U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission file number 0-10187
PRAB, INC.
(Name of Small Business Issuer in its charter)
Michigan 38-1654849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5944 E. Kilgore Road
P.O. Box 2121
Kalamazoo, Michigan 49003
(Address of principal executive offices) (Zip Code)
Issuer's telephone number,
including area code: (616) 382-8200
--------------------
Securities Registered under Section 12(b) of the Act
None
Securities Registered under Section 12(g) of the Act
Common Stock, $.10 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 ______
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for its most recent fiscal year were:
$15,389,060.
The aggregate market value of Common Stock held by persons not
"affiliated" with the issuer, based on the average bid and ask price of the
Common Stock as of December 31, 1996, was $1,720,236. For purposes of this
computation, all executive officers, directors and 5% shareholders of the
Company have been assumed to be affiliates. Certain of such persons may
disclaim that they are affiliates of the Company.
As of December 31, 1996, the registrant had outstanding 1,757,339
shares of Common Stock, $.10 Par Value.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts of Form 10-KSB Into Which
Identity of Document Document is Incorporated
- -------------------- -------------------------------
Definitive Proxy Statement with
Part III respect to the 1997 Annual
Meeting of Shareholders of the Company.
Transitional Small Business Disclosure Format:
Yes [ ] No [ X ]
<PAGE>
PART I
Item 1. Business
General
The Company is a Michigan corporation organized in 1961. The
Company's operations consist of two separate business segments: (1) the
"Conveyor Segment" designs and manufactures conveyors, metal scrap
reclamation systems and bulk material handling equipment; and (2) the "Robot
Segment" sells parts for Prab robots. The Company sells its products
worldwide through a network of factory sales engineers, manufacturers'
agents, and distributors. These products are used in a variety of
manufacturing processes to reduce labor costs, increase productivity, improve
quality and save materials and energy resources. The market for the Company's
hydraulic robot parts has been shrinking as robot users convert to electrical
robots and Management believes that this trend will continue. The Company is
focusing its efforts on its original core Conveyor Segment business. See Note
10 of Notes to Financial Statements under Item 7 for certain financial
information regarding the Company's two business segments.
Overview of Conveyor Segment
The Company designs and manufactures complete metal scrap reclamation
systems which it sells to die casting, metal stamping, general metal working,
and other industries. These systems reduce labor, manufacturing and
transportation costs associated with metal scrap disposal, reclaim cutting
fluids, and increase the value of metal scrap. The Company's scrap metal
reclamation systems are priced from $50,000 to $1,500,000 and range from a
single machine to a complex group of machines including conveyors, crushers,
centrifuges, and related equipment.
Reclamation systems are specifically designed for each customer and
in general are used to collect and transfer metal scrap, crush the scrap into
a more convenient chip size for handling, clean the scrap of fluids and other
impurities, and reclaim oil used as a machining coolant during the
manufacturing process.
The Company also designs and manufactures, to meet customer
specifications, for prices ranging from $3,000 to $100,000, stand-alone
conveyors for transporting aluminum, brass, cast iron and steel scrap. These
conveyors, include HarpoonTM, drag, tubular, oscillating, screw, hinged steel
belt, magnetic, and pneumatic models.
The Company also sells conveyors under the trade name of HapmanTM,
which are used primarily to transport bulk materials, such as powders and
chemicals.
These tubular, flexible screw (HelixTM) and pneumatic conveyors (also
known as "bulk material handling equipment") are used in the chemical,
pharmaceutical, food, plastics and other process industries and sell in the
price range of $2,000 to $100,000.
<PAGE>
Overview of Robot Segment
Prior to 1993, the Company manufactured and remanufactured a wide
range of hydraulically driven robots. The Company completed its withdrawal
from the UnimateTM robot business in the first quarter of fiscal year 1993.
The Company continues to sell parts for the Prab robot line only, but will no
longer manufacture a Prab robot.
In the future, the Company intends to focus its Robot Segment
business on selling existing inventory and supplying parts for its installed
base of robots sold under the Prab Robot name. The Company expects that its
Robot Segment business will not be significant in the future and will
disappear in the next few years.
Sales
The Company's businesses are not seasonal; however, fluctuations in
sales are common due to large system orders, which is typical of the capital
equipment industry. Foreign sales and license fees accounted for 6%, 6%, and
4% of the Company's net sales for fiscal years 1996, 1995 and 1994,
respectively. See Note 10 of Notes to Financial Statements under Item 7. The
Company's sales are not dependent on one or a few major customers.
Backlog
The Company's backlog of orders as of October 31, 1996 and October
31, 1995 is set forth below. The Company believes all backlog orders
outstanding as of October 31, 1996 will be filled within one year.
<TABLE>
<CAPTION>
Increase
As of As of (Decrease)
October 31, October 31, From 1995
1996 1995 to 1996
---------- ---------- ---------
<S> <C> <C> <C>
Conveyor Segment $3,156,000 $3,117,000 1%
Robot Segment $ 88,000 $ 35,000 251%
---------- ----------
Totals $3,244,000 $3,152,000 3%
========== ==========
</TABLE>
Marketing and Distribution
The Company maintains demonstration equipment in its factory
applications laboratory for the conveyor business segment.
The Conveyor Segment generates inquiries through advertising, trade
shows, trade releases, and customer referrals. The Company has discontinued
advertising and sales promotion activities for the Robot Segment. Sales of
all the Company's products are made by factory sales engineers, manufacturing
agents, distributors and licensees.
<PAGE>
Engineering and Design Development
The Company's engineering and design personnel are combined into a
single department that develops and modifies its products to meet the
customers' specifications. All of the Company's products require a certain
amount of custom engineering or design work. The Company does not engage in
substantial research and development activities.
Manufacturing
The Company fabricates and assembles the primary components of its
Conveyor Segment products. It purchases most of the components of its robot
products from outside sources and fabricates other components. The principal
materials used in all of the Company's products are bar and sheet metal,
castings, machined parts, electrical components, completed controls and
finished goods. All of these materials are readily available from a variety
of sources.
Warranty expense for the past three years has been approximately
$234,000, $357,000, and $497,000 for 1994, 1995 and 1996, respectively.
None of the Company's principal products require government approval
and compliance with governmental regulations is not a significant factor in
the Company's businesses. Except for the landfill matter described in Item 3
below, the costs and effects of compliance with environmental laws is not a
significant factor in the Company's businesses.
Patents and Trademarks
The Company owns numerous domestic and foreign patents and has
developed technology and special skills relating to metal scrap reclamation
systems, conveyors, and bulk material handling equipment. While the aggregate
protection afforded by these patents is of value, the Company does not
consider that the successful conduct of any material part of its businesses
is dependent upon such protection. The Company holds registered trademarks
for the names "Prab", "Hapman", "Harpoon", and "Helix".
Competition
The Company competes with many domestic and foreign firms, some of
which are large, diversified companies with financial, engineering, technical
and other resources greater than those of the Company. The Company's products
compete with similar products on the basis of price, design and quality.
Several large companies manufacture metal scrap reclamation systems and
conveyors and no reliable information is available as to the number of such
companies, the volume of their sales, or the total sales of any particular
product. However, the Company believes that it is one of the leading sellers
of large metal scrap reclamation systems.
The Company also believes it is a leading manufacturer of single unit
conveyors with its primary competitor being Mayfran International, a division
of Tomkins Industries, Inc. Competition for the Company's Hapman conveyor
products include a number of public and private companies.
<PAGE>
Employees
As of December 31, 1996, the Company employed 94 persons, 92 of which
persons were employed on a full-time basis. 44 of the employees are covered
by a collective bargaining agreement with the United Steelworkers of America,
AFL-CIO-CLC. The three-year contract with the Union expires on October 31,
1998.
Item 2. Properties
All of the Company's offices and manufacturing facilities are located
in Kalamazoo, Michigan, in a 72,000 square foot building.
The Company's facility has been used for conveyor manufacturing since
the early 1960's and robot manufacturing since 1969. The facility's office
space is more than adequate for the Company's present level of business, and
the manufacturing capacity is under-utilized with a full first shift
operation and a small second shift operation. The facility is in good
operating condition. The Company's bank holds a mortgage on the facility to
secure payment of the Company's obligations to it.
Item 3. Legal Proceedings
In December, 1992, litigation was commenced against the Company in
the United States District Court for the Western District of Michigan
entitled Charter Township of Oshtemo, City of Kalamazoo, Kalamazoo County,
and the Upjohn Company v. American Cyanamid Company et al.
The Company is one of 38 defendants in this action. The litigation arises out
of the Company's disposal of waste at a local landfill which has been
subsequently identified as a "superfund site".
A private party has taken responsibility for the remediation of the
landfill site and for collection of the remediation costs from several
hundred other potentially responsible persons. In July, 1992, the Plaintiffs
in this litigation and over 200 potentially responsible persons entered into
a consent decree (which was subsequently approved by the federal district
court), pursuant to which such potentially responsible parties contributed
various amounts for the remediation of the landfill site in exchange for a
release from further liability. The Company and the other defendants in this
litigation chose not to enter into the consent decree, and the purpose of
this litigation is to recover remediation costs for the landfill from such
defendants. The Complaint filed in this matter requests that the Company and
other defendants be found jointly and severally liable for all remediation
costs. If the Company had entered into the consent decree, it would have been
required to pay approximately $280,000. During November of 1993, the private
party revised the amount it is seeking in damages to approximately $162,000.
In 1996, the Company settled this litigation by payment of $88,767 to the
private party. The company has recorded as of October 31, 1996 $88,767 as an
expense from litigation settlement and in other accrued liabilities.
The Company is subject to other claims and lawsuits arising in the
ordinary course of business. In the opinion of management, all such pending
claims are either adequately covered by insurance or, if not insured, will
not have a material adverse effect on the Company.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The following table sets forth the range of high and low bid
information for the Company's two most recent fiscal years:
<TABLE>
<CAPTION>
1996
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Stock Price(bid)
High 1 3/4 1 3/4 1 5/8 1 3/4
Low 1 1/4 1 5/16 1 3/8 1 3/8
<CAPTION>
1995
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Stock Price(bid)
High 1 1/2 2 1/4 1 7/8 1 3/4
Low 3/4 1 1 1
</TABLE>
The Common Stock is reported in the "Pink Sheets" and is regularly
quoted by NASDAQ on its "over the counter bulletin board." The above bid
prices are quotations reflecting inter-dealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual
transactions. At December 31, 1996, there were approximately 1,132 record
holders of the Company's common stock.
The Company has paid no dividends on its Common Stock. The Board of
Directors does not intend to pay cash dividends in the foreseeable future.
The payment of dividends in the future will be dependent upon the financial
condition, capital requirements, earnings of the Company and such other
factors as the Board of Directors may deem relevant.
On Ocober 31, 1996, the Company sold 123,249 shares of the common
stock of the Company at a price of $.01 per share to nine individuals in a
private offering under exemptions provided by section 4(2) of the 1933
Securities Act and Rule 504 of the Securities and Exchange Commission. The
shares were issued upon the exercise of certain warrants, which warrants were
issued in conjunction with certain subordinated capital notes of the Company
issued to the nine
<PAGE>
individuals on October 31, 1996. No underwriters were utilized and no
commissions were paid regarding the sales of the Company's notes, warrants
and stock. The nine individuals are: Gary A. Herder, Robert Meyer, Robert
Klinge, Joseph Durlach, Eric V. Brown, Jr., William Blunt, David Blunt, John
Garside and Richard Leet.
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview of Recent Significant Events
The economy remained strong in fiscal 1996 allowing the Company to
increase sales by 11% and new order bookings by 5% when compared to 1995.
Operating profits in 1996 decreased by $19,000 resulting from higher cost of
sales and warranty expense, and adding employees to meet the increase in
sales.
In October 1996, the Company repurchased a significant portion of
stock owned by the State of Michigan. To finance the repurchase, Prab
borrowed $2,704,000 from a bank, $680,000 from unsecured lenders, and used
cash on hand. After this transaction, the State of Michigan's stock ownership
in the Company was reduced to 366,667 shares of convertible preferred stock.
Settlement was reached on the litigation entitled "Charter Township
of Oshtemo, City of Kalamazoo, Kalamazoo County, and the Upjohn Company V.
American Cyanamid Company et al." See Item 3 above.
1996 Compared to 1995
Net sales increased 11% in 1996 to $15,389,000 from $13,845,000 in
1995. Sales for the Conveyor Segment increased 12% as a result of increased
equipment and part sales. Sales for the Robot Segment decreased 32% primarily
from lower parts sales.
The Conveyor Segment business is highly competitive and very
sensitive to price. The increase in net sales in 1996 was primarily due to
increased sales of parts, screw conveyors, and tubular drag conveyors. The
actual sales fluctuation due to price is not known.
Cost of sales compared to net sales increased to 62% in 1996 from 61%
in 1995. Selling, general and administrative expenses were 30% of net sales
in 1996 and in 1995. Decreased interest expense resulted from the Company
being debt free for most of the fiscal year.
Trends
The current backlog of orders combined with the present strength of
the United States economy should allow sales for the Company to remain steady
for the first half of fiscal 1997. Sales should generally follow the national
economic trends in the second half.
Sales of bulk material handling parts and equipment in fiscal 1996
increased 48% above 1995 sales. While the Company may not be able to match
this level of growth in 1997, the Company will continue to aggressively
pursue additional business in the bulk material market in 1997.
<PAGE>
Sales for the Robot Segment will likely continue to decrease in 1997
as a result of customers' aging machines being replaced by new equipment. The
Company will continue to sell parts as long as it is profitable to do so.
The Company's business is not seasonal; however, monthly, quarterly
and annual fluctuations in sales are common due largely to the timing of the
receipt of large systems orders and the impact of scheduling requirements.
Liquidity and Financial Condition
The Company's primary cash requirements in 1996 were operating
expenses, capital expenditures, stock repurchase, and costs associated with
the repurchase of stock from the State of Michigan.
In fiscal 1996, the Company's operations provided $1,144,000 of cash
and the Company had working capital at the end of the year of $1,184,000
compared to $2,220,000 a year ago. The decrease resulted primarily from
financing required to repurchase stock from the State of Michigan. Accounts
receivable increased $355,000 which increased days sales outstanding to 61
days compared to 55 days a year ago. The increase resulted primarily from a
large job shipped October 1995 that required significant payments prior to
shipment which reduced accounts receivable for 1995. The current portion of
deferred income taxes decreased due to the effect of projected interest
expense on taxable income for fiscal 1997. Capital expenditures were down
from the prior year with $142,000 in 1996 versus $226,000 in 1995. Other
assets includes deferred income taxes that the Company estimates will offset
income tax in years after 1997.
The Company obtained significant financing in order to repurchase its
stock from the State of Michigan at the end of fiscal year 1996. The Company
incurred a $1,800,000 term loan with a bank which has been completely drawn
upon and borrowed $680,000 from unsecured lenders. The Company had $904,000
outstanding on a $1,670,000 line of credit at October 31, 1996, with the
balance of $766,000 available to the Company. The Company believes this
financing, combined with cash generated by operations in 1997, will provide
sufficient funds to finance working capital requirements, capital additions,
and debt repayments.
Summary
The Company's net income for 1997 will be impacted by the additional
interest expense on debt, however, earnings per share will be positively
impacted by fewer shares outstanding. Excess cash will be primarily used to
reduce long term debt. The Company's order backlog is higher going into the
first quarter than the previous year and should produce a profitable first
quarter.
<PAGE>
Item 7. Financial Statements
(a) The following Financial Statements are attached hereto in
response to Item 7:
Independent Auditor's Report - Plante & Moran
Consolidated Balance Sheets - October 31, 1996 and October 31,
1995
Consolidated Statement of Income - Two Years ended October 31,
1996
Consolidated Statement of Stockholders' Equity - Two Years
ended October 31, 1996
Consolidated Statement of Cash Flows - Two Years ended October
31, 1996.
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information under the caption "Election of Directors" contained
in the Company's Definitive Proxy Statement filed with the Commission, is
incorporated herein by reference.
Item 10. Executive Compensation
The information under the caption "Executive Compensation" (except
the information under the caption, "Certain Relationships and Related
Transactions"), contained in the Company's Definitive Proxy Statement filed
with the Commission, is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management", contained in the Company's Definitive
Proxy Statement filed with the Commission, is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The information under the caption "Certain Relationships and Related
Transactions", contained in the Company's Definitive Proxy Statement filed
with the Commission, is incorporated herein by reference.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached hereto:
Exhibit Description of Exhibit
Number
3(i) Second Restated Articles of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(ii) of the Company's
Form 8-A/A (Amendment No.1) dated May 25, 1995.
3(ii) By-Laws of the Company as amended incorporated herein by reference to
Exhibit 4 of the Company's Form 8-A/A (Amendment No.1) dated May 25,
1995.
4a $77,500 Subordinated Capital Note dated October 31, 1996 from the
Company to Gary A. Herder (except for varying principal amounts, the
terms of Mr. Herder's Subordinated Capital Note are identical to the
terms of all other Subordinated Capital Notes issued by the Company
in the aggregate principal amount of $680,000 on October 31, 1996)
incorporated herein by reference to Exhibit 4a of the Company's Form
8-K dated October 31, 1996.
4b $1,800,000 Commercial Term Note dated October 31, 1996 from the
Company to FMB-Arcadia Bank incorporated herein by reference to
Exhibit 4b of the Company's Form 8-K dated October 31, 1996.
4c Security Agreement with Addendum dated October 31, 1996 from the
Company to FMB-Arcadia Bank incorporated herein by reference to
Exhibit 4c of the Company's Form 8-K dated October 31, 1996.
4d Future Advance Mortgage dated October 30, 1992 from the Company to
FMB-Arcadia Bank (formerly known as Arcadia Bank), together with
Amendment to Mortgage dated October 31, 1996 incorporated herein by
reference to Exhibit 4d of the Company's Form 8-K dated October 31,
1996.
10a. Deferred Compensation and Salary Continuation Agreement between the
Company and Gary A. Herder dated September 13, 1976 incorporated by
reference to Exhibit 19b. of the Company's Form 10-K for the fiscal
year ended October 31, 1987.
10b. Prab Robots, Inc. 1988 Stock Option Plan incorporated by reference to
Exhibit "C" of the Company's Definitive Proxy Statement for the 1988
Annual Meeting.
10c. Registration Rights and Shareholders Agreement, dated October 30,
1992, between the Company and State Treasurer of the State of
Michigan, custodian for certain retirement systems incorporated
herein by reference to Exhibit 4e of the Company's Form 8-K dated
November 13, 1992, as amended by First Amendment to Registration
Rights and Shareholders Agreement dated October, 1994 incorporated
herein by reference to Exhibit 4c. 2 of the Company's Form 10-KSB for
the fiscal year ended October 31, 1994.
<PAGE>
21 List of Subsidiaries.
24a. Power of Attorney for William Blunt
24b. Power of Attorney for John Garside
24c. Power of Attorney for Eric V. Brown, Jr.
24d. Power of Attorney for James H. Haas
27 Financial Data Schedule
The Company will furnish copies of the above described Exhibits upon written
request and payment of a fee equal to $20.00 per request, plus $.20 per page
copied, plus postage. All requests for copies of Exhibits should be sent to:
Mr. Robert Klinge, Prab, Inc., 5944 E. Kilgore Road, P.O. Box 2121,
Kalamazoo, Michigan 49003.
On November 15, 1996, the Company filed a Form 8-K Current Report
dated October 31, 1996 reporting a change in control of the Company arising
from the Company's purchase of its stock from the State of Michigan.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PRAB, INC.
By: /s/ John J. Wallace
-------------------------
John J. Wallace,
Chairman of the Board
January 29, 1997
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ John J. Wallace Chairman of the January 29, 1997
- -------------------
John J. Wallace Board and Director
/s/ Gary A. Herder President, Principal January 29, 1997
- ----------------- Executive Officer
Gary A. Herder Principal Financial
Officer, and Director
- -------------------- Secretary and Director January 29, 1997
*Eric V. Brown, Jr.
- -------------------- Director January 29, 1997
*William Blunt
- -------------------- Director January 29, 1997
*James H. Haas
- -------------------- Director January 29, 1997
*John Garside
/s/ Robert W. Klinge Controller (Principal January 29, 1997
- --------------------
Robert W. Klinge Accountant)
*
By:/s/ John J. Wallace January 29, 1997
-------------------
John J. Wallace
Attorney-in-Fact
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report on Form 10-KSB
For the Year Ended October 31, 1996
------------
Financial Statements
Index to Exhibits
Exhibits
------------
PRAB,INC.
(A Michigan Corporation)
5944 E. Kilgore Road
P.O. Box 2121
Kalamazoo, Michigan 49003
<PAGE>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
OCTOBER 31, 1996
Independent Auditor's Report
To the Directors and Stockholders
Prab, Inc.
We have audited the accompanying consolidated balance sheet of Prab, Inc. and
subsidiary as of October 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended, as listed in the index at item 7(a). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits 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 Prab, Inc. and subsidiary at October 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Plante & Moran, LLP
PLANTE & MORAN, LLP
Kalamazoo, Michigan
December 5, 1996
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
OCTOBER 31
------------------------
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 491,367 $ 323,297
Accounts receivable, net of allowance for doubtful
accounts of $39,190 in 1996 and $39,000 in
1995 2,728,507 2,373,362
Inventories (Note 2) 1,143,456 1,134,356
Deferred income taxes (Note 8) 262,830 362,190
Other current assets (Note 15) 37,843 76,285
---------- ----------
Total current assets 4,664,003 4,269,490
PROPERTY, PLANT AND EQUIPMENT (Note 3) 930,721 961,299
OTHER ASSETS
Deferred charges, net of accumulated amortization
of $0 in 1996 (Note 1) 25,657 --
Deferred income taxes (Note 8) 316,535 --
Other assets 18,145 17,961
---------- ----------
Total other assets 360,337 17,961
---------- ----------
Total assets $5,955,061 $5,248,750
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
OCTOBER 31
---------------------
1996 1995
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable - Bank $ 904,000 $ --
Current portion of long-term debt 360,000 --
Accounts payable 988,435 980,067
Customer deposits 189,187 91,185
Salaries, wages and vacation 412,609 357,056
Commissions 316,133 283,222
Other accrued expenses (Note 14) 309,881 297,760
Income tax payable -- 25,190
Deferred revenue - Non-competition agreement -- 14,812
---------- ----------
Total current liabilities 3,480,245 2,049,292
LONG-TERM DEBT - RELATED PARTY (Note 4) 355,583 --
LONG-TERM DEBT (Note 4) 1,626,547 --
DEFERRED COMPENSATION (Note 6) 14,940 13,883
STOCKHOLDERS' EQUITY
Convertible preferred stock (Note 13) - $.75 par value:
Authorized 2,000,000 shares
Issued and outstanding 366,667 and 2,000,000 shares,
respectively 275,000 1,500,000
Non-convertible preferred stock (Note 13) -
$.50 par value:
Authorized 600,000 shares
Issued and outstanding 0 and 600,000 shares,
respectively -- 300,000
Common stock - $.10 par value:
Authorized 7,000,000 shares
Issued and outstanding 1,757,339
and 2,647,860 respectively 175,734 264,786
Additional paid-in capital (net of deficit of
$4,228,988 eliminated October 31, 1995) -- 1,120,789
Retained earnings (Note 1) 27,012 --
---------- ----------
Total stockholders' equity 477,746 3,185,575
---------- ----------
Total liabilities and stockholders' equity $5,955,061 $5,248,750
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
NET SALES $ 15,389,060 $ 13,845,432
COST OF SALES 9,543,374 8,422,388
------------ ------------
GROSS PROFIT 5,845,686 5,423,044
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,639,471 4,197,743
------------ ------------
OPERATING INCOME 1,206,215 1,225,301
OTHER INCOME (EXPENSES)
Interest expense (4,700) (83,332)
Interest income 14,793 23,865
Gain (loss) on sale of property, plant and equipment (147) 2,022
Non-competition agreement 14,812 120,000
Litigation settlement (Note 11) (63,767) --
------------ ------------
INCOME - Before income taxes 1,167,206 1,287,856
INCOME TAX (RECOVERY) (Note 8) (205,395) --
------------ ------------
NET INCOME $ 1,372,601 $ 1,287,856
============ ============
EARNINGS PER COMMON AND COMMON
SHARE EQUIVALENT
Primary $ .05 $ .27
============ ============
Fully diluted $ .05 $ .27
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED NON-CONVERTIBLE PREFERRED
STOCK STOCK
--------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE - October 31, 1994 2,000,000 $ 1,500,000 600,000 $ 300,000
7% non-convertible preferred stock
dividend (Note 13) -- -- -- --
Exercise of 45,000 common stock options
(Note 7) -- -- -- --
Net income -- -- -- --
Corporate recapitalization (Note 1) -- -- -- --
----------- ----------- ----------- ----------
BALANCE - October 31, 1995 2,000,000 1,500,000 600,000 300,000
7% non-convertible preferred stock, and
5% convertible preferred stock
dividends (Note 13) -- -- -- --
State of Michigan capital stock redemption (1,633,333) (1,225,000) (600,000) (300,000)
(Note 16)
Issuance of 123,249 common stock
warrants (Note 16) -- -- -- --
Stock redemption costs (Note 16) -- -- -- --
Exercise of 123,249 common stock
warrants (Note 16) -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- ----------
BALANCE - October 31, 1996 366,667 $ 275,000 -- $ --
=========== =========== =========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
----------------------- ADDITIONAL (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT) EQUITY
--------- --------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE - October 31, 1994 2,602,860 $ 260,286 $ 5,349,613 $(5,516,844) $ 1,893,055
7% non-convertible preferred stock
dividend (Note 13) -- -- (21,000) -- (21,000)
Exercise of 45,000 common stock
options (Note 7) 45,000 4,500 21,164 -- 25,664
Net income -- -- -- 1,287,856 1,287,856
Corporate recapitalization (Note 1) -- -- (4,228,988) 4,228,988 --
----------- ----------- ----------- ----------- ----------
BALANCE - October 31, 1995 2,647,860 264,786 1,120,789 -- 3,185,575
7% non-convertible preferred stock,
and 5% convertible preferred
stock dividends (Note 13) -- -- -- (96,000) (96,000)
State of Michigan capital stock
redemption (Note 16) (1,013,770) (101,377) (997,623) (1,249,589) (3,873,589)
Issuance of 123,249 common stock
warrants (Note 16) 123,249 12,325 125,545 -- 137,870
Stock redemption costs (Note 16) -- -- (249,943) -- (249,943)
Exercise of 123,249 common stock
warrants (Note 16) -- -- 1,232 -- 1,232
Net income -- -- -- 1,372,601 1,372,601
----------- ----------- ----------- ----------- -----------
BALANCE - October 31, 1996 1,757,339 $ 175,734 $ -- $ 27,012 $ 477,746
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,372,601 $ 1,287,856
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 173,456 221,562
Bad debt expense 15,649 19,714
(Gain) loss on sale of assets 147 (2,022)
Non-competition agreement (14,812) (120,000)
Deferred taxes (217,175) (25,190)
(Increase) decrease in assets:
Accounts receivable (370,794) (589,990)
Inventories (9,100) (244,513)
Other current and non-current assets 11,579 107,121
Increase (decrease) in liabilities:
Accounts payable 8,368 381,641
Customer deposits 98,002 64,798
Accrued expenses 100,585 211,361
Income taxes payable (25,190) 25,190
Deferred compensation 1,057 1,016
----------- -----------
Net cash provided by operating activities 1,144,373 1,338,544
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (142,099) (225,546)
Proceeds from note receivable -- 171,524
Proceeds from sale of equipment 96 2,022
----------- -----------
Net cash used in investing activities (142,003) (52,000)
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
YEAR ENDED OCTOBER 31
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt 904,000 --
Proceeds from long-term debt 2,342,130 (1,223,569)
Proceeds from issuance of subordinated debt with
common stock warrants:
Related parties 91,225 --
Other 47,877 --
Proceeds from exercise of common stock options -- 25,664
Payments for redemption of stock (4,123,532) --
Payment of dividends (96,000) (21,000)
----------- -----------
Net cash used in financing activities (834,300) (1,218,905)
----------- -----------
NET INCREASE IN CASH 168,070 67,639
CASH - Beginning of year 323,297 255,658
----------- -----------
CASH - End of year $ 491,367 $ 323,297
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company is engaged in the manufacturing of metal scrap
reclamation systems, and conveyor equipment. The Company is also
engaged in the manufacturing, service and sales of replacement
parts for robots and automation systems. Major customers are in
the metal working, chemical, pharmaceutical, and food processing
industries throughout the United States, Canada and Mexico.
Basis of Consolidation - Effective November 1, 1988, the Company
formed a wholly-owned subsidiary, Prab Limited, to conduct
certain of its operations. The subsidiary is essentially inactive
at the present time. The consolidated financial statements
include the accounts of Prab, Inc. and its subsidiary, after
elimination of all significant intercompany transactions and
accounts.
Inventories - Inventories are stated at the lower of cost or
market. Cost is determined by the last-in, first-out (LIFO)
method.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. Costs for maintenance and repairs are charged
to expense when incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the
assets.
Warranties - The Company's products are generally under warranty
against defects in material and workmanship for a period of one
year. The Company has established a reserve of $114,443 and
$110,432 at October 31, 1996 and 1995, respectively, for these
anticipated future warranty costs.
Net Income Per Common and Common Equivalent Share - Per share
amounts are based upon the weighted average number of common and
dilutive common equivalent shares outstanding during the
respective periods, as follows: 1996 - 4,719,630 and 4,725,291
for primary and fully diluted earnings per share, respectively;
1995 - 4,737,298 and 4,744,783 for primary and fully diluted
earnings per share, respectively. In 1996, the effect of assuming
the conversion of common equivalent shares to common stock was
anti-dilutive. Accordingly, the Company did not include the
conversion of these shares and used 2,645,427 as the weighted
average number of common shares outstanding for primary and fully
diluted earnings per share. For the year ended October 31, 1996,
net income available for common stockholders used in computing
earnings per share was determined by reducing net income by the
preferred stock dividends of $96,000, the premium paid for the
preferred stock redeemed (Note 16) which totaled $980,000, and
stock redemption costs allocated to the convertible and
non-convertible preferred stock redemption of $161,635.
For the year ended October 31 ,1995, net income was reduced by
the preferred stock dividend of $21,000 to calculate earnings per
share.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Charges - Deferred charges include $25,657 in costs for
the issuance of debt related to the redemption of stock on
October 31, 1996, which is discussed further in Note 16. These
costs will be amortized according to the effective interest
method over a period of 5 years. Amortization related to these
deferred charges totaled $0 for the
year ended October 31, 1996.
Deferred Revenue - Non-competition Agreement - On December 15,
1992, the Company entered into an agreement not to compete with a
competitor for a period of three years. The covenant was
amortized on the straight-line basis over thirty-six months.
Included in the determination of net income for the years ended
October 31, 1996 and 1995 is $14,812 and $120,000, respectively,
from amortization of the covenant.
Elimination of Deficit in Retained Earnings - On October 31, 1995
the Company eliminated the earnings deficit amount on its balance
sheet through a quasi-reorganization in accordance with the state
laws of Michigan. The capital surplus (additional paid-in
capital) was used to eliminate in its entirety a deficit of
$4,228,988 in the balance sheet under stockholders' equity.
Retained earnings shown on the balance sheet in future years
reflects earnings beginning November 1, 1995.
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 consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Raw materials $ 798,026 $ 892,152
Work in process 171,355 141,413
Finished goods and display units 174,075 100,791
----------- -----------
Total inventories $ 1,143,456 $1,134,356
=========== ===========
</TABLE>
Inventories are stated at the lower of cost, determined by the
LIFO method, or market.
If the FIFO method had been used for the entire consolidated
group, inventories, after an adjustment to the lower of cost or
market, would have been approximately $1,520,000 and $1,450,000
at October 31, 1996 and 1995, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Cost of property, plant and equipment and depreciable lives are
summarized as follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1996 1995 LIFE-YEARS
---------- ---------- ----------
<S> <C> <C> <C>
Land $ 28,939 $ 28,939 -
Buildings and improvements 1,665,007 1,655,350 10 - 30
Machinery and equipment 2,419,754 2,330,419 3 - 10
---------- ----------
Total cost 4,113,700 4,014,708
Accumulated depreciation 3,182,979 3,053,409
---------- ----------
Net carrying amount $ 930,721 $ 961,299
========== ==========
</TABLE>
Depreciation expense aggregated $172,434 and $158,359 at
October 31, 1996 and 1995, respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -------
<S> <C> <C>
Term note payable collateralized by essentially all assets of the
Company, bearing interest at the bank's prime rate plus .50%
(prime rate 8.25% at October 31, 1996), due in quarterly payments
of $90,000 plus interest from January 31, 1997 through October
31, 2001. $1,800,000 $ --
Subordinated notes payable to related parties, bearing interest
at 12%. As discussed in Note 16, these notes have been discounted
to recognize interest at an effective rate of 18%. Interest only
payments of $13,380 are due quarterly beginning January 31, 1997
through October 31, 2001 with the principal of $446,000 due on
October 31, 2001. The unamortized discount related to these notes
on October 31, 1996 totaled $90,417 355,583 --
Subordinated notes payable, bearing interest at 12%. As discussed
in Note 16, these notes have been discounted to recognize
interest at an effective rate of 18%. Interest only payments of
$7,020 are due quarterly beginning January 31, 1997 through
October 31, 2001 with the principal of $234,000 due on October
31, 2001. The unamortized discount related to these notes on
October 31, 1996 totaled $47,453. 186,547 --
---------- -------
Total 2,342,130 --
Less current portion 360,000 --
---------- -------
Long-term portion $1,982,130 $ --
========== =======
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 4 - LONG-TERM DEBT (Continued)
Minimum principal payments on long-term debt to maturity as of
October 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 360,000
1998 360,000
1999 360,000
2000 360,000
2001 902,130
----------
Total $2,342,130
==========
</TABLE>
Pursuant to the term note and notes payable - bank agreements,
the Company has agreed to maintain certain levels of current
assets and tangible net worth, and maintain minimum ratios of
current assets to current liabilities and debt to tangible net
worth. The Company has also agreed not to create, incur, assume,
or guarantee indebtedness, merge, sell or lease a substantial
part of the business, or make loans.
Included in interest expense are the following amounts
attributable to the related party: $0 in 1996 and $82,994 in
1995.
NOTE 5 - NOTE PAYABLE - BANK
At October 31, 1996, the Company has available a $1,670,000 line
of credit under a commercial revolving note, expiring March 1997,
bearing interest at the bank's prime rate of interest plus 1/2%
for an effective rate of 8.75% at October 31, 1996. Available
borrowings are based on a formula of eligible accounts receivable
and inventory.
The amount borrowed on the line of credit was $904,000 and $0 at
October 31, 1996 and 1995, respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 6 - PENSION AND PROFIT SHARING PLANS
As of October 31, 1996 and 1995, the Company is participating in
a defined benefit plan for their collective bargaining unit. The
following table sets forth the funded status of the Company's
defined benefit pension plan and amounts recognized in the
balance sheet at October 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation including vested benefits of
$647,936 and $592,292 in 1996 and
1995, respectively $ 719,906 $ 669,328
========= =========
Projected benefit obligation for service rendered
to date $(730,386) $(724,637)
Plan assets at fair value - Primarily non-
government obligations and listed stock 810,790 689,831
--------- ---------
Assets in excess of projected benefit obligation
(Projected benefit obligation in excess of
plan assets) 80,404 (34,806)
Unrecognized net gain from experience different
than that assumed or change in assumptions (131,229) (59,326)
Unrecognized prior service cost due to plan
amendment being amortized over 15 years 108,834 114,770
Unrecognized net obligation at November 1, 1987
being recognized over 15 years (24,100) (28,174)
--------- ---------
(Accrued) prepaid pension cost included
in current assets or (current liabilities) $ 33,909 $ (7,536)
========= =========
<CAPTION>
Pension expense included the following components:
1996 1995
--------- ---------
<S> <C> <C>
Service cost - Benefits earned during the year $ 17,440 $ 18,787
Interest cost on projected benefit obligation 47,384 43,103
Actual return on plan assets (58,965) (48,731)
Net amortization and deferral (1,946) 1,862
--------- ---------
Net pension expense $ 3,913 $ 15,021
========= =========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 6 - PENSION AND PROFIT SHARING PLANS (Continued)
The discount rate used in determining the actuarial present value
of the projected benefit obligation was 7% for 1996 and 1995. The
expected long-term rate of return on assets was 8% for 1996 and
1995.
The Company contributed $45,358 in 1995 and $50,234 in 1994 to
the pension plan for hourly employees covered by its collective
bargaining agreement. The Company's policy is to make annual
contributions as required by applicable regulations.
The Company's salaried employees profit sharing plan is a
combination defined contribution profit sharing and 401(k) plan.
The profit sharing plan covers substantially all employees of the
Company other than those covered by the collective bargaining
agreement. The profit sharing plan provides for an annual
contribution of not less than 5% of the Company's income before
income taxes, proceeds from life insurance policies and gain on
sale of capital assets. Contributions for the profit sharing plan
are used to buy Company stock. The stock under this plan is
allocated to salaried employees based on their pro-rata
compensation. Salaried employees vest in the shares of the
Company based on a 5 year schedule, 10% in year 1, 20% in year 2,
40% in year 3, 70% in year 4, and 100% in year 5. Contributions
made by the Company in accordance with the profit sharing plan
were approximately $66,000 in 1996 and 1995. Employer matching
contributions are made to the 401(k) plan in an amount equal to
25% of the lessor of: the amount designated by the employee for
withholding and contribution to the 401(k) plan; or 4% of the
employee's total compensation. In addition, the Company will make
a contribution equal to 1% of each eligible employee's
compensation who is employed on the last day of the plan year and
who performs 1,000 or more hours of service for the Company
during the plan year. The cost of this plan was $28,953 and
$26,089 in 1996 and 1995, respectively.
During the year ended October 31, 1993, the Company adopted a
union 401(k) plan. The plan covers all employees of the Company
covered by the collective bargaining agreement. Participation in
the 401(k) plan is optional. Employer matching contributions are
made to the 401(k) plan in an amount equal to 25% of the lessor
of: the amount designated by the employee for withholding and
contribution to the 401(k) plan; or 4% of employee's total
compensation. Contributions to the plan totaled $10,837 and
$10,135 for the years ended October 31, 1996 and 1995.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 6 - PENSION AND PROFIT SHARING PLANS (Continued)
The Company has entered into deferred compensation and salary
continuation agreements with a key employee calling for periodic
payments totaling $48,000 at retirement or death of the employee.
The normal retirement date occurs during 2012. The liability has
been recorded using the present value method.
NOTE 7 - STOCK OPTION PLAN
The Company maintains qualified and nonqualified stock option
plans that provide for granting of options on common stock by the
Board of Directors to officers and key employees. 227,500 shares
remain reserved for issuance under the plans.
Transactions involving the plans for years ended October 31, are
summarized as follows:
<TABLE>
<CAPTION>
OPTION SHARES
------------------
1996 1995
------- -------
<S> <C> <C>
OUTSTANDING - Beginning of year 207,500 282,500
Granted - -
Canceled - 30,000
Exercised (45,000 shares at $.5703) - 45,000
------- -------
OUTSTANDING - End of year 207,500 207,500
======= =======
ELIGIBLE, for exercise at end of year 207,500 207,500
======= =======
</TABLE>
Option prices for options outstanding at year-end were $.5703 -
$2.375 for 1996 and 1995.
The stock options are exercisable from the date issued and expire
on various dates through 2004. None of the options granted
involved compensation expense.
As discussed in Note 16, the option holders have agreed not to
exercise their options for a period of three years from October
31, 1996.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 8 - INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current expense $ 11,780 $ 25,190
Deferred benefit (217,175) (25,190)
--------- --------
Total tax provision (benefit) $(205,395) $ --
========= =========
</TABLE>
A reconciliation of income tax expense at the statutory rate to
income tax expense at the Company's effective rate is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Taxes computed at statutory rates $ 396,850 $ 437,871
Benefit of net operating loss carryforward (396,850) (437,871)
Benefit of change in valuation allowance (205,395) --
--------- ----------
Provision (recovery) for income taxes $(205,395) $ --
========= ==========
</TABLE>
The Company has a net operating loss carryforward of $5,020,440
which expires on various dates through fiscal year ended 2008.
Differences between book income and taxable income creating
deferred tax assets relate to temporary differences for
deductibility of reserves, payments of certain accruals, and net
operating losses. Differences between book income and taxable
income creating deferred tax liabilities relate to temporary
differences in deductibility of depreciation. In addition, the
Company has unused investment and research and development credit
carryovers approximating $62,000 (expiring at various dates from
1997 through 2001) which are available to reduce future federal
tax liabilities. A valuation allowance equal to the tax effect on
cumulative temporary differences, net operating losses and tax
credits of $1,400,763 has been used to reduce the deferred tax
benefit to $579,365, which is the amount of deferred tax benefit
reasonably expected to be recognized as of October 31, 1996.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 8 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Total deferred tax assets $ 2,037,128 $ 2,382,000
Total deferred tax liabilities (57,000) (56,000)
Effect of valuation allowance on realization
of temporary differences, tax credits,
and net operating losses (1,400,763) (1,963,810)
------------ ------------
Net deferred tax asset $ 579,365 $ 362,190
============ ============
</TABLE>
Under the Internal Revenue Code, a change in ownership in excess
of 50 percentage points limits or eliminates the right to use the
net operating loss carryforward as an offset to taxable income
and unused credit carryovers to reduce federal tax liabilities.
On October 30, 1992 and October 31, 1996, the Company undertook
restructuring transactions that involved a change in ownership.
While the Company believes it is not subject to any such
limitation as a result of these transactions, any additional
ownership change or an adverse decision by the Internal Revenue
Service regarding the restructuring could result in a limitation.
NOTE 9 - RELATED PARTY TRANSACTIONS
A director of the Company is affiliated in an "of counsel"
capacity with the law firm which has been general legal counsel
to the Company since 1961. The Company incurred legal fees of
$87,595 and $93,671 to the law firm in 1996 and 1995,
respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 10 - BUSINESS SEGMENTS
The Company has identified its two business segments as shown
below. Intersegment sales are insignificant.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------
1996 1995
------ --------
<S> <C> <C>
Net sales:
Conveyors and metal scrap reclamation systems $15,168 $ 13,520
Robots and automation systems 221 325
------- --------
Total net sales $15,389 $ 13,845
======= ========
Operating profit:
Robots and automation systems $ 126 $ 196
Conveyors and metal scrap reclamation systems 1,338 1,301
------- --------
1,464 1,497
General corporate expenses (322) (270)
Interest income (expense) - Net 10 (59)
Other income 15 120
------- --------
Income before income taxes $1,167 $ 1,288
======= ========
Identifiable assets:
Robots and automation systems $ 26 $ 58
Conveyors and metal scrap reclamation systems 4,832 4,411
------- --------
4,858 4,469
Corporate assets 1,097 780
------- --------
Total assets $5,955 $ 5,249
======= ========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 10 - BUSINESS SEGMENTS (Continued)
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
1996 1995
----- -----
<S> <C> <C>
Depreciation:
Robots and automation systems $ - $ 1
Conveyors and metal scrap reclamation systems 172 157
----- -----
Total depreciation $ 172 $ 158
===== =====
Capital expenditures:
Robots and automation systems $ - $ -
Conveyors and metal scrap reclamation systems 142 226
----- -----
Total capital expenditures $ 142 $ 226
===== =====
</TABLE>
Export sales, the majority of which were made in Canada and
Europe, were as follows for fiscal years ended October 31: 1996 -
$773,730; 1995 - $846,957.
NOTE 11 - LITIGATION SETTLEMENT
The Company has been involved in a legal action arising out of
its disposal of waste at a local landfill that has been
subsequently identified as a "superfund site". During 1996, the
Company settled this matter for a total of $88,767 which was paid
in November of 1996. Accordingly, this entire amount was accrued
at October 31 ,1996. Included in the determination of net income
is expense of $63,767 since $25,000 was already accrued and
expensed in a previous year related to this matter.
NOTE 12 - CASH FLOWS
Cash paid during the years ended October 31, 1996 and 1995 for
interest approximated interest expense. $36,879 and $400 were
paid for alternative minimum income taxes during the years ended
October 31, 1996 and 1995, respectively.
There were no significant noncash financing or investing
activities during 1996 and 1995.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 13 - PREFERRED STOCK
Convertible Preferred Stock
The convertible preferred stock is entitled to quarterly
dividends as follows:
<TABLE>
<S> <C> <C>
November 1, 1995 to October 31, 1996 5% per annum ($.0375 per share)
November 1, 1996 to October 31, 1997 6% per annum ($.0450 per share)
November 1, 1997 to October 31, 1998 7% per annum ($.0525 per share)
November 1, 1998 and thereafter 8% per annum ($.0600 per share)
</TABLE>
The Company has the option to pay the dividend in cash or common
stock. The Company's ability to pay cash dividends is subject to
Michigan statutes. If a dividend is paid in common stock, the
Company would have an obligation to register the stock.
The Company has the right to redeem the convertible preferred
stock at $.75 per share provided all of the non-convertible
preferred stock has been redeemed. Upon the Company's offer to
redeem the convertible preferred stock, the preferred stockholder
has the right to convert these shares to common. Additionally,
the holder of the convertible preferred stock has the right to
convert all, or any portion, of the convertible preferred stock
to common stock on a one to one ratio. After November 1, 1994,
the convertible preferred stockholder will have a 60 day period
after tender of a Company redemption payment to elect to convert
to common stock in lieu of redemption.
The convertible preferred stockholders are entitled to vote as a
class to elect one member of the Board of Directors of the
Company.
The convertible preferred stock has a liquidation priority over
common stock, but not over non-convertible preferred stock, of
$.75 per share plus any accrued but unpaid dividends.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 14 - OTHER ACCRUED EXPENSES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued warranty $114,443 $110,432
Accrued royalty 12,000 --
Accrued pension and profit sharing 45,555 85,961
Accrued property tax 2,660 2,505
Accrued settlement offer 88,767 25,000
Accrued insurance 654 22,412
Other accrued expenses 2,094 51,450
Accrued interest 932 --
State taxes payable 42,776 --
--------- ---------
Total $309,881 $297,760
========= =========
<CAPTION>
NOTE 15 - OTHER CURRENT ASSETS
1996 1995
--------- ---------
<S> <C> <C>
Deposits $ 762 $ 149
Prepaid workmen's compensation 9,919 5,221
Prepaid advertising 21,494 9,292
Other prepaid assets 5,668 5,786
State taxes refundable -- 55,837
--------- ---------
Total $ 37,843 $ 76,285
========= =========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 16 - STOCK REDEMPTION
On October 31, 1996, the Company redeemed certain common and
preferred shares from the State of Michigan Retirement Systems
(SMRS). Pursuant to this agreement, the Company redeemed
1,633,333 shares of convertible preferred stock for $1.35 per
share, 600,000 shares of non-convertible preferred stock for $.50
per share, and 1,013,770 of the Company's common stock for $1.35
per share.
As part of this transaction the Company entered into various
transactions and agreements as follows:
o The Company incurred a total of $249,943 in professional fees
to complete the stock redemption transaction and has
accordingly classified these costs as a reduction in equity.
Professional fees incurred include reimbursement of legal and
other professional fees to SMRS totaling $135,000 that were
incurred to complete the transaction.
o Incurred subordinated debt as discussed further in Note 4.
These notes carry a stated rate of interest of 12%. However,
as part of this agreement the Company issued warrants whereby
the noteholders could purchase 123,249 shares of Prab, Inc.
for $.01 a share. The Company allocated $137,870 of the note
proceeds to the warrants, which reflects management's
estimate that notes of this type would carry an effective
interest rate of 18%. As such, the subordinated notes carry a
total discount of $137,870 that will be amortized into
interest expense over the five year term of the notes, and
the Company has classified this discount as additional
paid-in capital which represents the purchase price of the
warrants. As of October 31 ,1996, the noteholders exercised
all the warrants under this agreement and the Company issued
123,249 shares of common stock accordingly.
o As discussed in Note 7, the option holders have agreed not to
exercise their options for a period of three years from the
effective date of the transaction.
o As part of this transaction, the Prab, Inc. Salaried Employee
Profit Sharing Plan purchased 52,897 shares directly from
SMRS at $1.35 per share for a total of $71,411. This
transaction had no impact on the Company's earnings or
stockholders' equity.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the fair value of the Company's financial
instruments and the methods and significant assumptions used to
estimate those values is as follows:
Short-term Financial Instruments - The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable and payable and certain accrued liabilities,
approximates their carrying amounts in the financial statements
due to the short maturity of such instruments.
Notes Payable and Long-term Debt - The fair value of the variable
rate term note payable and line of credit approximates their
carrying amount since the currently effective rates reflect
market rates. The fair value of fixed rate subordinated notes
payable approximates their carrying amount based on the Company's
estimated current incremental borrowing rate for similar
obligations with similar terms.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER Description of Exhibit
- ------ ----------------------
3(i) Second Restated Articles of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(ii) of the Company's
Form 8-A/A (Amendment No.1) dated May 25, 1995.
3(ii) By-Laws of the Company as amended incorporated herein by reference to
Exhibit 4 of the Company's Form 8-A/A (Amendment No.1) dated May 25,
1995.
4a $77,500 Subordinated Capital Note dated October 31, 1996 from the
Company to Gary A. Herder (except for varying principal amounts, the
terms of Mr. Herder's Subordinated Capital Note are identical to the
terms of all other Subordinated Capital Notes issued by the Company
in the aggregate principal amount of $680,000 on October 31, 1996)
incorporated herein by reference to Exhibit 4a of the Company's Form
8-K dated October 31, 1996.
4b $1,800,000 Commercial Term Note dated October 31, 1996 from the
Company to FMB-Arcadia Bank incorporated herein by reference to
Exhibit 4b of the Company's Form 8-K dated October 31, 1996.
4c Security Agreement with Addendum dated October 31, 1996 from the
Company to FMB-Arcadia Bank incorporated herein by reference to
Exhibit 4c of the Company's Form 8-K dated October 31, 1996.
4d Future Advance Mortgage dated October 30, 1992 from the Company to
FMB-Arcadia Bank (formerly known as Arcadia Bank), together with
Amendment to Mortgage dated October 31, 1996 incorporated herein by
reference to Exhibit 4d of the Company's Form 8-K dated October 31,
1996.
10a. Deferred Compensation and Salary Continuation Agreement between the
Company and Gary A. Herder dated September 13, 1976 incorporated by
reference to Exhibit 19b. of the Company's Form 10-K for the fiscal
year ended October 31, 1987.
10b. Prab Robots, Inc. 1988 Stock Option Plan incorporated by reference to
Exhibit "C" of the Company's Definitive Proxy Statement for the 1988
Annual Meeting.
10c. Registration Rights and Shareholders Agreement, dated October 30,
1992, between the Company and State Treasurer of the State of
Michigan, custodian for certain retirement systems incorporated
herein by reference to Exhibit 4e of the Company's Form 8-K dated
November 13, 1992, as amended by First Amendment to Registration
Rights and Shareholders Agreement dated October, 1994 incorporated
herein by reference to Exhibit 4c. 2 of the Company's Form 10-KSB for
the fiscal year ended October 31, 1994.
<PAGE>
21 List of Subsidiaries.
24a. Power of Attorney for William Blunt
24b. Power of Attorney for John Garside
24c. Power of Attorney for Eric V. Brown, Jr.
24d. Power of Attorney for James H. Haas
27 Financial Data Schedule
Exhibit 21
List of Subsidiaries
Prab Limited (f/k/a "Prab Robots International Ltd.") an English corporation,
which subsidiary does not hold any material assets and is inactive.
Exhibit 24a.
POWER OF ATTORNEY
The person signing below hereby designates John J. Wallace and Gary
Herder, or either of them, as his Attorney-in Fact with power to execute on
behalf of such person, in his capacity or capacities, as indicated below, the
Form 10-KSB, Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934, for Prab, Inc. for the year ended October 31, 1996, and
all amendments to such Form 10-KSB.
Dated: January 21, 1997 /s/William Blunt
------------------
William Blunt
Director
Exhibit 24b.
POWER OF ATTORNEY
The person signing below hereby designates John J. Wallace and Gary
Herder, or either of them, as his Attorney-in Fact with power to execute on
behalf of such person, in his capacity or capacities, as indicated below, the
Form 10-KSB, Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934, for Prab, Inc. for the year ended October 31, 1996, and
all amendments to such Form 10-KSB.
Dated: January 21, 1997 /s/John Garside
---------------
John Garside
Director
Exhibit 24c.
POWER OF ATTORNEY
The person signing below hereby designates John J. Wallace and Gary
Herder, or either of them, as his Attorney-in Fact with power to execute on
behalf of such person, in his capacity or capacities, as indicated below, the
Form 10-KSB, Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934, for Prab, Inc. for the year ended October 31, 1996, and
all amendments to such Form 10-KSB.
Dated: January 21, 1997 /s/Eric V. Brown, Jr.
---------------------
Eric V. Brown, Jr.
Director
Exhibit 24d.
POWER OF ATTORNEY
The person signing below hereby designates John J. Wallace and Gary
Herder, or either of them, as his Attorney-in Fact with power to execute on
behalf of such person, in his capacity or capacities, as indicated below, the
Form 10-KSB, Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934, for Prab, Inc. for the year ended October 31, 1996, and
all amendments to such Form 10-KSB.
Dated: January 21, 1997 /s/James H. Haas
-----------------
James H. Haas
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 491,367
<SECURITIES> 0
<RECEIVABLES> 2,728,507
<ALLOWANCES> 0
<INVENTORY> 1,143,456
<CURRENT-ASSETS> 4,664,003
<PP&E> 4,113,700
<DEPRECIATION> 3,182,979
<TOTAL-ASSETS> 5,955,061
<CURRENT-LIABILITIES> 3,480,245
<BONDS> 0
<COMMON> 175,734
0
275,000
<OTHER-SE> 27,012
<TOTAL-LIABILITY-AND-EQUITY> 5,955,061
<SALES> 15,389,060
<TOTAL-REVENUES> 15,389,060
<CGS> 9,543,374
<TOTAL-COSTS> 14,182,845
<OTHER-EXPENSES> 34,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,700
<INCOME-PRETAX> 1,167,206
<INCOME-TAX> (205,395)
<INCOME-CONTINUING> 1,372,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,372,601
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
