<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/x/ ANNUAL REPORT pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee required).
For the fiscal year ended March 31, 1995
--------------
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required)
For the transition period from to .
-------- ----------
Commission file number: 0-12530
-------
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
- - --------------------------------------------------------------------------------
(Name of Small Business Issuer as specified in its charter)
Nevada 95-3615472
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P. O. Box 23160, Albuquerque, NM 87192-1160
-----------------------------------------------------
(Address of principal executive offices and zip code)
Issuer's telephone number, with area code (505) 271-2200
--------------
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Class B Warrants
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
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incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
----
State issuer's revenues for the most recent fiscal year.
$10,002,000
As of June 1, 1995, 3,692,300 common shares were outstanding, and the aggregate
market value of the common shares (based upon the closing bid price on NASDAQ)
held by non-affiliates was approximately $13,200,000.
Documents incorporated by reference:
Proxy Statement for 1995 Annual Meeting of Shareholders - Items 9, 10, and
11.
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PART I
Item 1. Business
Panatech Research and Development Corporation ("Panatech" or the "Company")
was incorporated in Nevada in 1981. Panatech conducts its business principally
through a wholly owned subsidiary, ASM Company, Inc. ("ASM"). ASM, which was
acquired by the Company on October 1, 1989, manufactures and sells precision
engineered accessories for high pressure, airless paint spraying equipment used
by industrial, commercial and residential paint contractors.
In fiscal 1995 and 1994, Panatech reported net income of $1,122,000 and
$757,000, or $.31 and $.21 per share, respectively, on sales of $10,002,000 and
$6,972,000, comprising the consolidated operating performance of Panatech and
ASM. The Company has $2.9 million in cash, a net worth of $5.4 million, a
current ratio of 2.5:1, and debt of $1,050,000.
ASM Company, Inc.
ASM designs, manufactures, markets, and sells engineered accessories for
airless spray equipment. An airless sprayer consists of a pump (the "airless
pump") which forces paint, coatings, or other viscous fluids at high pressures
(2000 - 6000 psi), through a hand-controlled valve (the "airless spray gun")
which incorporates a tungsten carbide nozzle with a specially designed orifice
(the "spray tip"). As the fluid is forced through the spray tip, it is
dispersed by a pressure gradient into a fan-shaped pattern of fine droplets.
The spray patterns and flow rates differ according to the application.
ASM produces a complete line of airless guns, spray tips, and related
accessories. It neither makes nor sells airless pumps. The Company has been
particularly prominent in the development of reversing spray tips which can be
cleaned quickly without disassembling the gun. The ASM QUICK-CHANGE TIP,
MAXI-TIP, and, more recently, the ZIP-TIP have gained wide acceptance in the
industry. ASM's spray tips can be used with all models of spray guns made by
ASM and its principal competitors. Despite the extreme hardness of the
tungsten carbide nozzle, the orifice wears with use, and spray tips must be
replaced frequently to control the flow dynamics, and to mitigate the corrosive
effects of particulate suspensions under high pressure gradients.
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Other ASM products include the ASM-400, the PRO-5, and the PRO-6 spray
guns, the wrenchless HAND-TIGHT assembly system, various extension poles,
non-reversible spray tips, and miscellaneous accessories.
The principal customers for ASM products are equipment distributors,
original equipment manufacturers, industrial operators, and warehouse
distributors. The products are sold to end-users through over 7,000 paint,
hardware, and equipment outlets to commercial painting contractors in North
America, Europe, Australia, and the Pacific Rim. Many of the retail outlets are
members of national or regional chains, such as the Glidden Company, the
Sherwin-Williams Company, and Dunn-Edwards Company. At March 31, 1995,
approximately 62% of its accounts receivable was related to three customers,
each of which accounted for 15% to 26% of sales (See Note 1 of Notes to
Consolidated Financial Statements - Concentration of Credit Risk).
ASM sales are made against individual purchase orders or volume purchase
agreements. The Company generally fills most of its orders within one week of
receipt, so therefore its backlog is not a meaningful indicator of future
sales.
The Company's foreign sales represented 15% and 17%, respectively, of 1995
and 1994 sales. Foreign sales are made under specific purchase orders in U. S.
dollars. They are made on open account, if insured by the U. S. Ex-Im Bank, or
on a prepayment basis, if not insured. All products are manufactured in the
United States and there are no overseas inventory locations.
All ASM products are designed and prototyped in-house. Virtually all
manufacturing is performed in-house on a variety of machine tools. Raw
materials, such as tungsten carbide, steel, aluminum, brass, and commodity
plastics, and certain components made therefrom, are available from many
sources. All ASM products are subjected to testing before shipment.
Although the airless spray industry is a relatively mature market and thus
not subject to rapid technological development, ASM conducts research and
development projects to improve the quality and ergonomics of its present
product line, to develop new products to better serve the customer's functional
needs and to achieve cost reductions through innovative product designs and
manufacturing techniques.
ASM owns seventeen US patents covering features of its reversing spray
tips and airless spray guns, and several
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other U.S. patents are pending. In addition, it has three foreign patents on
the ZIP-TIP with several more pending. Management believes that the competitive
position of ASM relies as well on other significant factors, such as the
performance history of its products, its established position in the
marketplace, and its manufacturing know-how.
ASM's major competitors are Graco, Inc. and Titan Tool, Inc., which are
the dominant suppliers of airless pumps and accessories to the industry. The
principal competitive factors in the industry are product performance and
special sales promotions which are made periodically during the year. ASM
believes that it competes favorably in both these areas. The Company has a
rebate program as a sales incentive, in which customers are given
non-refundable rebate certificates based upon total volume of purchases during
the fiscal year (See Note 1 of Notes to Consolidated Financial Statements).
At March 31, 1995, ASM had 128 full-time personnel, consisting of 12 in
administration, 8 in sales, and 108 in manufacturing.
Item 2. Properties
ASM occupies a 20,000 square foot building in Orange, California. The
building is leased under a three-year net lease which expires October 1, 1997
at an annual rent of approximately $108,000.
Item 3. Legal Proceedings
Panatech is involved in various legal proceedings in the ordinary course
of business. The Company believes that it has sufficient insurance coverage,
and that the ultimate outcome of these proceedings will not have a materially
adverse effect on its financial condition or operating results. During the
year, a wrongful termination lawsuit against ASM Company was settled for an
immaterial amount.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock of the Company is traded in the NASDAQ National Market
System under the symbol PNTC. The following table shows the high and low
closing sale prices of the Company's Common Stock as quoted on NASDAQ for the
periods indicated.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C> <C>
Fiscal 1995 June 30, 1994 3 3/8 2 1/4
September 30, 1994 3 1/8 1 3/4
December 31, 1994 2 1/2 1 3/4
March 31, 1995 3 1/8 1 3/4
Fiscal 1994 June 30, 1993 1 7/8 1 1/4
September 30, 1993 2 1
December 31, 1993 2 7/8 3/4
March 31, 1994 3 1/8 2 1/2
</TABLE>
The Company had approximately 450 record holders of its Common Stock as of
June 1, 1995. On April 11, 1995, the Company declared its first cash dividend
of $.05 per share which was paid on May 15, 1995 to stockholders of record on
April 28, 1995. In its letter to shareholders of that date, the Company
indicated that it had commenced a program of semi-annual cash dividends. ASM's
bank loan agreement prohibits ASM from paying cash dividends to Panatech, but
does not restrict Panatech's ability to pay cash dividends to its shareholders.
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1995 Compared to 1994
In the fiscal year ended March 31, 1995, ASM Company, Inc. (ASM), the
Company's operating subsidiary, had sales of $10,002,000, an increase of
$3,030,000, or 43.5%, over the $6,972,000 reported in the previous fiscal year,
mainly due to increased unit shipments. Price increases were approximately 3%
during the year. Almost 10% of the sales gain was from the Company's spray tip
product line, with the balance coming from sales of spray guns and
miscellaneous products. Most of the sales gains resulted from increased market
penetration with existing products. Approximately 5% of the sales increase
resulted from new products such as a new specialized tip. It is anticipated
that these new products, together with increased acceptance of existing
products, will enable ASM to maintain and increase its market performance.
Foreign sales were approximately $1,500,000, or 15% of total sales, an increase
of $315,000, or 27%, from the previous year.
Cost of sales was $4,183,000, or 41.8% of sales, compared to $3,069,000,
or 44.0% of sales, in the prior year. The decrease in cost of sales as a
percentage of sales was due principally to greater unit shipments in 1995.
Labor costs were essentially unchanged, while material costs declined mainly
due to more efficient buying resulting from larger quantity purchasing. Gross
profit was $5,819,000, 49.1% higher than the $3,903,000 generated in 1994,
principally due to the higher sales volume.
Selling, general, and administrative expenses at ASM were $3,528,000 in
1995 compared to $2,715,000 in 1994, an increase of 29.9%. The increase in
expenditures reflected an expansion of sales effort, advertising, and
international marketing activities. Interest expense was $117,000 compared to
$146,000 last year principally due to the reduced principal balance outstanding
on its acquisition-related bank loan which offset higher interest rates.
ASM's pretax income was $2,190,000, an increase of 108% over 1994 when it
had pretax income of $1,055,000. The increase was primarily due to higher
sales volume and reduced interest expense.
The Company's net corporate expenses were $425,000 compared to $409,000 in
1994, an increase of 3.9%. Interest income was $38,000 compared to $30,000 in
1994. Royalty
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income from the sale of a business in FY 1991 was $218,000 in 1995, including a
one-time final payment of $120,000, compared to $84,000 in 1994 (See Note 7 of
Notes to Consolidated Financial Statements).
In 1995, the Company had a consolidated pretax profit of $2,021,000
compared to $760,000 in 1994, an increase of 166%. In 1994, the Company used
all of its remaining net operating loss carryforward which reduced the income
tax provision to $3,000. In 1995, the Company's pretax earnings were subject
to full Federal and state tax and amounted to $899,000, or 44.5% of income.
Therefore, net income in 1995 was $1,122,000, or $.31 per share, compared to
$757,000, or $.21 per share, last year, an increase of 48.2%. Average shares
outstanding were 3,568,000 in 1995 compared to 3,541,000 in 1994.
1994 Compared to 1993
In the fiscal year ended March 31, 1994, ASM had sales of $6,972,000, an
increase of $1,947,000, or 38.7%, over the $5,025,000 reported in the previous
fiscal year, mainly due to increased unit shipments. Price increases were
approximately 3% during the year. Almost 80% of the sales gain was from the
Company's spray tip product line, with the balance coming from sales of spray
guns and miscellaneous products. Most of the sales gains resulted from
increased market penetration with existing products. Approximately 13% of the
sales increase resulted from new products such as a new aluminum tip and a new
spray gun. It is anticipated that these new products, together with increased
acceptance of existing products, will enable ASM to maintain and increase its
market performance. Foreign sales were approximately $1,200,000, or 17% of
total sales, an increase of $300,000, or 33%, from the previous year.
Cost of sales was $3,069,000, or 44.0% of sales, compared to $2,272,000,
or 45.2% of sales, in the prior year. The decrease in cost of sales as a
percentage of sales was due principally to greater unit shipments in 1994.
Labor costs were essentially unchanged, while material costs declined mainly
due to more efficient buying resulting from larger quantity purchasing. Gross
profit was $3,903,000, 41.7% higher than the $2,753,000 generated in 1993,
principally due to the higher sales volume.
Selling, general, and administrative expenses at ASM were $2,715,000 in
1994 compared to $1,912,000 in 1993, an increase of 41.9%. The increase in
expenditures reflected an expansion of sales effort, advertising, and
international
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marketing activities. Interest expense was $146,000 compared to $189,000 last
year principally due to the reduced principal balance outstanding on its
acquisition-related bank loan.
ASM's pretax income was $1,055,000, an increase of 57.5% over 1993 when it
had pretax income of $670,000. The increase was primarily due to higher sales
volume and reduced interest expense.
The Company's net corporate expenses were $409,000 compared to $367,000 in
1993, an increase of 11.4%, principally due to higher professional and legal
expenses this year. Professional expenses mainly involved consulting to assist
the Company in exploring new business opportunities and legal expenses
resulting principally from charges relating to settlement of a dispute in
connection with a 1989 divestiture. Interest and other income at the corporate
level was $114,000 compared to $62,000 in 1993, due mainly to an increase in
royalty payments from the sale of a business in FY 1991 (See Note 7 of Notes to
Consolidated Financial Statements).
In 1994, the Company had a consolidated pretax profit of $760,000 compared
to $365,000 in 1993. Net income was $757,000, or $.21 per share, this year
compared to $326,000, or $.09 per share, last year. Average shares outstanding
were 3,541,000 in 1994 compared to 3,597,000 in 1993.
Liquidity and Capital Resources
The Company had, at March 31, 1995, cash and cash equivalents of
$2,902,000, working capital of $3,782,000 and total debt of $1,050,000.
Capital equipment requirements are not material. Management believes that its
resources are sufficient to finance its operations for at least the next twelve
months. On April 11, 1995, the Company declared a cash dividend of $.05 per
share, which is the first of a program of semi-annual cash dividends. The
annual dividend requirements are presently approximately $369,000.
Under a Credit Agreement with the Bank of America, NT&SA, in October 1989,
ASM borrowed $4,000,000 to finance the acquisition of ASM's business and
assets. At March 31, 1995, the balance outstanding on the loan was $1,050,000.
The principal is payable in semi-annual installments over seven years and is
secured by substantially all of ASM's assets. In addition to the semi-annual
payments, ASM is required to make mandatory pre-payments equal to its "Excess
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Cash Flow" (as defined in the Agreement) up to a maximum of $200,000 per year,
and in the amount of the proceeds from any sales of assets outside of the
ordinary course of business or from the issuance of debt or equity securities.
ASM is required to make a mandatory pre-payment of $200,000 in fiscal 1996
based upon fiscal 1995 results. The loan agreement provides for restrictions
with respect to payment of dividends by ASM to the Company, and requires
maintenance of certain financial ratios. At March 31, 1995, ASM was not in
violation of any covenants of this agreement.
The Company has outstanding 873,700 Class B Warrants. Each Warrant is
exercisable for one share of Common Stock at $5.00 per share. The Company's
Board of Directors extended the expiration date of the Warrants from June 30,
1995 to June 30, 1996.
Item 7. Financial Statements
The Consolidated Financial Statements of Panatech appear in this Report
beginning at Page 15.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16 (a) of the Exchange Act
The required information is hereby incorporated by reference to the
sections entitled "Election of Directors", "Executive Officers", and "Ownership
of Common Stock" of the Company's proxy statement for the 1995 Annual Meeting
of Shareholders.
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<PAGE> 11
Item 10. Executive Compensation
The required information is hereby incorporated by reference to the
sections entitled "Executive Compensation" and "Election of Directors -
Directors' Compensation" of the Company's proxy statement for the 1995 Annual
Meeting of Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The required information is hereby incorporated by reference to the
section entitled "Ownership of Common Stock" of the Company's proxy statement
for the 1995 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions
None.
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<PAGE> 12
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits [Management Contracts, Compensation Plans and Arrangements are
identified by an asterisk (*)].
3.1 Articles of Incorporation as amended(1)
3.2 Bylaws (2)
4.1 Warrant Agreement dated March 17, 1983 between the Company and U.S.
Stock Transfer Corporation (3)
4.2 Forms of Certificates for Common Stock and Class B Warrants (3)
10.1 Credit Agreement dated October 30, 1989 between Bank of America and ASM
Acquisition Corporation, and related Security Agreements, Subordination
Agreements and Pledge Agreement with Registrant (4)
10.2 Form of Stock Option Certificate for non-qualified stock options (5)
10.3* Employment Agreement between Panatech Research and Development
Corporation and Arthur J. Rosenberg dated March 3, 1994
10.4* Employment Agreement between ASM Company and Robert J. Perret, Jr.,
dated March 3, 1994
10.5* Consulting Agreement between Panatech Research & Development Corporation
and Paul B. Rosenberg dated September 11, 1992 (6)
10.7* 1993 Stock Option Plan (7)
21 Subsidiaries (6)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- - -----------------
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1987.
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(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended March 31, 1989.
(3) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Company's Registration Statement on Form S-1 (No. 2- 73658) filed March 16,
1983.
(4) Incorporated by reference to the Company Current Report on Form 8-K
dated October 5, 1989.
(5) Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-33408) filed on April 6, 1990.
(6) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended March 31, 1993.
(7) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended March 31, 1994.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Albuquerque, State of New Mexico, on the ninth day of June, 1995.
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
By: /s/ Arthur J. Rosenberg
----------------------------------------
Arthur J. Rosenberg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Arthur J. Rosenberg President, Treasurer,
- - ----------------------- and Director 6/9/95
Arthur J. Rosenberg (Principal Executive and
Financial Officer)
/s/ Joseph Elmaleh
- - ----------------------- Director 6/9/95
Joseph Elmaleh
/s/Paul B. Rosenberg
- - ----------------------- Director and Principal
Paul B. Rosenberg Accounting Officer 6/9/95
/s/ James T. Stamas
- - ----------------------- Director 6/9/95
James T. Stamas
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
of Panatech Research and Development Corporation
We have audited the accompanying consolidated balance sheet of Panatech
Research and Development Corporation and Subsidiary as of March 31, 1995 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe 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 financial position of Panatech
Research and Development Corporation and Subsidiary as of March 31, 1995, and
the results of their operations and their cash flows for each of the two years
in the period then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
May 23, 1995
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 1995
<TABLE>
<CAPTION>
ASSETS Notes
-----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,902,000
Receivables, net of allowance for
doubtful accounts of $98,000 2,343,000
Inventories 2 887,000
Prepaid expenses 125,000
Deferred income tax asset 6 126,000
-----------
Total current assets 6,383,000
Property, plant and equipment, net 3 525,000
Covenants not to compete, net of
amortization of $1,179,000 321,000
Cost of purchased business in excess of net assets
acquired, net of amortization of $119,000 969,000
Other assets 144,000
-----------
Total assets $ 8,342,000
===========
LIABILITIES
Current liabilities
Current portion of long-term debt 4 $ 750,000
Accounts payable 113,000
Income taxes payable 6 796,000
Accrued payroll and benefits 621,000
Other accrued expenses 321,000
-----------
Total current liabilities 2,601,000
Long term debt, less current portion 4 300,000
-----------
Total liabilities 2,901,000
Commitments and contingencies 7
SHAREHOLDERS' EQUITY 5
Common Stock, par value $.01 per share -
authorized 20,000,000 shares, issued
and outstanding 3,692,000 37,000
Additional paid in capital 7,771,000
Accumulated deficit (2,367,000)
-----------
Total shareholders' equity 5,441,000
-----------
Total liabilities and shareholders' equity $ 8,342,000
===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended March 31, 1995 and 1994
(000's except per share values)
<TABLE>
<CAPTION>
Notes 1995 1994
----- ---- ----
<S> <C> <C> <C>
Sales $10,002 $6,972
Cost of Sales 4,183 3,069
------- ------
Gross Profit 5,819 3,903
Selling, general and
administrative expenses 3,687 2,835
Amortization of intangibles 266 289
------- ------
Operating Income 1,866 779
Other income (expense)
Interest income 78 49
Interest expense (141) (152)
Royalty income 218 84
------- ------
Income before income taxes 2,021 760
Income tax provision 6 (899) (3)
------- ------
Net Income $ 1,122 $ 757
======= ======
Income per common share $ .31 $ .21
======= ======
Weighted average shares outstanding 3,568 3,541
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1995 and 1994
(000's)
<TABLE>
<CAPTION>
COMMON STOCK ADDIT- TOTAL
$.01 Par Value IONAL ACCUMU- SHARE-
-------------- PAID-IN LATED HOLDERS'
Shares Amt CAPITAL DEFICIT EQUITY
----- --- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993 3,540 $35 $7,532 ($4,246) $3,321
Repurchase and cancell-
ation of common stock (2) - (5) - (5)
Exercise of
stock options 7 - 13 - 13
Net income - - - 757 757
----- --- ------ ------- ------
Balance, March 31, 1994 3,545 35 $7,540 ($3,489) $4,086
Repurchase and cancell-
ation of common stock (11) - (25) - (25)
Exercise of
stock options 158 2 256 - 258
Net income - - - 1,122 1,122
----- --- ------ ------- ------
Balance, March 31, 1995 3,692 $37 $7,771 ($2,367) $5,441
===== === ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1995 and 1994
(000's)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash from operations
Net income $ 1,122 $ 757
Adjustments to reconcile net income to
net cash provided by operations -
Provision for uncollectible accounts 98 9
Amortization 266 289
Depreciation 133 111
Changes in current assets and liabilities
(Increase) in receivables (1,082) (279)
(Increase) in inventories (178) (130)
Decrease in prepaid expenses 122 148
(Increase) in deferred tax asset (88) (38)
Increase (decrease) in accounts payable
and other accrued expenses (57) 404
Increase in income taxes payable 671 61
(Increase) in other assets (35) (34)
------- ------
Net cash provided by operations 972 1,298
Cash flow from investing activities
Capital expenditures (198) (146)
Cash flow from financing activities
Payment of note payable (750) (550)
Exercise of stock options 258 13
Purchase and cancellation of common stock (25) (5)
------- ------
Cash used by financing activities (517) (542)
Net increase in cash 257 610
Beginning balance, cash and cash equivalents 2,645 2,035
------- ------
Ending balance - cash and cash equivalents $ 2,902 $2,645
======= ======
Supplemental information
Interest paid $ 116 $ 146
Taxes paid, net of refunds received $ 285 $ (56)
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
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PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of
Panatech Research and Development Corporation ("Panatech" or the "Company") and
its wholly-owned subsidiary, ASM Company, Inc. ("ASM"). All material
intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents are carried at cost, which approximates market
value. Highly liquid money market and debt instruments are considered to be
cash equivalents when purchased with an original maturity of 90 days or less.
Inventories
Inventories are carried at the lower of cost or market value on an
average cost basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and
major improvements are capitalized, and repairs, maintenance, and minor
improvements are charged to expense as incurred. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts. Gains or losses from retirements and disposals are
credited or charged to income. Depreciation is computed primarily using the
straight line method over the following useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Leasehold improvements Life of lease
Vehicles 4
Office furniture and equipment 3 - 7
Machinery and equipment 5 - 10
</TABLE>
Amortization
The Company amortizes covenants not-to-compete over seven years, the
life of the covenant, and cost of purchased business in excess of net assets
acquired over forty years. These assets were valued at estimated fair value at
date of acquisition, and are amortized on a straight line basis. At each
quarter end, management
20
<PAGE> 21
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Summary of Significant Accounting Policies, (continued:)
Amortization (continued)
assesses the performance, growth and market and competitive outlook of the
business acquired to determine if there has been any permanent impairment. As
a result of this assessment, management has determined that the recorded value
of these assets is not impaired.
Revenue Recognition and Customer Rebates
The Company recognizes revenue upon delivery of goods and accrues
sales rebates based on current sales. The sales rebates are applied to
customers' sales in the following calendar year.
Concentration of Credit Risk
The Company sells its products to customers throughout the United
States (85% of fiscal 1995 sales) and foreign customers (15% of fiscal 1995
sales). Over the past three years, the Company's uncollectible accounts have
been less than 0.3% of sales and the Company has no reason to believe that its
receivables will not be collected in the normal course of business. Sales are
typically on credit terms of sixty days. At March 31, 1995, approximately 62%
of its accounts receivable was related to three customers, all of whom have
historically had good payment records, are of substantial size and financial
strength and of good reputation. During the year ended March 31, 1995, sales
to each of the Company's three largest customers were between 15-26% of total
sales.
The Company maintains excess cash balances in money market and cash
accounts with several major financial institutions, and has not experienced any
losses on its money market and cash investments.
Income Taxes
The Company adopted, in fiscal 1994, the method of accounting for
income taxes as prescribed by Statement of Financial Accounting Standards
(SFAS) No. 109, which supersedes SFAS 96.
Under the provisions of SFAS No. 109 (and SFAS 96), the financial
statements reflect the current and deferred tax consequences of all events
recognized in the financial statements or tax returns.
21
<PAGE> 22
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Summary of Significant Accounting Policies, (continued:)
Income Per Share
Income per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. No
effect is given to common stock equivalents since their inclusion would have an
immaterial or antidilutive impact.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1995 presentation.
2. Inventories
The components of inventories at March 31, 1995 are as follows:
<TABLE>
<S> <C>
Raw materials $719,000
Work in process 63,000
Finished goods 105,000
--------
Total $887,000
</TABLE>
3. Property, Plant and Equipment
Property, plant and equipment consist of the following at March 31, 1995:
<TABLE>
<S> <C>
Leasehold improvements $ 10,000
Machinery and equipment 752,000
Office furniture & equipment 233,000
Vehicles 82,000
----------
$1,077,000
Less: Accumulated depreciation (552,000)
----------
Property, plant and equipment, net $ 525,000
</TABLE>
22
<PAGE> 23
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Long-Term Debt
Long-term notes payable consist of the following as of March 31, 1995:
<TABLE>
<S> <C>
ASM note payable, bearing interest at
the bank reference, or prime, rate plus
1 1/4% (10 1/4% at March 31, 1995),
due in October 1996. Principal
payable in semi-annual installments
ranging from $150,000 to $275,000, plus
excess cash flow as defined in the credit
agreement, interest payable quarterly.
Common stock of ASM, receivables, invent-
ory, fixed assets, and patents have been
pledged as collateral. $1,050,000
Less: current portion (750,000)
----------
$ 300,000
</TABLE>
ASM's debt agreement provides that it comply with certain covenants, the
most restrictive being those with respect to the payment of dividends and
compliance with certain ratios. In fiscal 1996, in accordance with the terms
of the debt agreement, ASM is required to make a mandatory prepayment of
principal of $200,000 based on fiscal 1995 cash flow. This amount is included
in the current portion of long-term debt. A similar prepayment of $200,000 was
made in fiscal 1995.
Aggregate maturities of long-term debt are as follows: year ended March
31, 1996 - $750,000 and March 31, 1997 - $300,000.
5. Capital Stock
At March 31, 1995, there were Class B warrants outstanding for the
purchase of 873,700 shares of the Company's common stock at $5.00 per share.
The warrants expire on June 30, 1996.
On August 16, 1993, the Company's shareholders approved the 1993 Stock
Option Plan which authorizes the granting of incentive and non-qualified
options to purchase up to 400,000 shares of the Company's common stock to
employees,
23
<PAGE> 24
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Capital Stock (continued):
directors, and consultants. The Plan provides that the option price for
incentive options shall not be less than fair market value on the date of the
grant. The option price for non- qualified options is determined by the Board
of Directors on the date of grant.
The Company also has options outstanding under its 1983 Option Plan,
as amended. No further options may be granted under the 1983 Plan.
Option transactions under the 1983 and 1993 Option plans for the two
years ended March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares
under option Price range
------------ -----------
<S> <C> <C>
Outstanding at March 31, 1993 225,000 $.375-$1.50
1994 Activity
Granted 76,000 $1.75-$2.625
Exercised - 1983 Plan (7,000) $1.50
Exercised - 1993 Plan -
-------- ------------
Outstanding at March 31, 1994 294,000 $.375-$2.625
1995 Activity
Granted 76,500 $2.00
Canceled (5,000) $2.625
Exercised - 1983 Plan (158,000) $.375-$1.50
Exercised - 1993 Plan -
-------- ------------
Outstanding at March 31, 1995 207,500 $.375-$2.625
Exercisable at March 31, 1995 57,750 $.375-$2.625
Available for future grant at March 31, 1995 252,500
</TABLE>
In fiscal 1995 and 1994, the Company repurchased in the open market
and retired 10,600 and 2,500 shares of its common stock for $25,000 and $5,000,
respectively.
24
<PAGE> 25
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Income Taxes
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standard No. 109 (SFAS 109), "Accounting for Income Taxes" retroactive to April
1, 1993. Prior to 1994, the Company accounted for income taxes following the
provisions of Financial Accounting Standard No. 96 (SFAS 96). SFAS 109
required a change from the deferred method to the asset and liability method of
accounting for income taxes. At April 1, 1993, the Company determined there
was no cumulative effect of adoption of SFAS 109 as no net asset or liability
would have previously been recorded in prior years under either accounting
method.
The provision (benefit) for income taxes consists of the following for the
fiscal years ended March 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current:
Federal $ 766,000 $ 141,000
State 221,000 6,000
--------- ---------
987,000 147,000
Deferred
Federal (128,000) 96,000
State (55,000) 29,000
--------- ---------
(183,000) 125,000
Adjustment to valuation
allowance 95,000 (269,000)
--------- ---------
Total $ 899,000 $ 3,000
========= =========
</TABLE>
25
<PAGE> 26
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Income Taxes (continued):
The provision for income taxes is reconciled with the Federal statutory
rate for the years ended March 31, as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
Tax Tax
Tax Rate Tax Rate
--- ---- --- ----
<S> <C> <C> <C> <C>
Provision computed at federal
statutory rate $687,000 34% $ 258,000 34%
State taxes, net of federal
tax benefit 140,000 7% 4,000 1%
Amortization of goodwill 10,000 - 10,000 1%
Adjustment of beginning of year
valuation allowance 95,000 5% (269,000) (35%)
Other, net (33,000) (2%) - -
-------- --- --------- ----
$899,000 44% $ 3,000 1%
======== === --------- ====
</TABLE>
Components of the net deferred income tax asset at March 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred income tax assets:
Deferred compensation, bonus,
and vacation liability $207,000 $137,000
Liability reserves for
warranties and rebates 29,000 32,000
Deferred acquisition cost 16,000 41,000
Inventory capitalization and reserve 58,000 40,000
Bad debt reserves 39,000 9,000
Capital loss carryforward 436,000 401,000
-------- --------
Total 785,000 660,000
Deferred income tax liabilities:
Prepaid fees - (60,000)
Depreciation and amortization (43,000) (41,000)
-------- --------
Total (43,000) (101,000)
</TABLE>
26
<PAGE> 27
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Income Taxes (continued):
<TABLE>
<S> <C> <C>
Net deferred tax asset before
valuation allowance 742,000 559,000
Valuation allowance (616,000) (521,000)
--------- ---------
Net deferred income tax asset $ 126,000 $ 38,000
========= =========
</TABLE>
The Company conducts a periodic examination of its valuation allowance.
Factors considered in the evaluation include recent and expected future
earnings, the Company's liquidity, and equity positions. Deferred tax assets
can only be realized to the extent the Company generates taxable income in
future periods.
7. Commitments and Contingencies
ASM leases a facility under a renewable operating lease. At March 31,
1995, future minimum rental payments are as follows: years ended March 31, 1996
and 1997 - $108,000; March 31, 1998 - $54,000.
Rental expense charged to operations for the years ended March 31, 1995
and 1994 was $115,000 and $124,000, respectively.
On March 3, 1994, the Company entered into an extension to a previous five
year Employment Agreement with Arthur J. Rosenberg which would have expired on
August 31, 1995. Under the new Agreement, the Company agreed to employ Dr.
Rosenberg as its President from April 1, 1994, through March 31, 1997, at a
base annual salary of not less than $160,000. In addition to said salary, Dr.
Rosenberg receives ordinary and customary employee fringe benefits, the use of
an automobile paid for by the Company, and deferred compensation equal to at
least 30% but not more than 50%, of his annual salary, the exact amount to be
determined by the Board of Directors. The salary and fringe benefit provisions
are unchanged from the previous Employment Agreement.
27
<PAGE> 28
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Commitments and Contingencies, (continued):
The Employment Agreement also provides certain disability income for Dr.
Rosenberg should he be unable to perform his duties due to illness or injury.
Pursuant to the Employment Agreement, the Company also maintains in force and
pays for a universal life insurance policy on Dr. Rosenberg's life in the face
amount of $1,000,000, the cash surrender value of which, presently $144,000,
remains the property of the Company. The Employment Agreement may be
terminated at any time for Good Cause as defined therein and is subject to
customary provisions.
ASM had an agreement with Dean Warner, former shareholder and chief
executive officer of ASM's predecessor, pursuant to which Mr. Warner provided
consulting services. Under this agreement which expired on September 30, 1994,
ASM paid Mr. Warner $71,000 and $142,000 in fiscal years 1995 and 1994,
respectively. No further amounts are payable to Mr. Warner under the
agreement. In addition, Mr. Warner was entitled to an annual bonus in an amount
equal to one-third of the amount by which ASM's operating income, as adjusted
for certain items, exceeded $1,500,000 in each of the years ended March 31,
1991 through 1994, and the twelve-month period consisting of October 1, 1989 -
March 31, 1990 and April 1 - September 30, 1994. For the years ended March 31,
1995 and 1994, ASM accrued bonuses under this agreement of $296,000 and
$239,000, respectively.
Effective March 31, 1991, the Company sold its former electronic
interconnect subsidiary, AIDCO, Inc., to a group of private investors. As part
of the purchase price, the investors agreed to pay the Company a royalty of
1.5% of sales on a monthly basis for a period of five years. At the time of
the sale, the Company recorded a receivable of $101,000 for future royalty
income. This amount was exceeded during fiscal year 1993, and in the years
ended March 31, 1995 and 1994, the Company received and recorded $218,000 and
$84,000 of royalty income, respectively. The royalty agreement was set to
expire on June 30, 1996. Under the terms of the agreement, the investors
elected, effective November 1, 1994, to make a one-time settlement equal to the
sum of $6,000 times the number of months left under the
28
<PAGE> 29
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Commitments and Contingencies, (continued):
agreement, which at that date, was twenty. A final payment of $120,000 is
included in the amount shown above as received in the fiscal year ended March
31, 1995.
The Company is involved in various legal proceedings in the ordinary
course of business, but believes that it has sufficient insurance coverage, and
that the ultimate outcome of these proceedings will not have a material adverse
effect on its financial condition, results of operations, or liquidity.
8. Subsequent event
On April 11, 1995, the Board of Directors declared a cash dividend of $.05
per share payable on May 15, 1995 to stockholders of record on April 28, 1995.
This is the Company's first such dividend in a program of semiannual cash
dividends.
29
<PAGE> 30
EXHIBIT INDEX
(a) Exhibits [Management Contracts, Compensation Plans and Arrangements are
identified by an asterisk (*)].
3.1 Articles of Incorporation as amended(1)
3.2 Bylaws (2)
4.1 Warrant Agreement dated March 17, 1983 between the Company and U.S.
Stock Transfer Corporation (3)
4.2 Forms of Certificates for Common Stock and Class B Warrants (3)
10.1 Credit Agreement dated October 30, 1989 between Bank of America and ASM
Acquisition Corporation, and related Security Agreements, Subordination
Agreements and Pledge Agreement with Registrant (4)
10.2 Form of Stock Option Certificate for non-qualified stock options (5)
10.3* Employment Agreement between Panatech Research and Development
Corporation and Arthur J. Rosenberg dated March 3, 1994
10.4* Employment Agreement between ASM Company and Robert J. Perret, Jr.,
dated March 3, 1994
10.5* Consulting Agreement between Panatech Research & Development Corporation
and Paul B. Rosenberg dated September 11, 1992 (6)
10.7* 1993 Stock Option Plan (7)
21 Subsidiaries (6)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- - -----------------
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1987.
30
<PAGE> 31
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended March 31, 1989.
(3) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Company's Registration Statement on Form S-1 (No. 2- 73658) filed March 16,
1983.
(4) Incorporated by reference to the Company Current Report on Form 8-K
dated October 5, 1989.
(5) Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-33408) filed on April 6, 1990.
(6) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended March 31, 1993.
(7) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended March 31, 1994.
31
<PAGE> 1
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-KSB, into the Company's previously
filed Registration Statements on Form S-8 (Files No. 33-3855 and No. 33-70798).
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
June 9, 1995
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-KSB FOR THE YEAR ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) 10-KSB FOR THE YEAR ENDED MARCH 31, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,902
<SECURITIES> 0
<RECEIVABLES> 2,343
<ALLOWANCES> 0
<INVENTORY> 887
<CURRENT-ASSETS> 6,383
<PP&E> 1,077
<DEPRECIATION> 552
<TOTAL-ASSETS> 8,342
<CURRENT-LIABILITIES> 2,576
<BONDS> 300
<COMMON> 37
0
0
<OTHER-SE> 5,429
<TOTAL-LIABILITY-AND-EQUITY> 8,342
<SALES> 10,002
<TOTAL-REVENUES> 10,002
<CGS> 4,183
<TOTAL-COSTS> 4,183
<OTHER-EXPENSES> 3,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 2,021
<INCOME-TAX> 899
<INCOME-CONTINUING> 1,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,122
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
