ITEM 2. PROPERTIES
Momentum's executive offices, which are leased, are located at Koll Center Bellevue, Suite 1900, 500 108th Avenue N.E. Bellevue, Washington 98004. Principal properties are summarized as follows:
Momentum believes that its facilities are well suited to its business needs and are adequate to accommodate its current business and expected growth for the next two years. It is not anticipated there will be any difficulty in acquiring and/or leasing additional facilities as and when needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Momentum is involved in various contractual, personal injury and general liability cases and claims which are considered normal to its business. In the opinion of Management, these claims, when finally concluded, will not have a material adverse impact on the consolidated financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the year.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Momentum is traded on the Over-The-Counter NASDAQ National Market System under the symbol: MMDI. The number of common shareholders of record as of March 24, 1994, was 1,502.
The prices below reflect closing prices for Momentum as reported by NASDAQ for the years ended December 31:
(Prices have been adjusted to reflect the three-for-one stock split in July, 1992)
No cash dividends have been declared since incorporation.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In September 1993, the Company sold its Textiles Group composed of VWR Textiles & Supplies Inc. and Momentum Textiles Inc. The financial statements have been restated to report the Textiles Group as discontinued operations. Accordingly, the following discussion and analysis is for the continuing operations.
Two subsequent events, when completed, will have a significant impact on the future of the Company, and accordingly, the applicability of the current results to future periods. As described under Part I, Item I, Business, the Company has signed two agreements in principle, one to buy the assets of T.K. Gray, Inc., a regional distributor of photographic and graphic arts supplies and equipment, with sales in excess of $40 million, and a second to combine with Phillips & Jacobs, Incorporated, a national distributor of photographic and graphic arts supplies and equipment, with sales in excess of $160 million. Due to the significance of these transactions, the analysis of 1993 and applicability of 1993 to subsequent periods may be of limited value.
COMPARISON OF 1993 TO 1992
Sales in 1993 were $116.8 million or 4% greater than 1992. Sales were hampered by an 8% decrease in sales on the west coast, which was strongly impacted by the weak California economy and a contraction in demand for reprographic and professional photographic products in the defense industry. Sales excluding the west coast locations increased by almost 9% for the year. This gain is primarily attributable to strong sales growth of electronic-prepress systems. The gross margin percentage decreased from 19.6% to 19.3%, primarily due to competitive price pressure and changes in product mix.
Selling and administrative expenses increased 8% between years. This increase, which was higher than the sales growth, was primarily due to increased sales and marketing expenses. During the year, the Company replaced the traditional sales structure with a team of sales and technical specialists, which will better meet customer requirements as the graphics industry goes through the current period of rapid technological changes. This restructuring resulted in increased fixed costs, but with an ongoing decrease in variable costs. Thus, in the future, as the Company's sales volume increases, the incremental sales and marketing expenses should increase at a slower rate.
In 1993, the Company incurred $2.4 million in restructure and other charges. One million was incurred for the restructure of the sales and marketing function as discussed above. These costs were primarily for employee severance and relocation costs. In addition, computer equipment of $.8 million was written-off as a result of the Company's decision to replace this equipment with new more efficient and cost effective equipment. The balance of the charge, $.6 million, represents salaries and benefits applicable to positions which have been eliminated as a result of the divestiture of the Textiles Group. Similar charges for 1992 amount to $.6 million for salaries and benefits applicable to positions which have been eliminated as a result of the divestiture of the Textiles Group. The full benefit of the restructure and other charges will not occur until 1994.
Interest expense decreased $144,000 or 26% in 1993. This decrease was primarily due to the repayment of the Company's revolving debt with the proceeds from the sales of the Textiles Group.
The effective tax rate for both 1993 and 1992 approximated the statutory federal rate of 34%.
COMPARISON OF 1992 TO 1991
Sales increased 15% in 1992 to $112 million. This growth was primarily the result of increased penetration in the market. The gross margin percentage remained constant between years at 19.6%.
Selling and administrative expenses increased 5%. Due to the significant sales growth and relationship of fixed to variable expenses selling and administrative expenses as a percent of sales decreased from 22.4% to 20.4%.
Interest expense decreased $131,000 or 19% in 1992. This decrease was primarily due to a reduction of interest rates charged under the revolving credit agreements.
Restructure and other charges of $.6 million in 1992 and 1991 represent salaries and benefits applicable to positions which have been eliminated as a result of the divestiture of the Textiles Group.
The effective tax rate for both years approximated the statutory federal rate of 34%.
FINANCIAL CONDITION AND LIQUIDITY
The Company had negative cash flow from operations of approximately $1.6 million in 1993 which was primarily due to an increase in income taxes receivable which will be recovered in 1994 as refunds.
Investing activities consisted of $17.1 million in cash proceeds from the sale of the discontinued operations offset by additions to property and equipment and other assets of $3.1 million.
Financing activities resulted in a net cash outflow of $7 million. This was primarily the result of using funds from the sales of the discontinued operations to pay off the outstanding balances under the Company's revolving credit agreements.
The Company's primary source of debt financing is two revolving credit agreements, with a total commitment of $17.5 million, subject to certain covenant restrictions. Both agreements expire in January, 1995. At December 31, 1993, there was no outstanding debt under these agreements.
At December 31, 1993, the Company had over $6 million in short-term investments. These funds combined with available bank financing and payments from outstanding notes receivable will be adequate to fund on-going operations and the expansion of these operations both internally and through acquisitions.
During inflationary times, the Company's prices generally rise in tandem with costs. Operating results partially provide for the effects of inflation by using LIFO inventory accounting, so that the cost of sales generally reflects the most recent cost of the inventory sold. Asset values are based upon historical costs that do not necessarily represent either replacement costs or result in charges to operations based on replacement costs; however, since the Company is not capital intensive, it is the Company's opinion that charging operations for replacement costs of long-lived assets would not significantly reduce income from operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MOMENTUM CORPORATION AND SUBSIDIARY Consolidated Statements of Operations
See Notes to Consolidated Financial Statements
MOMENTUM CORPORATION AND SUBSIDIARY Consolidated Balance Sheets
See Notes to Consolidated Financial Statements
MOMENTUM CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements
MOMENTUM CORPORATION AND SUBSIDIARY Consolidated Statements of Shareholders' Equity
See Notes to Consolidated Financial Statements
MOMENTUM CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The accompanying consolidated financial statements include the accounts of Momentum Corporation (the Company/Momentum) and its wholly owned subsidiary, Momentum Graphics Inc. Material intercompany balances and transactions have been eliminated.
DISCONTINUED OPERATIONS The consolidated financial statements for 1992 and prior have been restated to show the Textiles Group, VWR Textiles & Supplies Inc. and Momentum Textiles Inc., as discontinued operations. As further described in the following Notes to Consolidated Financial Statements, this group was sold in September, 1993.
CASH AND CASH EQUIVALENTS For purposes of the cash flow statement, the Company considers investments which have an original maturity of three months or less to be cash equivalents. In addition, the Company's cash management system operates so that a cash overdraft for uncleared checks exists in the disbursing account. To the extent the outstanding balance for uncleared checks exceeds the cash balances, the net balance is reported as a current liability on the balance sheet and is included as cash and cash equivalents on the cash flow statement.
SHORT-TERM INVESTMENTS The Company invests idle funds in short-term investments, with maturities of three months or less. The Company records these investments at cost which approximates market. All investments are in investment grade commercial paper.
CAPITALIZATION, DEPRECIATION AND AMORTIZATION Property and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method for financial reporting purposes and, generally, using accelerated methods for income tax purposes.
Capital leases are included under property and equipment with the corresponding amortization included in depreciation. The related financial obligations under the capital leases are included in long-term obligations.
INCOME (LOSS) PER SHARE Income (loss) per share is based on the weighted average number of shares and dilutive common share equivalents outstanding during the year. Common stock equivalents related to stock options have not been considered in computing the loss per share for 1991 as the effect is antidilutive. The weighted average number of shares outstanding were 3,629,089, 3,492,568, and 3,422,310 for the years ended December 31, 1993, 1992 and 1991, respectively. Shares outstanding include shares held by the Momentum Employee Stock Ownership Plan.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk, as defined by Financial Accounting Standards Board Statement No. 105, are primarily accounts receivable. Concentrations of credit risk with respect to the receivables are limited due to the large number of customers in the Company's customer base, and their dispersion across different industries and geographic areas. The Company maintains an allowance for losses based upon the expected collectibility of all accounts receivable.
RECLASSIFICATION Certain prior year amounts have been reclassified to conform with current year presentation.
INVENTORIES
Inventories consist primarily of purchased goods for sale. Substantially all of the Company's inventories are valued at lower of cost or market using the last-in, first-out (LIFO) method of accounting. Inventories at current costs exceed those reported under the LIFO method by approximately $2.2 million at December 31, 1993 and $2.4 million at December 31, 1992.
PROPERTY AND EQUIPMENT
Net property and equipment at December 31 consisted of:
LONG-TERM OBLIGATIONS AND REVOLVING CREDIT AGREEMENTS
The long-term obligations of the Company at December 31 consisted of:
Maturities of long-term obligations for each of the five years beginning January 1, 1994 are as follows:
The Company has two unsecured revolving credit agreements, with a total commitment of $17.5 million. Under the terms of these agreements, the Company can borrow under several options including rates tied to prime, certificate of deposit, and LIBOR. The approximate weighted average interest rates were 5.0%, 5.8% and 7.3% for 1993, 1992, and 1991, respectively. One of the revolving credit agreements provides for conversion of up to $5 million of the line into term loans with a maximum term period extending to March, 1997. Among other provisions, the revolving credit agreements include various limitations on working capital, tangible net worth, current ratio, debt to equity and cash flow to interest expense. Under the most restrictive of these terms, none of the Company's shareholders' equity would have been available for cash dividends in 1993.
Under the terms of a March, 1990 agreement with the Company's former parent company, VWR Corporation (VWR), VWR is obligated through February, 1995 to make available to the Company an unsecured subordinated revolving line of credit of approximately $5 million. At December 31, 1993, the Company had no outstanding debt under this agreement.
Under terms of its insurance policies and claims handling agreements, the Company is required to maintain certain standby letters of credit. At December 31, 1993 these totaled approximately $1,500,000.
INCOME TAXES
Income tax benefit for the years ended December 31 consisted of:
Reconciliation of the statutory Federal tax benefit to the actual tax benefit for the years ended December 31 consisted of:
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 deferred tax assets and liability at December 31, consisted of:
(Thousands of dollars) 1993 1992 - --------------------------------------------------------------------------------
PENSION AND OTHER EMPLOYEE BENEFITS
PENSION PLANS The Company has a defined benefit pension plan (the Plan/pension plan) covering substantially all employees. Pension benefits are based on years of credited service and highest five consecutive years average compensation. Contributions to the Plan are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA).
The Plan's funded status and the amounts recognized in the Company's consolidated balance sheet at December 31 were:
The assets of the Plan consist predominantly of undivided interests in several funds structured to duplicate the performance of various stock and bond indexes. The net pension asset is included in other current assets and other assets.
The assumptions used for computing the net pension asset were:
Net pension expense for the years ended December 31 included the following components:
Net pension expense includes pension expense applicable to discontinued operations of approximately $123,000, $88,000, and $117,000 for 1993, 1992, and 1991, respectively.
In calculating the net pension expense, an expected long-term rate of return on plan assets of 10% was used for 1993, 1992, and 1991.
The Company maintains a supplemental pension plan for certain senior officers. Expenses for this plan were $34,000, none, and $18,000 for 1993, 1992, and 1991, respectively.
RESTRICTED STOCK AWARDS Under the Company's 1989 Long-term Incentive Stock Plan, the Company provides for grants of restricted Company common stock to directors, officers and managers. The vesting periods on the stock range from two to four years. The fair market value of the stock at the date of grant establishes the compensation amount which is amortized to operations over the restricted period. During 1993, 107,190 shares were granted at a fair market value of $731,000. At December 31, 1993, the unamortized balance of the restricted stock awards was approximately $301,000, as shown in the shareholders' equity section of the consolidated balance sheets.
STOCK OPTIONS Under stock option plans (vesting over one to ten years), options have been granted to certain officers and managers to purchase common stock of the Company at its fair market value at the date of grant. Changes in options outstanding for the three years ended December 31, 1993 are:
Options exercisable at December 31, 1993, were 74,302.
Under the Company's 1989 Long-term Incentive Stock Plan, approximately 223,000 shares of the Company's common stock has been reserved for issuance under various stock option and award plans.
MOMENTUM MONEY-MAKER 401(K) RETIREMENT PLAN The Momentum Money-Maker 401(k) Retirement Plan (Money-Maker) is a voluntary savings plan available to all employees covered under the Company pension plan. Company matching contributions, if any, are determined by the Board of Directors based on the historical performance of the Company.
The Company's expense for the Money-Maker was approximately $35,000, $56,000 and $122,000 for 1993, 1992, and 1991, respectively.
MOMENTUM EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) The ESOP was established in 1990 as a means to provide employees with increased ownership in the Company. All full time employees with one year of service are eligible to participate. Total shares to be allocated to the employees for each year is determined by the Board of Directors based on the performance of the Company, with a minimum contribution each year of 30 shares to each employee.
The Company's expense for the ESOP, based on the shares allocated or to be allocated to the employees' accounts, was approximately $40,000, $37,000 and $47,000 in 1993, 1992, and 1991 respectively.
The ESOP held 103,591 unallocated shares of the Company's common stock at December 31, 1993, including 6,770 shares earned in 1993 but not allocated until 1994.
The ESOP acquired the Company's common stock by issuing a note to the Company. The balance of the note is shown as a reduction of shareholders' equity on the consolidated balance sheets. The repayment of the note and the accompanying interest is made by a contribution in the form of a forgiveness of the debt by the Company as the shares are allocated to the employees' accounts.
LEASES
The Company leases various facilities and equipment under non-cancellable lease arrangements. The major leases are for terms of three to ten years. Renewal and purchase options are available on certain of these leases. Future minimum lease payments as of December 31, 1993 under non-cancellable operating leases, having initial lease terms of more than one year are:
Rent expense, net of non-cancellable sublease rentals, was approximately $1.1, $1.6 and $1.6 million for 1993, 1992, and 1991, respectively.
RESTRUCTURE AND OTHER CHARGES
The Company incurred restructure and other charges of $2,382,000, $619,000 and $553,000 for 1993, 1992 and 1991, respectively. For 1993, the expense includes (a) $1 million for the restructuring of the sales and marketing function, which is composed predominantly of employee severance and relocation costs; (b) $800,000 for the write-off of computer hardware; and (c) $582,000 for employee salaries and benefits applicable to positions which have been eliminated as a result of the divestiture of the Textiles Group. For 1992 and 1991, the expense represents the portion of the salaries and benefits applicable to positions which have been eliminated as a result of the divestiture of the Textiles Group.
DISCONTINUED OPERATIONS
In September 1993, the Company sold its Textiles Group composed of VWR Textiles & Supplies Inc. and Momentum Textiles Inc. The net proceeds on the sales were $20.5 million, including $3.4 million in short-term notes receivable. The consolidated financial statements show the Textiles Group as discontinued operations.
Net sales of the Textiles Group were $60,511,000 for the period ended September 30, 1993 and $82,300,000 and $68,102,000 for the years 1992 and 1991, respectively. Interest expense, which included interest on debt assumed by the buyers and an allocation of interest on other debt based on the average net assets of the discontinued operations to the consolidated net assets, was $238,000, $356,000, and $198,000 for 1993, 1992, and 1991, respectively.
Income tax expense for discontinued operations was $841,000 for the period ended September 30, 1993 and $1,439,000 and $799,000 for the years 1992 and 1991, respectively. Income tax expense on the gain on the sales was $3,913,000.
SUBSEQUENT EVENTS
ACQUISITION On February 17, 1994, the Company signed an agreement in principle to acquire the assets of T.K. Gray, Inc. (Gray), a regional distributor of photographic and graphic arts supplies and equipment, for a purchase price in excess of $14 million, predominantly in cash. The acquisition, which is expected to be accounted for as a purchase, is subject to the execution of a definitive agreement, receipt of customary regulatory approval, and satisfactory completion of due diligence investigations. Completion of the acquisition is anticipated in April, 1994.
COMBINATION
On March 17, 1994, the Company signed an agreement in principle to form a new holding company and combine, in a tax-free reorganization, with Phillips & Jacobs, Incorporated (P&J), a national distributor of photographic and graphic arts supplies and equipment. P&J common stock is traded on the NASDAQ National Market System and is headquartered in Pennsauken, N.J.
Under the agreement, each share of outstanding P & J common stock will be exchanged for one share of the new company. Each share of Momentum common stock will be exchanged for .71 shares of the new company.
The combination is subject to the execution of a definitive agreement, the approval of the stockholders of both Momentum and P&J, satisfactory completion of due diligence investigations by both parties, receipt of customary regulatory approvals, and satisfaction of certain other standard conditions.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Income from discontinued operations for the third quarter of 1993 includes the gain on the sales of the discontinued operations of $6,146,000 ($1.69 per share).
(2) Due to changes in the outstanding shares during the year, the sum of the quarterly income (losses) per share for 1993 will not equal the loss per share for the year.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Momentum Corporation
We have audited the accompanying consolidated balance sheets of Momentum Corporation and subsidiary as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Momentum Corporation and subsidiary at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
BY (SIGNATURE) ERNST & YOUNG
Seattle, Washington March 8, 1994 (except for the subsequent event note regarding combination, as to which the date is March 17, 1994)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 1994, except information regarding executive officers which appears under Part I.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Registrants' definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 1994.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Registrants' definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 1994.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Registrants' definitive proxy statement to be filed with the Securities and Exchange Commission by April 30, 1994.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
(a)(1) Financial Statements
The following financial statements have been included as part of this report:
Form 10-K Page ---- Consolidated Statements of Operations 8 Consolidated Balance Sheets 9 Consodated Statements of Cash Flows 10 Consolidated Statements of Shareholders' Equity 11 Notes to Consolidated Financial Statements 12 Report of Independent Auditors 20
(2) Financial Statement Schedule (a) The following financial statement schedules are submitted herewith: -Schedule I Marketable Securities - Other Investments -Schedule VIII Valuation of Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K No Forms 8-K were filed for the Registrant during the fourth quarter covered by this report.
(c) Exhibits The required exhibits are included at the back of this Form 10-K and are described in the Exhibit Index immediately preceding the first exhibit.
MOMENTUM CORPORATION AND SUBSIDIARY
SCHEDULE I -- MARKETABLE SECURITIES
SCHEDULE VIII -- VALUATION OF QUALIFYING ACCOUNTS
(1) Uncollectible accounts written-off, net of recoveries
MOMENTUM CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOMENTUM CORPORATION AND SUBSIDIARY
Date March 29, 1994 BY (SIGNATURE) John H. Goddard, Jr. President Chief Executive Officer (principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the behalf of the registrant and in the capacities and on the dates indicated.
Date March 29, 1994 BY (SIGNATURE) Patsy R. Turnipseed Senior Vice President Chief Financial Officer (principal financial and accounting officer)
DIRECTORS Richard E. Engebrecht } John C. Dimmer } John H. Goddard } Jerrold B. Harris } Gary MacLeod } BY (SIGNATURE} Andrew V. Smith } Patsy R. Turnipseed William K. Street } Attorney in fact James H. Wiborg } Power of Attorney dated February 22, 1994
Date: March 29, 1994
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
* Management contracts and/or compensatory plans, contracts or arrangements in which a director and/or an executive officer participates.