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, 1997
[ ] 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 (Zip Code)
executive offices)
Issuer's telephone number: (616) 382-8200
--------------------
Securities Registered under Section 12(b) of the Exchange Act
None
Securities Registered under Section 12(g) of the Exchange 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: $16,914,611.
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, 1997, was $4,001,520. 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.
<PAGE>
As of December 31, 1997, 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 1998 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 designing and manufacturing conveyors, metal
scrap reclamation systems and bulk material handling equipment. 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.
Overview
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.
Sales
The Company's business is 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 17%, 6%, and
6% of the Company's net sales for fiscal years 1997, 1996 and 1995,
respectively. The Company's sales are not dependent on one or a few major
customers.
Backlog
<PAGE>
The Company's backlog of orders as of October 31, 1997 and October
31, 1996 is set forth below. The Company believes all backlog orders
outstanding as of October 31, 1997 will be filled within one year.
<TABLE>
<CAPTION>
Increase
As of As of (Decrease)
October 31, October 31, From 1996
1997 1996 to 1997
------------- ------------- ----------
<S> <C> <C>
$4,588,000 $3,244,000 41%
</TABLE>
Marketing and Distribution
The Company maintains demonstration equipment in its factory
applications laboratory.
The Company generates inquiries through advertising, trade shows,
trade releases, and customer referrals. Sales of all the Company's products
are made by factory sales engineers, manufacturing agents, distributors and
licensees.
Engineering and Design Development
The Company's engineering and design personnel develop and modify
its products to meet customers' specifications. Most 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
products. The principal materials used in all of the Company's products are
bar and sheet metal, stampings, 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
$357,000, $497,000, and $525,000 for 1995, 1996 and 1997, 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 business. The costs and effects of compliance with
environmental laws is not a significant factor in the Company's business.
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
<PAGE>
does not consider that the successful conduct of any material part of its
business 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.
Employees
As of December 31, 1997, 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
November 1, 1998.
Year 2000 Compliance.
The Company has conducted a review of the expected impact of the Year
2000 on the Company's computer software and hardware. In the opinion of
management, there is no reason to believe that any computer systems or
software used internally by the Company will materially affect transactions
with any customer, supplier or business partner, now or in the future. In
addition, in the opinion of management, there is no reason to believe that
Year 2000 failure of any computer systems operated by the Company's suppliers
and business partners would have a material adverse effect on the Company's
operations.
Item 2. Properties
All of the Company's offices and manufacturing facilities are
located in Kalamazoo, Michigan, in a 72,000 square foot building owned by the
Company.
The Company's facility has been used for conveyor manufacturing
since the early 1960's. 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
<PAGE>
The Company is subject to claims and lawsuits arising in the
ordinary course of business. In the opinion of management, all such pending
claims and lawsuits are either adequately covered by insurance or, if not
insured, will not have a material adverse effect on the Company.
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>
1997
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Stock Price (bid) ------- ------- ------- -------
<S> <C> <C> <C> <C>
High 1 13/16 1 1/2 1 3/8 1 7/8
Low 1 1/2 1 3/8 1 1 1/4
<CAPTION>
1996
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Stock Price (bid) ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
The Common Stock is regularly quoted on the OTC Bulletin Board
(OTCBB). 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, 1997, there were approximately
1,099 record holders of the Company's Common Stock.
The Company has paid no dividends on its Common Stock. 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
<PAGE>
Overview of Recent Significant Events
Net sales in 1997 increased 10% and new order bookings increased
17% when compared to 1996. Operating profits in 1997 increased by $473,170
resulting primarily from a more favorable product mix.
In July 1997, the Company made a $300,000 voluntary principal
payment on its bank term debt. In November 1997, the Company paid all
subordinated debt holders in full using a combination of cash on hand and
drawing on its bank line of credit. The payment should lower interest expense
in 1998 as the Company was paying 12% on the subordinated debt versus 8% (as
of December 31, 1997) on the line of credit. Total debt repayment in 1997
amounted to $1,114,000.
1997 Compared to 1996
Net sales increased 10% in 1997 to $16,915,000 from $15,389,000 in
1996. Part sales grew to 20% of total sales versus less than 18% a year ago.
The Company's business is highly competitive and very sensitive to
price. The increase in net sales in 1997 was primarily due to increased sales
of parts and chip processing systems. The actual sales fluctuation due to
price is not known.
Cost of sales compared to net sales decreased to 59% in 1997 from
62% in 1996. Selling, general and administrative expenses were 31% of net
sales in 1997 and 30% in 1996.
Interest expense increased as a result of debt incurred at the end
of fiscal year 1996 to repurchase the Company's common and preferred stock
from the State of Michigan.
The Company has restated its previously reported earnings for 1996
and will restate its earnings for the first three fiscal quarters of 1996 and
1997 to reflect the Company's income tax recoveries as a direct increase to
paid-in capital rather than a component of earnings. The Company's 1997
financial statements included with this report have been prepared on a basis
consistent with the restatement. See footnote 16 of Notes to Consolidated
Financial Statements for an explanation of the restatement and its effect on
previously reported 1996 earnings.
Trends
The Company's current backlog of orders combined with first half
bookings should allow sales for the Company to remain steady for the first
half of fiscal 1998. Sales should generally follow the national economic
trends in the second half.
Sales of bulk material handling parts and equipment in fiscal 1997
increased 5% above 1996 sales. Sales of metal scrap processing conveyors,
parts, and chip systems in fiscal 1997 increased 14% above 1996 sales.
Liquidity and Financial Condition
<PAGE>
The Company's primary cash requirements in 1997 were operating
expenses, capital expenditures, debt repayment, and interest payments on
debt.
In fiscal 1997, the Company's operations provided $946,000 of cash
and the Company had working capital at the end of the year of $1,738,000
compared to $1,184,000 a year ago. The increase resulted primarily from
higher accounts receivable, inventory, and prepaid insurance. Accounts
receivable increased $636,000 which increased days sales outstanding to 66
days compared to 61 days a year ago. The increase resulted primarily from
higher sales in the fourth quarter of 1997 versus a year ago. Capital
expenditures were up from the prior year with $281,000 in 1997 versus
$142,000 in 1996. Other assets increased primarily because of an increase in
deferred income taxes.
The Company had $450,000 outstanding on a $1,670,000 line of credit
at October 31, 1997. The line of credit also supported a $17,500 letter
of credit which left a balance of $1,202,500 available to the Company.
The Company believes this financing, combined with cash generated by
operations in 1998, will provide sufficient funds to finance working capital
requirements, capital additions, and debt repayments.
Summary
The Company's net income for 1998 will be positively impacted by
lower interest expense on reduced debt. Excess cash will continue to be
primarily used to reduce debt. The Company's order backlog is higher going
into the first quarter than the previous year and should produce a profitable
first quarter.
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, 1997 and October 31, 1996
Consolidated Statement of Income - Years ended October 31, 1997
and October 31, 1996
Consolidated Statement of Stockholders' Equity - Years ended
October 31, 1997 and October 31, 1996
Consolidated Statement of Cash Flows - Years ended October 31,
1997 and October 31, 1996
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
<PAGE>
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.
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 (now known as The Huntington National
Bank) incorporated herein by reference to Exhibit 4b of the
Company's Form 8-K dated October 31, 1996.
<PAGE>
4c Security Agreement with Addendum dated October 31, 1996 from the
Company to FMB-Arcadia Bank (now known as The Huntington National
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 (now known as The Huntington National 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.
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
24e. Power of Attorney for John J. Wallace
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.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
<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/ Gary A. Herder
------------------
Gary A. Herder
President
January 28, 1998
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
- --------- ----- ----
- ---------------------- Chairman of the January 28, 1998
*John J. Wallace Board and Director
/s/ Gary A. Herder President, Principal January 28, 1998
- ---------------------- Executive Officer
Gary A. Herder Principal Financial
Officer, and Director
- ---------------------- Secretary and Director January 28, 1998
*Eric V. Brown, Jr.
- ---------------------- Director January 28, 1998
*William Blunt
- ---------------------- Director January 28, 1998
*James H. Haas
- ---------------------- Director January 28, 1998
*John Garside
/s/ Robert W. Klinge Controller (Principal January 28, 1998
- ---------------------- Accountant)
Robert W. Klinge
*
By:/s/ Gary A. Herder January 28, 1998
-------------------
Gary A. Herder
Attorney-in-Fact
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report on Form 10-KSB
For the Year Ended October 31, 1997
-----
Financial Statements
Index to Exhibits
Exhibits
-----
PRAB,INC.
(A Michigan Corporation)
5944 E. Kilgore Road
P.O. Box 2121
Kalamazoo, Michigan 49003
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. 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, 1997 and 1996, 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 10, 1997
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
OCTOBER 31
------------------------------------------
1997 1996
-------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 26,235 $ 491,367
Accounts receivable, net of allowance for doubtful
accounts of $42,094 in 1997 and $39,190 in
1996 3,364,163 2,728,507
Inventories (Note 2) 1,367,463 1,143,456
Deferred income taxes (Note 8) 290,000 262,830
Other current assets (Note 14) 206,068 37,843
------------------- ------------------
Total current assets 5,253,929 4,664,003
PROPERTY, PLANT AND EQUIPMENT (Note 3) 1,041,231 930,721
OTHER ASSETS
Deferred charges, net of accumulated amortization
of $4,451 in 1997 and $0 in 1996 (Note 1) 21,206 25,657
Deferred income taxes (Note 8) 523,000 316,535
Other assets 102,364 18,145
------------------- ------------------
Total other assets 646,570 360,337
------------------- ------------------
Total assets $ 6,941,730 $ 5,955,061
=================== ==================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
OCTOBER 31
------------------------------------------
1997 1996
-------------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable - Bank (Note 5) $ 450,000 $ 904,000
Current portion of long-term debt (Note 4) 360,000 360,000
Accounts payable 1,113,251 988,435
Customer deposits 445,897 189,187
Salaries, wages and vacation 423,801 412,609
Commissions 359,380 316,133
Other accrued expenses (Note 13) 363,305 309,881
------------------- ------------------
Total current liabilities 3,515,634 3,480,245
LONG-TERM DEBT - RELATED PARTY (Note 4) 367,840 355,583
LONG-TERM DEBT (Note 4) 972,977 1,626,547
DEFERRED COMPENSATION (Note 6) 16,039 14,940
STOCKHOLDERS' EQUITY
Convertible preferred stock (Note 12) - $.75 par value:
Authorized 2,000,000 shares
Issued and outstanding 366,667 shares at October 31,
1997 and 1996 275,000 275,000
Common stock - $.10 par value:
Authorized 7,000,000 shares
Issued and outstanding 1,757,339 at October 31, 1997 and 1996 175,734 175,734
Additional paid-in capital 709,467 -
Retained earnings since November 1, 1995 (net of $4,228,988
deficit eliminated October 31, 1995) (Note 1) 909,039 27,012
------------------- ------------------
Total stockholders' equity 2,069,240 477,746
------------------- ------------------
Total liabilities and stockholders' equity $ 6,941,730 $ 5,955,061
=================== ==================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31
--------------------------------------------
1997 1996
-------------------- ---------------------
<S> <C> <C>
NET SALES $ 16,914,611 $ 15,389,060
COST OF SALES 10,015,157 9,543,374
------------------- --------------------
GROSS PROFIT 6,899,454 5,845,686
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,220,069 4,639,471
------------------- --------------------
OPERATING INCOME 1,679,385 1,206,215
OTHER INCOME (EXPENSES)
Interest expense (286,025) (4,700)
Interest income 6,145 14,793
Loss on sale of property, plant and equipment - (147)
Non-competition agreement - 14,812
Litigation settlement (Note 10) - (63,767)
------------------- --------------------
INCOME - Before income taxes 1,399,505 1,167,206
INCOME TAX EXPENSE (Notes 8 and 16) 500,978 408,630
------------------- --------------------
NET INCOME (Note 16) $ 898,527 $ 758,576
=================== ====================
EARNINGS PER COMMON AND COMMON SHARE
EQUIVALENT (Note 16)
Primary $ .41 $ (.18)
=================== ====================
Fully diluted $ .40 $ (.18)
=================== ====================
<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, 1995 ............... 2,000,000 $ 1,500,000 600,000 $ 300,000
7% non-convertible preferred stock, and
5% convertible preferred stock
dividends (Note 12) .................. -- -- -- --
Recognition of income tax recoveries
subsequent to a quasi reorganization
(Note 1) ............................. -- -- -- --
State of Michigan capital stock redemption
(Note 15) ............................ (1,633,333) (1,225,000) (600,000) (300,000)
Issuance of 123,249 common stock warrants
(Note 15) ............................ -- -- -- --
Stock redemption costs (Note 15) ......... -- -- -- --
Exercise of 123,249 common stock warrants
(Note 15) ............................ -- -- -- --
Net income, as restated for 1996 (Note 16) -- -- -- --
----------- ----------- ----------- -----------
BALANCE - October 31, 1996 ............... 366,667 275,000 -- --
6% convertible preferred stock dividends
(Note 12) ............................ -- -- -- --
Recognition of income tax recoveries
subsequent to a quasi reorganization
(Note 1) ............................. -- -- -- --
Net income ............................... -- -- -- --
----------- ----------- ----------- -----------
BALANCE - October 31, 1997 ............... 366,667 $ 275,000 -- $ --
=========== =========== =========== ===========
<PAGE>
<CAPTION>
COMMON STOCK TOTAL
- -------------------------- ADDITIONAL RETAINED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
- ----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
2,647,860 $ 264,786 $ 1,120,789 $ -- $ 3,185,575
-- -- -- (96,000) (96,000)
-- -- 614,025 -- 614,025
(1,013,770) (101,377) (1,611,648) (635,564) (3,873,589)
123,249 12,325 125,545 -- 137,870
-- -- (249,943) -- (249,943)
-- -- 1,232 -- 1,232
-- -- -- 758,576 758,576
- ----------- ----------- ----------- ----------- -----------
1,757,339 175,734 -- 27,012 477,746
-- -- -- (16,500) (16,500)
-- -- 709,467 -- 709,467
-- -- -- 898,527 898,527
- ----------- ----------- ----------- ----------- -----------
1,757,339 $ 175,734 $ 709,467 $ 909,039 $ 2,069,240
=========== =========== =========== =========== ===========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRAB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 898,527 $ 758,576
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 175,022 173,456
Amortization of discounts on subordinated notes 18,687 --
Bad debt expense 10,880 15,649
Loss on sale of assets -- 147
Non-competition agreement -- (14,812)
Deferred taxes 475,832 396,850
(Increase) decrease in assets:
Accounts receivable (646,536) (370,794)
Inventories (224,007) (9,100)
Other current and non-current assets (252,685) 11,579
Increase (decrease) in liabilities:
Accounts payable 124,816 8,368
Customer deposits 256,710 98,002
Accrued expenses 107,863 100,585
Income taxes payable -- (25,190)
Deferred compensation 1,099 1,057
----------- -----------
Net cash provided by operating activities 946,208 1,144,373
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (280,840) (142,099)
Proceeds from sale of equipment -- 96
----------- -----------
Net cash used in investing activities (280,840) (142,003)
<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
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayment) of short-term debt (454,000) 904,000
Proceeds from long-term debt -- 2,342,130
Proceeds from issuance of subordinated debt with
common stock warrants:
Related parties -- 91,225
Other -- 47,877
Payments on long-term debt (660,000) --
Payments for redemption of stock -- (4,123,532)
Payment of dividends (16,500) (96,000)
----------- -----------
Net cash used in financing activities (1,130,500) (834,300)
----------- -----------
NET INCREASE (DECREASE) IN CASH (465,132) 168,070
CASH - Beginning of year 491,367 323,297
----------- -----------
CASH - End of year $ 26,235 $ 491,367
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
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, Mexico, Asia, and Europe. Sales outside the United
States were approximately 17% of total sales in 1997 and 6% of
total sales in 1996.
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
$156,244 and $114,443 at October 31, 1997 and 1996,
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: 1997 - 2,197,970 and 2,218,693
for primary and fully diluted earnings per share, respectively;
1996 - 2,645,427 and 4,725,291 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. Amounts 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 15) which totaled $980,000, and stock redemption
costs allocated to the convertible and non-convertible
preferred stock redemption of $161,635.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
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 15. These
costs will be amortized according to the effective interest
method over a period of 5 years. Amortization related to these
deferred charges totaled $4,451 and $0 for the years ended
October 31, 1997 and 1996, respectively.
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 reflects
earnings since November 1, 1995.
Income tax recoveries of temporary differences and
carryforwards that had not been recognized as of the date of
the quasi reorganization that are recognized in subsequent
years will be added directly to additional paid-in capital.
Such income tax recoveries were $709,000 in 1997 and $614,000
in 1996.
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.
Concentration of Labor - Approximately 50% of the Company's
workforce is subject to a collective bargaining agreement. The
collective bargaining agreement expires November 1, 1998.
Stock Options - The Company has two stock option plans (Note
7). Options granted to employees are accounted for using the
intrinsic value method, under which compensation expense is
recorded at the amount by which the market price of the
underlying stock at the grant date exceeds the exercise price
of an option. Under the Company's plans, the exercise price on
all options granted equals or exceeds the fair value of the
stock at the grant date. Accordingly, no compensation cost is
recorded as a result of stock option awards under these plans.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 938,863 $ 798,026
Work in process 348,597 171,355
Finished goods and display units 80,003 174,075
---------- ----------
Total inventories $1,367,463 $1,143,456
========== ==========
</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 $1,760,000 and $1,520,000
at October 31, 1997 and 1996, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Cost of property, plant and equipment and depreciable lives are
summarized as follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1997 1996 LIFE-YEARS
---------- ---------- ----------
<S> <C> <C> <C>
Land $ 28,939 $ 28,939 --
Buildings and improvements 1,700,063 1,665,007 10 - 30
Machinery and equipment 2,665,539 2,419,754 3 - 10
---------- ----------
Total cost 4,394,541 4,113,700
Accumulated depreciation 3,353,310 3,182,979
---------- ----------
Net carrying amount $1,041,231 $ 930,721
========== ==========
</TABLE>
Depreciation expense aggregated $170,330 and $172,434 at
October 31, 1997 and 1996, respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Term note payable collateralized by
essentially all assets of the
Company, bearing interest at the
bank's prime rate plus .50%
(effective rate 9% at October 31,
1997), due in quarterly payments of
$90,000 plus interest from January
31, 1997 through October 31, 2001
Effective December 4, 1997, the
interest rate was reduced to a fixed
rate of 8.25% $1,140,000 $1,800,000
Subordinated notes payable to
related parties, bearing interest at
12%. As discussed in Note 15, 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, 1997
totaled $78,172 367,840 355,583
Subordinated notes payable, bearing
interest at 12%. As discussed in
Note 15, 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, 1997 totaled $41,011 192,977 186,547
---------- ----------
Total 1,700,817 2,342,130
Less current portion 360,000 360,000
---------- ----------
Long-term portion $1,340,817 $1,982,130
========== ==========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 4 - LONG-TERM DEBT (Continued)
Minimum principal payments on long-term debt to maturity as of
October 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 360,000
1999 360,000
2000 360,000
2001 620,817
-------------
Total $ 1,700,817
=============
</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 amounts attributable to the
related party of approximately $66,000 in 1997 and $0 in 1996.
The 12% subordinated notes described above were repaid by the
Company in November 1997. Since the payoff amount of this debt
exceeded its carrying amount, the effect of this transaction
for the year ending October 31, 1998 will be to decrease income
by approximately $117,000 before consideration of income taxes.
NOTE 5 - NOTE PAYABLE - BANK
At October 31, 1997, the Company has available a $1,670,000
line of credit under a commercial revolving note, expiring
March 31, 1998, bearing interest at the bank's prime rate of
interest plus 1/2% for an effective rate of 9% at October 31,
1997. Available borrowings are based on a formula of eligible
accounts receivable and inventory. Effective December 4, 1997,
the interest rate under this agreement was reduced to 1/2%
below prime. The line of credit supports letters of credit
totaling $17,500 and $0 for the years ended October 31, 1997
and 1996, respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 6 - PENSION AND PROFIT SHARING PLANS
As of October 31, 1997 and 1996, 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation including vested benefits
of $691,085 and $647,936 in 1997 and 1996,
respectively $ 763,308 $ 719,906
=========== ===========
Projected benefit obligation for service
rendered to date $ (763,308) $ (730,386)
Plan assets at fair value - Primarily non-
government obligations and listed stock 1,008,752 810,790
----------- -----------
Assets in excess of projected benefit obligation 245,444 80,404
Unrecognized net gain from experience
different than that assumed or change
in assumptions (248,260) (131,229)
Unrecognized prior service cost due to plan
amendment being amortized over 15 years 102,898 108,834
Unrecognized net obligation at November 1,
1987 being recognized over 15 years (20,026) (24,100)
----------- -----------
Prepaid pension cost included in
other assets $ 80,056 $ 33,909
=========== ===========
</TABLE>
Pension expense included the following components:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Service cost - Benefits earned during the year $ 19,447 $ 17,440
Interest cost on projected benefit obligation 49,406 47,384
Actual return on plan assets (67,873) (58,965)
Net amortization and deferral (3,882) (1,946)
----------- -----------
Net pension expense $ (2,902) $ 3,913
=========== ===========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
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 1997 and
1996. The expected long-term rate of return on assets was 8%
for 1997 and 1996.
The Company contributed $43,245 in 1997 and $45,358 in 1996 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 $72,000 in 1997 and $66,000 in 1996. 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
$32,100 and $28,953 in 1997 and 1996, 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 $10,537 and $10,837 for the years ended October 31,
1997 and 1996.
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.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
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>
1997 1996
---------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
<S> <C> <C> <C> <C>
OUTSTANDING - Beginning of year 207,500 $1.18 207,500 $1.18
Granted -- -- -- --
Canceled -- -- -- --
Exercised -- -- -- --
------- ----- ------- -----
OUTSTANDING - End of year 207,500 $1.18 207,500 $1.18
======= ===== ======= =====
Eligible for exercise at end of year 207,500 $1.18 207,500 $1.18
======= ===== ======= =====
<CAPTION>
WEIGHTED
OUTSTANDING EXPIRATION AVERAGE
OPTION SHARES ISSUE DATE DATE EXERCISE PRICE
- ------------- ---------- ---------- --------------
<S> <C> <C> <C>
22,500 12/14/89 12/14/99 $ 2.3750
70,000 2/22/91 2/22/01 .8125
70,000 10/23/91 10/23/01 1.5625
45,000 5/26/94 5/26/04 .5703
</TABLE>
Option prices for options outstanding at year-end were $.5703 -
$2.375 for 1997 and 1996.
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 15, 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, 1997 AND 1996
NOTE 8 - INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current expense $ 25,146 $ 11,780
Deferred tax expense 475,832 396,850
-------- --------
Total tax provision $500,978 $408,630
======== ========
</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>
1997 1996
-------- --------
<S> <C> <C>
Taxes computed at statutory rates $475,832 $396,850
State income taxes, net of federal benefit 11,108 --
Nondeductible expenses and other adjustments 14,038 11,780
-------- --------
Provision for income taxes $500,978 $408,630
======== ========
</TABLE>
The details of the net deferred tax asset/liability are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total deferred tax assets $ 1,550,264 $ 2,037,128
Total deferred tax liabilities (50,988) (57,000)
Valuation allowance on deferred tax assets (686,276) (1,400,763)
----------- -----------
Net deferred tax asset $ 813,000 $ 579,365
=========== ===========
</TABLE>
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 8 - INCOME TAXES (Continued)
The following items affected the net deferred tax asset during
the years ended October 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax expense charged against income $(475,832) $(396,850)
Tax recoveries reported as additions to
paid-in capital:
Benefit of net operating loss carryforward 489,870 396,850
Change in valuation allowance 219,597 217,175
--------- ---------
Increase in net deferred tax asset $ 233,635 $ 217,175
========= =========
</TABLE>
The deferred tax liabilities result from using accelerated
depreciation for tax purposes. Deferred tax assets result from
expenses not deductible for tax purposes until paid, net
operating loss carryforwards and tax credit carryforwards. For
tax purposes, the Company has net operating loss carryforwards
of $3,600,000 that expire at various times through 2008,
investment and research and development credit carryovers of
$62,000 that expire at various dates between 1998 and 2001, and
alternative minimum tax credit carryforwards of $62,000 that do
not expire. These loss carryforwards and credits, net of a
valuation allowance, have been used to reduce deferred taxes
for financial reporting purposes. The valuation allowance was
provided at October 31, 1997 and 1996 to reduce deferred tax
assets to an amount management reasonably expects can be
recognized in the future based on facts available at that time.
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 that has been general legal counsel
to the Company since 1961. The Company incurred legal fees of
$24,746 and $87,595 to the law firm in 1997 and 1996,
respectively.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 10 - 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 for 1996 is expense of $63,767 since $25,000 was
already accrued and expensed in a previous year related to this
matter.
NOTE 11 - CASH FLOWS
Cash paid during the years ended October 31, 1997 and 1996 for
interest approximated interest expense. $25,146 and $36,879
were paid for alternative minimum income taxes during the years
ended October 31, 1997 and 1996, respectively.
There were no significant noncash financing or investing
activities during 1997 and 1996.
NOTE 12 - PREFERRED STOCK
Convertible Preferred Stock
The convertible preferred stock is entitled to quarterly
dividends as follows:
<TABLE>
<S> <C> <C>
November 1, 1995 to October 31, 1996 5% per annum ($.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. 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.
<PAGE>
PRAB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 12 - PREFERRED STOCK (Continued)
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 of $.75 per share plus any accrued but unpaid
dividends.
Non-convertible Preferred Stock - There are 600,000 shares of
.50(cent) par non-convertible preferred stock authorized.
Holders of the non-convertible preferred stock would be
entitled to quarterly cash dividends equal to 8% per annum
($.040 per share) from November 1, 1997 to October 31, 1998,
and 9% per annum ($.045 per share) thereafter. As of October
31, 1997, there were no shares of non-convertible preferred
stock issued and outstanding.
NOTE 13 - OTHER ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued warranty $156,244 $114,443
Accrued royalty 42,000 12,000
Accrued pension and profit sharing 88,580 45,555
Accrued property tax 7,059 2,660
Accrued settlement offer -- 88,767
Accrued insurance -- 654
Other accrued expenses 16,674 2,094
Accrued interest -- 932
State taxes payable 52,748 42,776
-------- --------
Total $363,305 $309,881
======== ========
</TABLE>
NOTE 14 - OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deposits $ 15,734 $ 762
Prepaid workmen's compensation 13,473 9,919
Prepaid advertising 12,466 21,494
Other prepaid assets 11,684 5,668
Prepaid insurance 152,711 --
-------- --------
Total $206,068 $ 37,843
======== ========
</TABLE>
NOTE 15 - 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. As discussed
in Note 4, the Company has repaid the subordinated notes
subsequent to October 31, 1997.
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, 1997 AND 1996
NOTE 16 - RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The accompanying financial statements for 1996 have been
restated to reflect the Company's income tax recoveries as a
direct increase to paid-in capital rather than a component of
earnings. Generally accepted accounting principles require the
tax benefits of deductible temporary differences and
carryforwards recognized subsequent to a quasi reorganization
be reported as a direct addition to paid-in capital. The effect
of this restatement on net income and earnings per share is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1996
----------------------------------------------
AS
PREVIOUSLY AS
REPORTED RESTATEMENT RESTATED
----------- ----------------- -----------
<S> <C> <C> <C>
INCOME - Before taxes $ 1,167,206 $ -- $ 1,167,206
Income tax expense (recovery) (205,395) 614,025 408,630
----------- ----------------- -----------
NET INCOME $ 1,372,601 $ (614,025) $ 758,576
=========== ================= ===========
Primary earnings per share $ .05 $ (.23) $ (.18)
=========== ================= ===========
Fully diluted earnings per share $ .05 $ (.23) $ (.18)
=========== ================= ===========
</TABLE>
<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 (now known as The Huntington National
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 (now known as The Huntington National
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 (now known as The Huntington National 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
24e. Power of Attorney for John J. Wallace
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 Gary Herder and Eric V.
Brown, Jr., 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, 1997, and
all amendments to such Form 10-KSB.
Dated: January 20, 1998 /s/William Blunt
----------------
William Blunt
Director
Exhibit 24b.
POWER OF ATTORNEY
The person signing below hereby designates Gary Herder and Eric V.
Brown, Jr., 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, 1997, and
all amendments to such Form 10-KSB.
Dated: January 22, 1998 /s/John Garside
---------------
John Garside
Director
Exhibit 24c.
POWER OF ATTORNEY
The person signing below hereby designates Gary Herder and Eric V.
Brown, Jr. 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, 1997, and
all amendments to such Form 10-KSB.
Dated: January 21, 1998 /s/Eric V. Brown, Jr.
---------------------
Eric V. Brown, Jr.
Director
Exhibit 24d.
POWER OF ATTORNEY
The person signing below hereby designates Gary Herder and Eric V.
Brown, Jr., 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, 1997, and
all amendments to such Form 10-KSB.
Dated: January 21, 1998 /s/James H. Haas
----------------
James H. Haas
Director
Exhibit 24e.
POWER OF ATTORNEY
The person signing below hereby designates Gary Herder and Eric V.
Brown, Jr., 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, 1997, and
all amendments to such Form 10-KSB.
Dated: January 20,1998 /s/John J. Wallace
------------------
John J. Wallace
Chairman of the Board and Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 26,235
<SECURITIES> 0
<RECEIVABLES> 3,364,163
<ALLOWANCES> 0
<INVENTORY> 1,367,463
<CURRENT-ASSETS> 5,253,929
<PP&E> 4,394,541
<DEPRECIATION> 3,353,310
<TOTAL-ASSETS> 6,941,730
<CURRENT-LIABILITIES> 3,515,634
<BONDS> 0
<COMMON> 175,734
0
275,000
<OTHER-SE> 1,618,506
<TOTAL-LIABILITY-AND-EQUITY> 6,941,730
<SALES> 16,914,611
<TOTAL-REVENUES> 16,914,611
<CGS> 10,015,157
<TOTAL-COSTS> 15,235,226
<OTHER-EXPENSES> (6,145)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,025
<INCOME-PRETAX> 1,399,505
<INCOME-TAX> 500,978
<INCOME-CONTINUING> 898,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 898,527
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
</TABLE>
