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, 1996
--------------
/ / 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 incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. XX
----
1
<PAGE>
State issuer's revenues for the most recent fiscal year. $11,325,000
----------
As of June 3, 1996, 3,974,175 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 $16,200,000.
Documents incorporated by reference:
Proxy Statement for 1996 Annual Meeting of Shareholders - Items 9,
10, and 11.
2
<PAGE>
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 in 1989,
manufactures and sells precision engineered accessories for high
pressure, airless paint spraying equipment used by industrial,
commercial and residential paint contractors.
In fiscal 1996 and 1995, Panatech reported net income of
$1,641,000 and $1,122,000, or $.41 and $.31 per share, respectively, on
sales of $11,325,000 and $10,002,000, comprising the consolidated
operating performance of Panatech and ASM. The Company has $3,046,000
in cash, a net worth of $7,784,000, a current ratio of 4.9:1, and no
long-term debt.
ASM Company, Inc.
ASM designs, manufactures, markets, and sells engineered
accessories for airless spray systems, which are today the most favored
technology for the volume application of paints and other coating
materials. 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. The ZIP-TIP, which is
ASM's primary product, is the subject of a patent dispute in which ASM
has charged a competitor with infringement. See "Item 3. Legal
Proceedings." 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.
Other ASM products include the ASM-300, 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.
3
<PAGE>
ASM's principal marketing approach is the sale of its airless
accessories to retail stores or chains which service the after-market
needs of painting contractors. These products are sold primarily under
the ASM brand name, but in some cases are private-labeled under the
name of the retailer. Related tiers of retail distribution involve
rental stores and warehouse distributors, both of which are effective
in providing service to smaller customers; and master distributors,
which are particularly suited to foreign sales. In addition, ASM sells
it products to original equipment manufacturers of pumps who combine
the two product lines to create airless spraying systems for sale
through distribution channels which ASM cannot service economically.
In some instances, these customers have contracted with ASM to design,
manufacture and private-label special airless products based on ASM
technology for them to offer with both their system sales and their
after-market sales.
Today, ASM-manufactured airless spraying accessories are sold
through more than 7,500 retail outlets in North America, Europe,
Australia, and the Pacific Rim. Many of these outlets are members of
national or regional chains, such as the Glidden Company, the Sherwin-
Williams Company, and the Dunn-Edwards Company. At March 31, 1996,
approximately 54% of ASM's accounts receivable were related to three
customers, each of which accounted for 12% to 35% of annual sales.
These three customers accounted for approximately 62% of accounts
receivable at March 31, 1995. The loss of any of these customers would
have a material adverse effect on the Company's business. (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 to three working days of receipt, so therefore its backlog
is not a meaningful indicator of future sales.
The Company's foreign sales represented 13% and 15%, respectively,
of 1996 and 1995 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 sold to master
distributors and agents overseas who hold the products in inventory for
redistribution in their local markets.
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
extensive testing before shipment.
Although the airless spray industry is a relatively mature market
and thus not subject to rapid technological change, ASM conducts
research and development projects to improve the quality and ergonomics
of its present product line, to introduce new products which can better
4
<PAGE>
serve the customer's functional needs, and to achieve cost reductions
through innovative product designs and manufacturing techniques.
ASM is constantly developing proprietary new products, many of
which have resulted in successful patents. These patents, as well as
the Company's trademarks, are an integral part of ASM's market
position. As a matter of policy, therefore, the Company vigorously
defends its patents and trademarks against possible infringement. ASM
owns eighteen US patents covering features of its reversing spray tips
and airless spray guns, and several other U.S. patents are pending.
The three U. S. patents relating to ASM's primary product, the ZIP-TIP,
expire in 2001 and 2013. ASM also has three foreign patents on the
ZIP-TIP with several more pending. (See Item 3. Legal Proceedings,
below).
Management believes that the competitive position of ASM depends
not only on such patents, but 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. These companies have substantially greater financial,
manufacturing, and marketing resources than ASM.
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, 1996, ASM had 141 full-time personnel, consisting of
9 in administration, 7 in sales, and 125 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.
5
<PAGE>
In April 1995, ASM filed a lawsuit in the United States District
Court for the Central District of California against Titan Tool,
Inc.(Titan), claiming that a new product recently introduced into the
marketplace by Titan infringes three patents relating to ASM's primary
product, the ZIP-TIP. Thereafter, Titan answered and filed certain
cross-claims against ASM. In September 1995, the parties agreed to
dismiss all claims against each other for financial damages and to
submit all patent issues to final and binding arbitration before a
single arbitrator. The arbitration hearing was held in February and
March 1996, and the arbitrator's decision is expected to be rendered by
the end of June 1996.
The Company believes that an adverse result of this arbitration
could significantly affect its plans to build market share for this
product line over the next three to five years.
Item 4. Submission of Matters to a Vote of Security Holders
None
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, and dividends paid.
<TABLE>
<CAPTION>
Dividend
Quarter Ended High Low Paid
------------- ---- --- ----
<S> <C> <C> <C> <C>
Fiscal 1996 June 30, 1995 5 7/8 2 3/4 $.05
- - -----------
September 30, 1995 8 3/4 5
December 31, 1995 7 1/2 3 7/8 $.075
March 31, 1996 4 3/4 2 7/8
6
<PAGE>
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
</TABLE>
The Company had approximately 450 record holders of its Common
Stock as of June 3, 1996. According to the Company's transfer agent,
U. S. Stock Transfer Corporation, there were, in addition,
approximately 1,300 beneficial holders at that date.
In April 1995, the Company declared its first cash dividend, as
shown in the table above. On April 11, 1996, a cash dividend of $.10
per share was declared payable on May 12 to stockholders of record on
April 30, 1996.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
1996 Compared to 1995
In the fiscal year ended March 31, 1996, the Company had sales of
$11,325,000, an increase of 13% over the $10,002,000 reported in the
previous fiscal year. Price increases accounted for 3% of the gain,
while the remaining 10% was attributable largely to growing domestic
sales of ASM's spray tip product line. Foreign sales were
approximately $1,500,000 in 1996 and 1995, or 13% and 15% of total
sales, respectively. Foreign sales are made in U. S. dollars and are
therefore not subject to foreign currency exchange rate risk.
While the sales increase in fiscal 1996 was $1,300,000, up 13%,
over the prior year, the increase in 1995 had been $3,000,000, or 43%
higher than fiscal 1994. Approximately half of the increase in fiscal
1995 reflected large initial stocking orders, or "pipeline filling"
into ASM's new wholesale channels of distribution. These orders, which
only partly resulted in immediate end-user sales, were shipped primarily
in the last two quarters of fiscal 1995, i.e., those ended December 31,
1994 and March 31, 1995, and in the first quarter of fiscal 1996, ended
June 30, 1995. In the rest of fiscal 1996, ASM's new wholesale
customers adjusted their inventory levels to match both the actual
part-by-part demands of their retail customers and their overall sales
volume. Consequently, ASM's sales to these wholesalers in the latter
part of fiscal 1996 more accurately reflected end-user demand. One
effect of these events was to have temporarily distorted the normal
seasonal pattern of ASM sales in which shipments are historically
strongest in the June and September quarters, and lowest in the
December and March quarters.
7
<PAGE>
The results in fiscal 1996 reflected a return to normal season-
ality patterns such as a fourth quarter slowdown which was, in fact,
exaggerated by extreme weather conditions in many parts of the
country during the winter months.
Cost of sales was $4,529,000, or 40% of sales, compared to
$4,183,000, or 41.8% 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 1996. Labor costs were essentially unchanged, while
material costs declined mainly due to more efficient buying resulting
from larger quantity purchasing. Gross profit was $6,796,000, 16.8%
higher than the $5,819,000 generated in 1995, principally due to the
higher sales volume.
Selling, general, and administrative expenses were $3,800,000 in
1996 compared to $3,687,000 in 1995, an increase of 3.1%. Included in
1996 expenses was $565,000 of legal expenses incurred in connection
with the patent arbitration with Titan Tool Company (See Item 3 Legal
Proceedings). In 1995, there was $471,000 of expenses as the final
obligation in connection with the 1989 acquisition of ASM.
Interest income increased by $60,000, mainly due to income on
proceeds from the exercise of 251,325 warrants in August to October
1995. In 1995, royalty income from the FY 1991 sale of a business was
$218,000, including a one-time final payment of $120,000. There was no
such payment in 1996. (See Note 6 of Notes to Consolidated Financial
Statements).
Interest expense was $62,000 compared to $141,000 last year. The
Company prepaid the entire remaining balance of its acquisition-related
bank debt in July 1995.
In 1996, the Company had a consolidated pretax profit of
$2,829,000 compared to $2,021,000 in 1995, an increase of 39.9%. Net
income in 1996 was $1,641,000, compared to $1,122,000, last year, an
increase of 46%. Average shares outstanding were 4,021,000 in 1996
compared to 3,568,000 in 1995, an increase of 12.7%. The increase was
due to the exercise during the year of Class B warrants and stock
options. Therefore, earnings per share increased from $.31 to $.41, a
gain of 32.2%, at a lesser rate than the 46% gain in net income.
1995 Compared to 1994
In the fiscal year ended March 31, 1995, the Company had sales of
$10,002,000, an increase of $3,030,000, or 43%, over the $6,972,000
reported in the previous fiscal year, mainly due to increased market
penetration with existing products. Price increases were approximately
3% during the year, and approximately 5% of the sales increase resulted
from new products such as a new specialized tip. Foreign sales were
approximately $1,500,000, or 15% of total sales, an increase of
$315,000, or 27%, from the previous year.
8
<PAGE>
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 were $3,687,000 in
1995 compared to $2,835,000 in 1994, an increase of 30%. The increase
in expenditures reflected an expansion of sales effort, advertising,
and international marketing activities. Royalty 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 6 of
Notes to Consolidated Financial Statements).
Interest expense was $141,000 compared to $152,000 in the previous
year principally due to the reduced principal balance outstanding on
its acquisition-related bank loan which offset higher interest rates.
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 compared to $757,000 last year, an increase of
48.2%. Average shares outstanding were 3,568,000 in 1995 compared to
3,541,000 in 1994. Therefore, earnings per share increased from $.21 to
$.31, a gain of 47.6%.
Liquidity and Capital Resources
The Company had, at March 31, 1996, cash and cash equivalents of
$3,046,000, working capital of $5,647,000, and no debt. ASM also has a
$1,000,000 revolving credit facility under which no amounts were
outstanding at March 31, 1996. 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 commenced a semi-annual cash dividend program.
Initially, the dividend was $.05 per share, and has been increased to
$.075 and then $.10 per share. The semi-annual dividend requirements
are presently approximately $400,000.
The Company has outstanding 622,375 Class B Warrants. Each
Warrant is exercisable for one share of Common Stock at $5.00 per
share. During the year ended March 31, 1996, warrants for 251,325
shares were exercised, for a total of $1,257,000. The Company
announced on May 21, 1996 that the warrants were extended for a final
time, and will expire on June 30, 1997.
9
<PAGE>
Item 7. Financial Statements
The Consolidated Financial Statements of Panatech appear in this
Report beginning at Page 14.
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 1996 Annual Meeting of Shareholders.
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 1996 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 1996 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions
None.
10
<PAGE>
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)
10.2* Form of Stock Option Certificate for non-qualified stock options
granted to directors (4)
10.3* Employment Agreement between Panatech Research and Development
Corporation and Arthur J. Rosenberg dated March 3, 1994 (5)
10.4* Employment Agreement between ASM Company and Robert J. Perret,
Jr., dated March 3, 1994 (5)
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 (EDGAR filing only)
- - -----------------
(1) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1987 (File No. 0-12530).
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1989 (File No. 0-12530).
(3) Incorporated by reference to Pre-Effective Amendment No. 3 to
the Company's Registration Statement on Form S-1 (File No. 2-73658)
filed March 16, 1983.
(4) Incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-33408) filed on April 6, 1990.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1995.
11
<PAGE>
(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
12
<PAGE>
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 7th
day of June, 1996.
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 6/7/96
Arthur J. Rosenberg (Principal Executive and
Financial Officer)
/s/ Joseph Elmaleh
- - ------------------ Director 6/7/96
Joseph Elmaleh
/s/Paul B. Rosenberg
- - -------------------- Director and Principal
Paul B. Rosenberg Accounting Officer 6/7/96
/s/ James T. Stamas
- - -------------------- Director 6/7/96
James T. Stamas
13
<PAGE>
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, 1996 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, 1996, 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 21, 1996
14
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 1996
(000's of dollars)
<TABLE>
<CAPTION>
ASSETS Notes
-----
<S> <C> <C>
Current Assets
Cash and cash equivalents $3,046
Receivables, net of allowance for
doubtful accounts of $144,000 2,240
Inventories 2 1,478
Prepaid expenses 136
Deferred income tax asset 5 197
-----
Total current assets 7,097
Property, plant and equipment, net 3 913
Covenants not to compete, net of
amortization of $1,393,000 107
Cost of purchased business in excess of net assets
acquired, net of amortization of $148,000 940
Other assets 177
-----
Total assets $9,234
=====
LIABILITIES
Current liabilities
Accounts payable $ 233
Income taxes payable 5 31
Accrued payroll and benefits 662
Other accrued expenses 524
-----
Total liabilities 1,450
Commitments and contingencies 6
SHAREHOLDERS' EQUITY 4
Common Stock, par value $.01 per share -
authorized 20,000,000 shares, issued
and outstanding 3,987,000 40
Additional paid in capital 8,951
Accumulated deficit (1,207)
-----
Total shareholders' equity 7,784
-----
Total liabilities and shareholders' equity $9,234
=====
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
15
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended March 31, 1996 and 1995
(000's of dollars except per share values)
<TABLE>
<CAPTION>
Notes 1996 1995
----- ---- ----
<S> <C> <C> <C>
Sales $11,325 $10,002
Cost of Sales 4,529 4,183
------ -----
Gross Profit 6,796 5,819
Selling, general and
administrative expenses 3,800 3,687
Amortization of intangibles 243 266
----- -----
Operating Income 2,753 1,866
Other income (expense)
Interest income 138 78
Interest expense ( 62) ( 141)
Royalty income - 218
----- -----
Income before income taxes 2,829 2,021
Income tax provision 5 (1,188) ( 899)
----- -----
Net Income $ 1,641 $ 1,122
===== =====
Earnings per share - primary and fully diluted $ .41 $ .31
===== ====
Weighted average shares outstanding 4,021 3,568
===== =====
Dividends per common share $ .125 $ -
===== ====
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1996 and 1995
(000's of dollars)
<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, 1994 3,545 $35 $7,540 ($3,489) $4,086
Repurchase and cancellation
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
Repurchase and cancellation
of common stock ( 32) - (141) - (141)
Exercise of stock options 76 1 66 - 67
Exercise of warrants 251 2 1,255 - 1,257
Cash dividends paid - - - ( 481) ( 481)
Net income - - - 1,641 1,641
----- -- ----- ----- -----
Balance, March 31, 1996 3,987 $40 $8,951 ($1,207) $7,784
===== == ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
17
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1996 and 1995
(000's of dollars)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash from operations
Net income $1,641 $1,122
Adjustments to reconcile net income to
net cash provided by operations -
Provision for uncollectible accounts 67 98
Amortization 243 266
Depreciation 158 133
Changes in current assets and liabilities
(Increase) decrease in receivables 36 (1,082)
(Increase) in inventories (591) (178)
(Increase) decrease in prepaid expenses ( 11) 122
(Increase) in deferred tax asset ( 71) ( 88)
Increase (decrease) in accounts payable
and other accrued expenses 364 ( 57)
Increase (decrease) in income taxes payable (765) 671
(Increase) in other assets (33) ( 35)
----- -----
Net cash provided by operations 1,038 972
Cash flow from investing activities
Capital expenditures (546) (198)
Cash flow from financing activities
Payment of note payable (1,050) (750)
Exercise of stock options 67 258
Exercise of warrants 1,257 -
Purchase and cancellation of common stock ( 141) ( 25)
Dividends paid to shareholders ( 481) -
----- -----
Cash used by financing activities ( 348) (517)
Net increase in cash 144 257
Beginning balance, cash and cash equivalents 2,902 2,645
----- -----
Ending balance - cash and cash equivalents $3,046 $2,902
===== =====
Supplemental information
Interest paid $ 32 $ 116
Taxes paid $2,066 $ 285
===== ===
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies:
Nature of 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 in 1989,
manufactures and sells precision engineered accessories for high
pressure, airless paint spraying equipment used by industrial,
commercial and residential paint contractors.
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. The preparation of consolidated 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 at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
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:
Years
-----
Leasehold improvements Life of lease
Vehicles 4
Office furniture and equipment 3 - 7
Machinery and equipment 5 - 10
19
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Nature of Business and Significant Accounting Policies, (continued:)
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
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.
In March 1995, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of" (SFAS No. 121). The provisions of SFAS No. 121 must be
implemented by the Company in fiscal 1997. The Company believes that
its current impairment policy is substantially similar to SFAS No. 121
and, accordingly, the adoption of SFAS No. 121 is not currently
expected to have a significant effect on the Company's financial
position or results of operations when adopted.
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 (87% of fiscal 1996 sales) and foreign customers (13% of
fiscal 1996 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, 1996, approximately 54% 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, 1996, sales to each of the Company's three largest customers were
between 12-35% 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.
20
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Nature of Business and Significant Accounting Policies, (continued:)
Research and Development Costs
The Company charges research and development costs to
expense when incurred. In 1996 and 1995, the Company incurred
approximately $173,000 and $108,000, respectively, of research and
development costs. These amounts are included in selling, general, and
administrative expenses in the accompanying consolidated statements of
income.
Income Taxes
The Company and its subsidiary file a consolidated Federal
income tax return. In fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes." The adoption of SFAS 109 changes the Company's method
of accounting for income taxes from the deferred method (ABP Opinion
No. 11) to an asset and liability approach. Previously, the Company
deferred the past tax effects of temporary differences between
financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets
and liabilities.
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, including common stock equivalents for outstanding stock
options and Class B Warrants, where not antidilutive.
The calculation of shares outstanding for primary earnings
per share is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Weighted average shares outstanding
during the year 3,837,300 3,568,000
Common stock equivalents for
outstanding options 121,300 -
Common stock equivalents for
outstanding warrants 62,400 -
--------- ---------
4,021,000 3,568,000
</TABLE>
The calculation for shares outstanding for computing fully
diluted earnings produced immaterial differences in earnings per share
for both years.
21
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. Nature of Business and Significant Accounting Policies, (continued:)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents,
receivables, accounts payable and other accrued expenses approximate
fair value due to the short-term maturity of those instruments.
2. Inventories
The components of inventories at March 31, 1996 are as follows:
<TABLE>
<S> <C>
Raw materials $989,000
Work in process 166,000
Finished goods 323,000
---------
Total $1,478,000
</TABLE>
3. Property, Plant and Equipment
Property, plant and equipment consist of the following at March
31, 1996:
<TABLE>
<S> <C>
Leasehold improvements $ 10,000
Machinery and equipment 908,000
Office furniture & equipment 276,000
Vehicles 82,000
---------
1,276,000
Construction in Progress 347,000
---------
1,623,000
Less: Accumulated depreciation (710,000)
---------
Property, plant and equipment, net $913,000
</TABLE>
4. Capital Stock
At March 31, 1996, there were outstanding Class B warrants for the
purchase of 622,375 shares of the Company's common stock at $5.00 per
share. During the year ended March 31, 1996, 251,325 such warrants
were exercised to purchase common stock at $5.00 per share, for a total
of $1,257,000. No warrants were exercised in 1995. The Company
announced on May 21, 1996 that the warrants were extended for a final
time, and will expire on June 30, 1997.
22
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Capital Stock (continued)
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, 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, 1996 were as follows:
<TABLE>
<CAPTION>
Shares
under option Price range
------------ -----------
<S> <C> <C>
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
1996 Activity
Canceled ( 12,000) $2.00-$2.625
Exercised - 1983 Plan ( 55,000) $ .375
Exercised - 1993 Plan ( 20,750) $2.00-$2.625
------- ------------
Outstanding at March 31, 1996 119,750 $.375-$2.625
Exercisable at March 31, 1996 29,625 $1.75-$2.625
Available for future grant
at March 31, 1996 264,500
</TABLE>
In fiscal 1996 and 1995, the Company repurchased in the open
market and retired 32,200 and 10,600 shares of its common stock for
$141,000 and $25,000, respectively.
23
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Income Taxes
The provision (benefit) for income taxes consists of the following for
the fiscal years ended March 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal $ 979,000 $ 766,000
State 280,000 221,000
--------- -------
1,259,000 987,000
Deferred
Federal 29,000 (128,000)
State 5,000 ( 55,000)
--------- -------
34,000 (183,000)
Adjustment to valuation allowance (105,000) 95,000
--------- -------
Total $1,188,000 $899,000
========= =======
</TABLE>
The provision for income taxes is reconciled with the Federal statutory
rate for the years ended March 31, as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
Tax Tax
Tax Rate Tax Rate
--- ---- --- ----
<S> <C> <C> <C> <C>
Provision computed at federal
statutory rate $ 962,000 34% $ 687,000 34%
State taxes, net of federal
tax benefit 181,000 6% 140,000 7%
Amortization of goodwill 10,000 - 10,000 -%
Adjustment of beginning of year
valuation allowance 10,000 - 95,000 5%
Other, net 25,000 2% (33,000) (2%)
--------- -- ------- --
$ 1,188,000 42% $899,000 44%
========= == ======= ==
</TABLE>
24
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Income Taxes (continued):
Components of the net deferred income tax asset at March 31, are
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Deferred compensation, bonus,
and vacation liability $200,000 $207,000
Liability reserves for
warranties and rebates 42,000 29,000
Deferred acquisition cost 7,000 16,000
Inventory capitalization 115,000 58,000
Bad debt reserves 57,000 39,000
Capital loss carryforward 341,000 436,000
------- -------
Total 762,000 785,000
Deferred income tax liabilities:
Depreciation and amortization (54,000) ( 43,000)
------- -------
Total (54,000) ( 43,000)
Net deferred tax asset before
valuation allowance 708,000 742,000
Valuation allowance (511,000) (616,000)
------- -------
Net deferred income tax asset $197,000 $126,000
======= =======
</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.
In the current year, the Company recognized the expiration of
$95,000 of capital loss carryforward previously recognized as a
deferred tax asset. This capital loss carryforward reduction was
offset by a corresponding decrease in the valuation allowance. The
remaining capital loss carryforward of $341,000 expires in 1997. The
Company anticipates that, if not utilized, this amount will be offset
by a further reduction in the valuation allowance.
25
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Commitments and Contingencies
ASM leases a facility under a renewable operating lease. At March
31, 1996, future minimum rental payments are as follows: year ended
March 31, 1997 - $108,000; March 31, 1998 - $54,000.
Rental expense charged to operations for the years ended March 31,
1996 and 1995 was $108,000 and $115,000, 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.
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 $176,000, 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.
In the current year, ASM entered into a bank revolving credit
agreement (the "Agreement") effective November 15, 1995. The Agreement
provides for borrowings up to $1,000,000 through October 1, 1997, at
which time the Agreement expires. The interest rate on borrowings is
based on the bank's reference rate plus 1/2 percentage point (8.25% at
March 31, 1996). The Agreement contains various financial covenants,
including maintenance of a certain quick ratio, maintenance of certain
total liabilities to net worth ratio, positive net income before taxes
and extraordinary items, and restrictions on indebtedness. As of March
31, 1996, ASM was in compliance with all financial covenants. Included
in cash and cash equivalents is $100,000 of restricted cash which must
remain on deposit with the lender for the life of the Agreement. As of
March 31, 1996, ASM had no amounts outstanding under the Agreement.
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
26
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Commitments and Contingencies, (continued):
expired on September 30, 1994, ASM paid Mr. Warner $71,000 in fiscal
year 1995. No further amounts are payable to Mr. Warner under the
agreement.
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 for a period of five years. In the year
ended March 31, 1995, the Company received $218,000 of royalty income,
including a final one-time payment of $120,000.
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.
In April 1995, the Company's wholly owned subsidiary, ASM Company,
Inc. (ASM), filed a lawsuit in the United States District Court for the
Central District of California against Titan Tool, Inc.(Titan),
claiming that a new product recently introduced into the marketplace by
Titan infringed certain patents held by ASM. Thereafter, Titan
answered and filed certain cross-claims against ASM. In September
1995, the parties agreed to dismiss all claims against each other for
financial damages and to submit all patent issues to final and binding
arbitration before a single arbitrator. The arbitration hearing was
held in February and March 1996, and the arbitrator's decision is
expected to be rendered by the end of June 1996. During the year ended
March 31, 1996, the Company incurred $565,000 of legal expenses in
connection with this matter. Such amounts are included in selling,
general, and administrative expenses.
27
<PAGE>
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)
10.2* Form of Stock Option Certificate for non-qualified stock options
granted to directors (4)
10.3* Employment Agreement between Panatech Research and Development
Corporation and Arthur J. Rosenberg dated March 3, 1994 (5)
10.4* Employment Agreement between ASM Company and Robert J. Perret,
Jr., dated March 3, 1994 (5)
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 (EDGAR filing only)
- - -----------------
(1) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1987 (File No. 0-12530).
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1989 (File No. 0-12530).
(3) Incorporated by reference to Pre-Effective Amendment No. 3 to
the Company's Registration Statement on Form S-1 (File No. 2-73658)
filed March 16, 1983.
(4) Incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-33408) filed on April 6, 1990.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1995.
28
<PAGE>
(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.
29
<PAGE>
PANATECH RESEARCH AND DEVELOPMENT CORPORATION
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-KSB, into the
Company's previously filed Registration Statements on Form S-8 (File
No. 33-3855 and No. 33-70798), and Form S-3 (File No. 2-73658).
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
June 7, 1996
30
<PAGE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,046
<SECURITIES> 0
<RECEIVABLES> 2,384
<ALLOWANCES> (144)
<INVENTORY> 1,478
<CURRENT-ASSETS> 7,097
<PP&E> 1,623
<DEPRECIATION> 710
<TOTAL-ASSETS> 9,234
<CURRENT-LIABILITIES> 1,450
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 7,744
<TOTAL-LIABILITY-AND-EQUITY> 9,234
<SALES> 11,325
<TOTAL-REVENUES> 11,325
<CGS> 4,529
<TOTAL-COSTS> 4,529
<OTHER-EXPENSES> 4,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (62)
<INCOME-PRETAX> 2,829
<INCOME-TAX> (1,188)
<INCOME-CONTINUING> 1,641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,641
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
