax assets (67,652) (48,890)
----------- ----------
Net deferred tax assets 282,748 252,110
Deferred tax liabilities:
Prepaid insurance 11,400 12,000
----------- ----------
Total net deferred tax assets $ 271,348 $ 240,110
=========== ==========
Significant components of the provision for income taxes as of May 31
are as follows:
1997 1996 1995
------------ ------------ ------------
Current:
Federal $ 368,293 $ 188,683 $ (137,787)
State 53,263 28,075 (24,845)
------------ ------------ ------------
421,556 216,758 (162,632)
Deferred:
Federal (31,238) (28,110) (25,000)
------------ ------------ ------------
$ 390,318 $ 188,648 $ (187,632)
============ ============ ============
20
21
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The reconciliation of income tax at the U.S. federal statutory tax
rate to income tax expense (benefit) is as follows:
1997 1996 1995
---- ---- ----
Tax at U.S. statutory rates 34 % 34% (34)%
Amortization of goodwill 2 6 3
State income taxes, net of federal benefit 6 8 (3)
Stock repurchase - - 2
Nondeductible sales expense 3 7 -
Other (2) - 3
---- ---- ----
43% 55% (29)%
==== ==== ====
9. STOCK-BASED COMPENSATION PLANS
The Company adopted an Incentive/Nonqualified Stock Option Plan (the
1987 Plan) in June 1987 and the INOTEK Technologies Corp. Stock
Option Plan (the 1993 Plan) in October 1993 whereby the Company may
grant up to 100,000 and 200,000, respectively, qualified and
nonqualified incentive stock options to key employees, excluding
employees who own more than 10% of the Company's outstanding stock.
Options covering 19,750 shares of the Company's common stock granted
under the 1987 Plan had an initial exercise price of $.93 per share
and expire between 1999 and 2001. Options covering 96,000 shares of
the Company's common stock granted under the 1993 Plan vest over four
years, are exercisable over a ten year period from the date of
issuance, had an initial exercise price of $1.06 per share, and
expire between 2003 and 2005. At May 31, 1997, outstanding options
for 19,750 and 43,250 shares were exercisable under the 1987 and 1993
Plans, respectively.
In consideration of the standby letter of credit mentioned in Note 5,
the Company granted the two officers/shareholders warrants to
purchase common stock at an initial exercise price of $1 per share
for 250,000 shares each or a total of 500,000 shares. The warrants
expire on February 11, 2001.
The exercise price of all options and warrants approximates the fair
market value of the Company's common stock as of the date of grant.
In December 1995, the exercise price of all options under both plans
and warrants was reset to $.50 per share which represented the fair
market value at the time.
The Company has adopted only the disclosure provisions of SFAS 123.
The Company will continue to apply APB 25 and related interpretations
in accounting for its stock-based compensation plans. Had
compensation costs for the Company's 1996 stock grants for
stock-based compensation plans been determined consistent with SFAS
123, the Company's net earnings and net earnings per common share for
1997 and 1996 would approximate the pro forma amounts indicated
below:
1997 1996
---- ----
Net earnings
As reported $ 526,872 $ 156,266
Pro forma $ 520,403 $ 153,301
Earnings per common share
As reported $ .12 $ .04
Pro forma $ .12 $ .03
21
22
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future disclosures because they do not take into effect
pro forma compensation expense related to grants made before fiscal
1996. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants after 1995, expected
volatility of 120%, risk-free rate of 5.6%, and expected life of 7
years. The weighted average fair value of options granted during 1996
was $.45.
The following table summarizes activity under the Plans:
Weighted
Shares under average
option exercise price
------------ --------------
Balance at June 1, 1994 139,750 $ .50
Granted - -
Exercised (14,500) .50
Canceled (58,000) .50
------- -----
Balance at May 31, 1995 67,250 .50
Granted 57,500 .50
Exercised - -
Canceled (9,000) .50
------- -----
Balance at May 31, 1996 115,750 .50
Granted - -
Exercised - -
Canceled - -
------- -----
Balance at May 31, 1997 115,750 $ .50
======= =====
Exercisable at May 31:
Weighted
Shares under average
option exercise price
------------ --------------
1996 35,250 $ .50
1997 63,000 $ .50
The following information applies to options outstanding at May 31,
1997:
Weighted average Weighted
Number remaining contractual average
Exercise price outstanding life exercise price
-----------------------------------------------------------------------------------
$.50 115,750 6.9 years $ .50
22
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is set forth in
the Proxy Statement to be delivered to stockholders in connection with the
Company's Annual Meeting of Stockholders to be held on October 13, 1997
(the Proxy Statement) under the heading "Election of Directors," which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading
"Security Ownership of Management and Principal Stockholders," which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) AND (d) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedule are listed on the accompanying Index
of Financial Statements at Item 8 and are filed as part of this Annual
Report on Form 10-K.
(b) REPORTS ON FORM 8-K
There were no Form 8-K reports filed during the quarter ended May 31, 1997.
(c) EXHIBITS
Included as exhibits are the items listed in the Exhibit Index. The
Company will furnish a copy of any of the exhibits below upon payment of
$15.00 per exhibit to cover the costs to the Company of furnishing the
exhibit.
23
24
EXHIBIT
NUMBER EXHIBITS
------- --------
2.0 Plan and Agreement of Merger dated as of June 30, 1989 by and
between Entronics Inotek Acquisition Corporation and INOTEK
Corporation (Filed on 8-K dated June 30, 1989).*
2.1 Asset purchase agreement for Mill-Power Technologies and first
amendment (Filed on 8-K dated April 16, 1990).*
2.2 Second amendment to the asset purchase agreement for Mill-Power
Technologies.*
3.0 By-Laws of Entronics Inotek Acquisition Corporation.
(Filed on 8-K dated June 30, 1989).*
3.1 Amendment to Bylaws of Entronics Inotek Acquisition Corporation
for name change.*
3.2 Certificate of Ownership and Merger merging INOTEk Technologies Corp.
into Entronics Corporation.*
27.0 Financial Data Schedule
- --------------
* Previously filed
24
25
INOTEK TECHNOLOGIES CORP.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- --------- ---------- ---------
Allowance for doubtful accounts
1997 $ 77,809 $ 67,890 $ - $ 100,517 $ 45,182
1996 $ 25,770 $ 55,101 $ 57,097 $ 60,159 $ 77,809
1995 $ 56,714 $ - $ 21,400 $ 52,344 $ 25,770
Note: During 1997, 1996 and 1995, additions charged to other accounts consist
of certain reclassifications. Deductions consist of the write-off of
uncollectible accounts, net of recoveries.
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- --------- ---------- ---------
Allowance for inventory obsolescence
1997 $ 104,789 $ 94,439 $ - $ 82,642 $ 116,586
1996 $ 93,689 $ 36,670 $ - $ 25,570 $ 104,789
1995 $ 58,938 $ 47,841 $ - $ 13,090 $ 93,689
Note: Deductions consist of the write-off of inventory determined to be
obsolete.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INOTEK Technologies Corp.
(Registrant)
By: /s/ Neal E. Young
----------------------------------
Neal E. Young, August 28, 1997
(Chairman of the Board)
Pursuant to the requirements of the Securities and 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:
/s/ Wilson J. Prokosch
- ------------------------------------
Wilson J. Prokosch, August 28, 1997
(Director)
/s/ R. Lee Simpson
- ------------------------------------
R. Lee Simpson, August 28, 1997
(Chief Financial Officer)
/s/ Dennis W. Stone
- ------------------------------------
Dennis W. Stone, August 28, 1997
(Director, President)
/s/ David L. White
- ------------------------------------
David L. White, August 28, 1997
(Director, Chief Executive Officer)
/s/ Neal E. Young
- ------------------------------------
Neal E. Young, August 28, 1997
(Chairman of the Board)
26
27
EXHIBIT
NUMBER EXHIBIT INDEX
------- -------------
2.0 Plan and Agreement of Merger dated as of June 30, 1989 by and
between Entronics Inotek Acquisition Corporation and INOTEK
Corporation (Filed on 8-K dated June 30, 1989).*
2.1 Asset purchase agreement for Mill-Power Technologies and first
amendment (Filed on 8-K dated April 16, 1990).*
2.2 Second amendment to the asset purchase agreement for Mill-Power
Technologies.*
3.0 By-Laws of Entronics Inotek Acquisition Corporation.
(Filed on 8-K dated June 30, 1989).*
3.1 Amendment to Bylaws of Entronics Inotek Acquisition Corporation
for name change.*
3.2 Certificate of Ownership and Merger merging INOTEk Technologies Corp.
into Entronics Corporation.*
27.0 Financial Data Schedule
- --------------
* Previously filed