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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, 1998 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 17, 1998 was $989,287.
Shares of Common Stock outstanding at August 17, 1998 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 12, 1998 which will be filed with the Securities
and Exchange Commission on September 8, 1998----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 1998 for
industrial equipment and service contracts were $1,439,652.
MARKETING
At May 31, 1998, 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, 1998, INOTEK had 76 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
Kansas City, Missouri
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, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On June 8, 1998 the Company's Common Stock was delisted from the National
Association of Security Dealer's, Inc. Automatic Quotation System (NASDAQ) Small
Cap Market due to the inability of the stock to trade above the minimum bid
price of $1.00. As of June 9, 1998, the stock has been listed on the bulletin
board 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, 1998 and 1997.
QUARTERLY STOCK PRICES
FISCAL YEARS ENDED MAY 31
1998 1997
--------------------------------------------------------------
High Low High Low
--------------------------------------------------------------
June - Aug 1-5/16 25/32 1-5/32 19/32
Sep - Nov 1-9/32 25/32 7/8 1/2
Dec - Feb 1-1/16 11/16 7/8 1/2
Mar - May 1-7/32 15/32 1-1/32 21/32
At August 17, 1998, 4,354,088 shares of the Company's Common Stock were issued
and outstanding to 967 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.
Fiscal Year Ended May 31
(000's except per share data)
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $ 25,458 $ 24,758 $ 24,534 $ 24,892 $ 27,997
Gross profit 7,251 7,099 6,761 6,570 8,278
Earnings (loss) from continuing operations
before income taxes, extraordinary credit
and cumulative effect of accounting change 323 917 345 (656) 525
Earnings (loss) from continuing operations
before extraordinary credit and cumulative
effect of accounting change 177 527 156 (468) 282
Net earnings (loss) 177 527 156 (66) 815
Basic
Earnings (loss) from continuing operations
before extraordinary credit and cumulative
effect of accounting change .04 .12 .04 (.11) .06
Net earnings (loss) .04 .12 .04 (.02) .18
Diluted
Earnings (loss) from continuing operations
before extraordinary credit and cumulative
effect of accounting change .04 .12 .04 (.11) .06
Net earnings (loss) .04 .12 .03 (.02) .17
BALANCE SHEET DATA:
Total assets 8,753 9,183 8,050 8,602 10,509
Long-term obligations (including redeemable
common stock) -- 60 -- 387 635
Shareholders' equity 6,245 6,068 5,541 5,385 5,456
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 VS. 1997
Sales increased by 2.8% to $25,458,442 in 1998 from $24,757,619 in 1997, due
primarily to higher distribution revenues from higher unit volume. Product sales
increased 6.3% to $23,318,544 in 1998 from $21,942,508 in 1997 while service
revenues decreased by 24% to $2,139,898 in 1998 from $2,815,111 in 1997. We were
notified by Duke Energy that is was cancelling maintenance service on most
equipment under contract with INOTEK, effective March 1, 1998. The contract with
Duke Energy was implemented December 1, 1993 and is set to expire November 30,
1998. The reduction in the contract from March 1, 1998 through November 30, 1998
is approximately $700,000. Gross margins from the Company's distribution
operations increased slightly from 26.4% to 26.7% from 1997 to 1998. Gross
margins from the Company's service operations also increased slightly from 46.2%
in 1997 to 47.8% during 1998.
Sales and marketing expenses increased by 10.5% to $3,632,109 in 1998 from
$3,288,072 in 1997 due to higher compensation costs. General and administrative
costs increased by 14.2% to $3,272,724 in 1998 from $2,866,477 in 1997 due
primarily higher compensation cost in 1998 and the collection of insurance
proceeds totaling $175,000, net of related expenses of which $150,000 is
included in general and administrative expenses during 1997. The insurance
recovery primarily reimbursed expenses incurred prior to fiscal year 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 impairment of goodwill exists at
May 31, 1998.
Interest expense decreased from $27,309 in 1997 to $23,191 in 1998 due to lower
average borrowings during the year.
Tax expense amounted to $146,313 in 1998 as compared with tax expense of
$390,318 in 1997. The effective tax rates for 1998 and 1997 are 45% and 43%,
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.
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.
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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 $362,830 and $376,145, at May 31, 1998 and 1997,
respectively. Cash provided by or used in operations during the years ended May
31, 1998, 1996, and 1995 amounted to $629,443, ($33,873),and $335,371,
respectively.
In September 1997, 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, 1998, the
balance due under the revolving credit facility totaled $200,000 while the
maximum available borrowings amounted to $2,463,485.
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.
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 1998 the balance of the liability, $73,543, was repaid to the
officers/shareholders.
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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 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, 1998 and 1997 ............................................ 12
Statements of Earnings for the Years Ended May 31, 1998, 1997, and 1996 ............... 13
Statement of Shareholders' Equity for the Years Ended May 31, 1998, 1997, and 1996 .... 14
Statements of Cash Flows for the Years Ended May 31, 1998, 1997, and 1996 ............. 15
Notes to Financial Statements ......................................................... 16
Schedule II-Valuation and Qualifying Accounts ............................................. 26
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 and Shareholders
INOTEK Technologies Corp.
We have audited the accompanying balance sheets of INOTEK Technologies Corp. as
of May 31, 1998 and 1997, and the related statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended May 31,
1998. 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 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 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, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended May 31, 1998, 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, 1998. 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 31, 1998
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INOTEK TECHNOLOGIES CORP.
BALANCE SHEETS
MAY 31
1998 1997
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ASSETS
Current assets:
Cash $ 362,830 $ 376,145
Trade receivables, net of allowance for doubtful accounts
of $57,403 in 1998 and $45,182 in 1997 3,207,384 3,619,039
Inventories 2,131,155 2,178,744
Deferred tax asset 117,820 77,953
Prepaid expenses and other assets 133,138 178,900
- -------------------------------------------------------------------------------------------------------------------
Total current assets 5,952,327 6,430,781
Property and equipment, net 579,138 370,837
Goodwill, net of accumulated amortization of $584,328 in 1998
and $518,417 in 1997 2,057,623 2,123,534
Other assets 56,164 64,590
Deferred tax asset 108,101 193,395
===================================================================================================================
Total assets $ 8,753,353 $ 9,183,137
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 1,643,442 $ 1,865,089
Accrued expenses 664,774 776,153
Current portion of notes payable, including indebtedness
to shareholders of $13,833 in 1997 200,000 413,833
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,508,216 3,055,075
Notes payable to shareholders - 59,710
Shareholders' equity:
Common shares, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 4,354,088 43,541 43,541
Additional paid-in capital 3,299,546 3,299,546
Retained earnings 2,902,050 2,725,265
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,245,137 6,068,352
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,753,353 $ 9,183,137
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
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INOTEK TECHNOLOGIES CORP.
STATEMENTS OF EARNINGS
YEAR ENDED MAY 31
1998 1997 1996
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Net sales
Products $ 23,318,544 $ 21,942,508 $ 21,845,102
Services 2,139,898 2,815,111 2,688,625
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25,458,442 24,757,619 24,533,727
Cost of sales
Products 17,089,385 16,144,730 16,343,500
Services 1,117,935 1,513,841 1,429,353
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18,207,320 17,658,571 17,772,853
- -------------------------------------------------------------------------------------------------------------------
Gross margin 7,251,122 7,099,048 6,760,874
Operating expenses
Sales and marketing 3,632,109 3,288,072 3,466,482
General and administrative 3,272,724 2,866,477 2,915,663
- -------------------------------------------------------------------------------------------------------------------
6,904,833 6,154,549 6,382,145
- -------------------------------------------------------------------------------------------------------------------
Operating income 346,289 944,499 378,729
Interest expense (23,191) (27,309) (33,815)
- -------------------------------------------------------------------------------------------------------------------
Earnings from operations before income taxes 323,098 917,190 344,914
Income tax provision 146,313 390,318 188,648
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 176,785 $ 526,872 $ 156,266
===================================================================================================================
Basic earnings per common share $ .04 $ .12 $ .04
Diluted earnings per common share $ .04 $ .12 $ .03
===================================================================================================================
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
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
- -------------------------------------------------------------------------------------------------------------------
Balances at June 1, 1995 4,354,088 $43,541 $3,299,546 $2,042,127 $5,385,214
Net earnings - - - 156,266 156,266
- -------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1996 4,354,088 43,541 3,299,546 2,198,393 5,541,480
Net earnings - - - 526,872 526,872
- -------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1997 4,354,088 43,541 3,299,546 2,725,265 6,068,352
Net earnings - - - 176,785 176,785
- -------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1998 4,354,088 $43,541 $3,299,546 $2,902,050 $6,245,137
===================================================================================================================
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
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 176,785 $ 526,872 $ 156,266
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 235,251 266,112 290,418
Deferred taxes 45,427 (31,238) (28,110)
Provision for losses on accounts receivable 60,983 67,890 55,101
Provision for inventory obsolescence 74,783 94,439 36,670
Net changes in operating assets and liabilities:
Trade receivables 350,672 (1,042,907) (34,727)
Inventories (27,194) (270,952) 245,505
Prepaid expenses and other assets 92,591 (68,652) 18,805
Accounts payable-trade (221,647) 441,973 (451,644)
Income taxes payable (46,829) (124,437) 105,562
Accrued expenses (111,379) 107,027 (58,475)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 629,443 (33,873) 335,371
INVESTING ACTIVITIES
Purchases of property and equipment (352,909) (317,868) (87,755)
Decrease (increase) in capitalized service inventory (24,733) 98,785 (38,738)
Change in other assets 8,427 648 (21,248)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (369,215) (218,435) (147,741)
FINANCING ACTIVITIES
Increase (decrease) in bank borrowings (200,000) 100,000 100,000
Increase (reduction) in notes payable (73,543) 67,598 (22,298)
Purchase of redeemable common shares - - (381,276)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (273,543) 167,598 (303,574)
- -------------------------------------------------------------------------------------------------------------------
Decrease in cash (13,315) (84,710) (115,944)
Cash at beginning of year 376,145 460,855 576,799
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 362,830 $ 376,145 $ 460,855
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 25,045 $ 27,313 $ 28,737
Income taxes $ 97,583 $ 546,372 $ 111,178
The accompanying notes are an integral part of these financial statements.
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INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998, 1997, AND 1996
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.
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 estimated future cash flows. Based upon its most
recent analysis, the Company believes that no impairment of goodwill
exists at May 31, 1998. 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.
Revenue Recognition
Sales of products and services are recorded as products are shipped or
services are rendered. Sales to one customer, Duke Energy Co., totaled
approximately $1,439,652, $3,045,941, and $2,463,425 in 1998, 1997,
and 1996, respectively.
Earnings per Share
For the year ended May 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share". Under SFAS 128, basic earnings per common share is based upon
the weighted average number of shares of common stock outstanding.
Diluted earnings per share is based upon the weighted average number
of common shares outstanding plus the number of additional common
shares that would have been outstanding if dilutive potential common
shares had been issued. Earnings per share data for all periods has
been restated to conform to the provisions of SFAS 128.
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.
16
17
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 provide the
pro forma disclosures prescribed by SFAS 123.
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. The Company has not determined the effect on its
financial statements of SFAS 131.
17
18
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
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:
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Furniture and fixtures $ 795,770 $ 800,186
Service inventory 458,901 709,058
Machinery and equipment 1,313,052 977,136
Leasehold improvements 85,067 63,659
Vehicles 51,263 51,263
- -------------------------------------------------------------------------------------------------------------------
2,704,053 2,601,302
Accumulated depreciation and amortization (2,124,915) (2,230,465)
- -------------------------------------------------------------------------------------------------------------------
$ 579,138 $ 370,837
===================================================================================================================
4. ACCRUED EXPENSES
Accrued expenses at May 31, 1998 and 1997, include accrued
compensation costs of $461,583 and $376,572, respectively.
5. NOTES PAYABLE
Notes payable at May 31 consist of:
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Bank revolving credit agreement $ 200,000 $ 400,000
Notes payable to officer/shareholders - 73,543
- -------------------------------------------------------------------------------------------------------------------
200,000 473,543
Less current portion 200,000 413,833
- -------------------------------------------------------------------------------------------------------------------
$ - $ 59,710
===================================================================================================================
18
19
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
The bank revolving credit agreement provides for borrowings up to
$3,000,000, depending on the amount of the borrowing base, as defined
($2,463,485 maximum available borrowings at May 31, 1998), and bears
interest at the bank's prime rate (8.50% at May 31, 1998).
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, 1998 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, 1998.
The notes payable to officers/shareholders were paid in full on
January 29, 1998.
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 $290,309, $240,556, and $315,719 for the years ended May 31, 1998,
1997 and 1996, respectively. As of May 31, 1998, the future minimum
rental payments are as follows:
Year ending May 31
------------------
1999 $ 241,702
2000 218,746
2001 151,807
2002 139,125
Thereafter 131,769
-----------------------------------------------------
$ 883,149
=====================================================
7. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic
earnings per common share and diluted earnings per common share is as
follows:
Per-share
Year ended May 31, 1998 Income Shares amount
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per common share
Net earnings $ 176,785 4,354,088 $.04
Effective of dilutive securities
Stock options 31,893
Warrants 202,492
---------
Diluted earnings per common share $ 176,785 4,588,473 $.04
============ ========= ====
19
20
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE (CONTINUED)
Per-share
Year ended May 31, 1997 Income Shares amount
-------------------------------------------------------------------------------------------------------
Basic earnings per common share
Net earnings $ 526,872 4,354,088 $.12
Effective of dilutive securities
Stock options 37,280
Warrants 161,036
---------
Diluted earnings per common share $ 526,872 4,552,404 $.12
============ ========= ====
Per-share
Year ended May 31, 1996 Income Shares amount
-------------------------------------------------------------------------------------------------------
Basic earnings per common share
Net earnings $ 156,266 4,354,088 $.04
Effective of dilutive securities
Stock options 30,697
Warrants 183,105
---------
Diluted earnings per common share $ 156,266 4,567,890 $.03
============ ========= ====
8. 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 $88,496, $82,168, and $80,852
for Plan contributions for the years ended May 31, 1998, 1997, and
1996, respectively.
20
21
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. 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, 1998 and 1997 are as follows:
1998 1997 1996
--------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 21,239 $ 15,400 $ 26,000
Allowance for obsolete inventory 55,559 39,600 36,000
Property and equipment 158,101 257,300 213,000
Accrued expenses 41,902 29,400 13,000
Inventory 10,498 8,700 13,000
--------------------------------------------------------------------------------------------------------
Total deferred tax assets 287,299 350,400 301,000
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid insurance 11,378 11,400 12,000
Other 50,000 67,652 48,890
--------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 61,378 79,052 60,890
--------------------------------------------------------------------------------------------------------
Total net deferred tax assets $ 225,921 $ 271,348 $ 240,110
========================================================================================================
Significant components of the provision for income taxes as of May 31
are as follows:
1998 1997 1996
----------------------------------------------------------------------------------------------------------
Current:
Federal $ 86,264 $ 368,293 $ 188,683
State 14,622 53,263 28,075
----------------------------------------------------------------------------------------------------------
100,886 421,556 216,758
Deferred:
Federal 45,427 (31,238) (28,110)
--------------------------------------------------------------------------------------------------------
$ 146,313 $ 390,318 $ 188,648
=========================================================================================================
The reconciliation of income tax at the U.S. federal statutory tax
rate to income tax expense (benefit) is as follows:
1998 1997 1996
---------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rates 34 % 34 % 34 %
Amortization of goodwill 7 2 6
State income taxes, net of federal benefit 3 6 8
Nondeductible sales expenses 10 3 7
Other (9) (2) -
---------------------------------------------------------------------------------------------------------
45 % 43 % 55 %
=========================================================================================================
21
22
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. 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 qualified and nonqualified incentive stock
options, respectively, to key employees, excluding employees who own
more than 10% of the Company's outstanding stock. Options covering
17,250 shares of the Company's common stock granted under the 1987
Plan had an exercise price of $.93 per share and expire between 1999
and 2001. Options covering 61,500 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,
1998, outstanding options for 17,250 and 45,000 shares were
exercisable under the 1987 and 1993 Plans, respectively.
The Company granted 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 stock-based compensation plans been determined consistent
with SFAS 123, the Company's net earnings and net earnings per common
share for 1998, 1997 and 1996 would approximate the pro forma amounts
indicated below:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Net earnings
As reported $ 176,785 $ 526,872 $ 156,266
Pro forma $ 173,116 $ 520,403 $ 153,301
Basic earnings per common share
As reported $ .04 $ .12 $ .04
Pro forma $ .04 $ .12 $ .04
Diluted earnings per common share
As reported $ .04 $ .12 $ .03
Pro forma $ .04 $ .11 $ .03
22
23
INOTEK TECHNOLOGIES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. 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 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
Granted - -
Exercised - -
Canceled (37,000) .50
-----------------------------------------------------------------------------------
Balance at May 31, 1998 78,750 $ .50
Exercisable at May 31:
Weighted
Shares under average
option exercise price
-----------------------------------------------------------------------------------
1996 35,250 $ .50
1997 63,000 $ .50
1998 62,250 $ .50
The following information applies to options at May 31, 1998:
Weighted average Weighted
Number remaining average
Exercise price outstanding contractual life exercise price
-----------------------------------------------------------------------------------
Outstanding $ .50 78,750 5.9 years $ .50
Exercisable $ .50 62,250 5.9 years $ .50
23
24
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, 1998.
(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.
24
25
INDEX TO EXHIBITS
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 Financial Data Schedule
25
26
INOTEK TECHNOLOGIES CORP.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1998, 1997, AND 1996
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
1998 $ 45,182 $ 47,687 $ - $ 35,466 $ 57,403
1997 $ 77,809 $ 67,890 $ - $ 100,517 $ 45,182
1996 $ 25,770 $ 55,101 $ 57,097 $ 60,159 $ 77,809
Note: During 1998, 1997 and 1996, additions charged to other accounts
consist of certain reclassifications. Deductions consist of the
write-off of uncollectible accounts, net of recoveries.
Allowance for inventory obsolescence
1998 $ 116,586 $ 29,783 $ 29,836 $ 33,726 $ 142,479
1997 $ 104,789 $ 94,439 $ - $ 82,642 $ 116,586
1996 $ 93,689 $ 36,670 $ - $ 25,570 $ 104,789
Note: Deductions consist of the write-off of inventory determined to be
obsolete.
26
27
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, 1998
(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, 1998
(Director)
/s/ DENNIS W. STONE
- -----------------------------------------
Dennis W. Stone, August 28, 1998
(Director, President)
/s/ DAVID L. WHITE
- -----------------------------------------
David L. White, August 28, 1998
(Director, Chief Executive Officer)
/s/ SUSAN I. WILLIAMSON
- -----------------------------------------
Susan I. Williamson, August 28, 1998
(Controller/Treasurer)
/s/ NEAL E. YOUNG
- -----------------------------------------
Neal E. Young, August 28, 1998
(Chairman of the Board)
27
28
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
27 FINANCIAL DATA SCHEDULE