U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For quarterly period ended: March 31, 1996 or
___ Transition report under Section 13 or l5(d) of the Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 2-85984-C
North Atlantic Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1390785
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8120 Penn Avenue South, Suite 435, Bloomington, Minnesota 5543l
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 612-888-8553
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report)
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 ___.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date. 3,292,689 common shares as of March
31, 1996.
Transitional business format? Yes_____ No X
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTH ATLANTIC TECHNOLOGIES, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 44,092 $ 44,607
Trade accounts receivable, net of allowance for
doubtful accounts of $339,440 at March 31,
1996 and at December 31, 1995 1,086,230 818,887
Other receivable 171,404 171,404
Inventories 149,458 145,356
Costs and estimated earnings in excess of
billings on uncompleted contracts 256,941
Other current assets 25,424 29,029
----------- -----------
Total current assets 1,733,549 1,209,283
PROPERTY AND EQUIPMENT
Land 92,510 92,510
Buildings and leasehold improvements 692,441 692,441
Machinery and equipment 1,211,914 1,211,914
Office furniture and equipment 155,158 153,945
Automobiles 11,666 11,666
----------- -----------
Totals 2,163,689 2,162,476
Less accumulated depreciation (1,344,542) (1,305,351)
----------- -----------
Net property and equipment 819,147 857,125
OTHER ASSETS 12,399 3,652
----------- -----------
$ 2,565,095 $ 2,070,060
=========== ===========
</TABLE>
See notes to financial statements.
ITEM 1 (Continued)
<TABLE>
<CAPTION>
NORTH ATLANTIC TECHNOLOGIES, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
LIABILITIES AND EQUITY 1996 1995
----------- -----------
<S> <C> <C>
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities
Postpetition
Trade accounts payable $ 729,785 --
Billings in excess of costs and estimated
earnings on uncompleted contracts 129,290 --
Accrued liabilities:
Taxes other than income 6,329 --
Compensation 47,690 --
Interest 17,708 --
Other 11,078 --
----------- -----------
Total 941,880 --
Prepetition (See Note 3)
Current maturities of long-term debt $ 1,846,565 $ 3,547,622
Trade accounts payable 454,495 878,422
Other accounts payable 393,428 393,428
Billings in excess of costs and estimated earnings on
uncompleted contracts -- 477,893
Accrued liabilities:
Taxes other than income -- 15,219
Warranty reserve 175,000 200,000
Compensation 31,309 42,198
Interest -- 170,378
Other 87,830 --
----------- -----------
Totals 2,988,627 5,725,160
Total current liabilities 3,930,507 5,725,160
Lease obligations, net of current maturities 14,957 12,251
Total liabilities not subject
to compromise 3,945,464 5,737,411
LIABILITIES SUBJECT TO COMPROMISE (SEE NOTE BELOW) 2,169,426 --
----------- -----------
Total liabilities 6,114,890 5,737,411
STOCKHOLDER'S DEFICIT
Common stock, no par value; authorized
5,000,000 shares; issued and outstanding
2,392,689 at December 31, 1995, and
3,292,689 at March 31, 1996 3,056,804 3,047,804
Accumulated deficit (6,606,599) (6,715,155)
----------- -----------
Total stockholders' deficit (3,549,795) (3,667,351)
----------- -----------
$ 2,565,095 $ 2,070,060
=========== ===========
</TABLE>
See notes to financial statements.
Note: Liabilities subject to compromise consist of the
following:
Subordinated convertible debentures $1,993,000
Related debenture interest payable 176,426
----------
$2,169,426
==========
ITEM 1 (Continued)
<TABLE>
<CAPTION>
NORTH ATLANTIC TECHNOLOGIES, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended March 31
----------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES $ 1,394,512 $ 1,838,998
COST OF REVENUES 883,617 1,474,442
----------- -----------
GROSS PROFIT 510,895 364,556
OPERATING COSTS 310,996 428,245
----------- -----------
OPERATING INCOME (LOSS) 199,899 (63,689)
OTHER INCOME (EXPENSE)
Royalty and services income 6,245 1,244
Interest expense (contractual interest in
1996 was $123,891) (82,372) (105,284)
Rental and other income 10,350 27,949
----------- -----------
(65,777) (76,091)
----------- -----------
INCOME(LOSS) BEFORE REORGANIZATION ITEM 134,122 (139,780)
REORGANIZATION ITEM, PROFESSIONAL FEES 25,566 --
----------- -----------
NET INCOME (LOSS) $ 108,556 ($ 139,780)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE: $ .04 ($ .06)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,015,766 2,392,689
=========== ===========
</TABLE>
See notes to financial statements
ITEM 1 (Continued)
<TABLE>
<CAPTION>
NORTH ATLANTIC TECHNOLOGIES, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Quarter Ended March 31
----------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 777,708 $ 1,088,775
Cash paid to suppliers & employees (1,021,749) (1,533,024)
Interest, rent and royalties received 17,453 28,466
Interest paid (58,616) (45,436)
----------- -----------
Net cash used in operating activities (285,204) (461,219)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,213) (17,211)
Proceeds from disposal of fixed assets -- 400
Additions of other assets (8,747) --
----------- -----------
Net cash used in investing activities (9,960) (16,811)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 300,000 500,000
Payments of long-term debt (5,351) (23,636)
----------- -----------
Net cash provided by financing activities 294,649 476,364
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (515) (1,666)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,607 41,384
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,092 $ 39,718
=========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
OPERATING ACTIVITIES:
Net Income (loss) $ 108,556 $ (139,780)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 39,191 50,141
Stock issued for compensation 2,250
Gain on disposal of equipment -- (400)
Changes in assets and liabilities:
Receivables (267,343) (684,354)
Inventories (4,102) (73,041)
Other current assets 10,355 12,210
Accounts payable and accrued liabilities 431,433 337,709
Net increase (decrease) in billings related to costs
and estimated earnings on uncompleted contracts (605,544) 36,296
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (285,204) $ (461,219)
=========== ===========
</TABLE>
See notes to financial statements
Item I (continued)
NORTH ATLANTIC TECHNOLOGIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying financial statements are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the
results of operations for the periods presented have been made.
The Company's financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As a result
of the 1993, 1994 and 1995 net losses, the Company's financial resources
have been strained. As of March 31, 1996, current liabilities exceed
current assets by $2,221,958 and the Company has a net capital deficiency
of $3,574,795. In addition, on February 1, l996, the Company filed a
petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. A Plan of Reorganization was initially confirmed by the
United States Bankruptcy Court on April 19, 1996 and approved on May 7,
1996, as amended (See Note 3). These factors, among others, indicate that
the Company may be unable to continue as a going-concern for a reasonable
period of time. In addition to emergence from Chapter 11 (as discussed in
Item 2), the Company's continuation as a going-concern is dependent on its
ability to generate sufficient cash flow from operations, and obtain
additional financing to meet its obligations on a timely basis. The
Company's business is currently dependent on large projects in the
industrial sector. These projects involve long order cycles, and exact
order placement dates are beyond the control of the Company. While the
Company utilizes a progress billing procedure, there are periods of net
cash outflows when cash flow is of concern. During l995 and through March
31, 1996, the Company was able to manage its normal operating cash flow
through the use of internally generated funds and its established line of
credit.
2. Earnings per share - when calculated on a fully diluted basis, per share
amounts and average shares outstanding are identical to the amounts shown
in the Statement of Operations.
In January, 1996, 900,000 shares of the Company's common stock were
issued at a market value of $.01 per share. The market value of the shares
total $9,000 and is being charged to expense during 1996.
3. Subsequent Event - On February 1, 1996 the Company filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. As
stated in Note 1, the Plan of Reorganization was approved, as amended, on
May 7, 1996. The Plan of Reorganization provided that:
a) Subordinated Debenture Holders will receive one share of common stock
for each $1.50 owed by the Company. In addition, each debenture holder
will receive one share of convertible preferred stock at $0.01 par
value, with $25 redemption value for each $100 of debenture debt of the
Company, and
b) Each existing equity holder will be issued one share of common stock in
return for the cancellation of three shares owned by the shareholder.
c) $500,000 of the line of credit borrowings would be converted to a
five-year note bearing interest at a rate of up to 12%, with the
remainder, including an additional $200,000 in financing which will
become available upon approval of the plan, being financed under a new
line of credit at comparable rates with required monthly reductions of
$25,000 commencing May 1, 1996. It has been subsequently agreed to
defer reduction of the line of credit in $25,000 increments until
August 1, 1996. On May 8, 1996 a note was signed with the foregoing
terms.
d) All other general creditors claims will be settled in full upon a
schedule to be agreed upon between the Company and its creditors.
Under the terms of the Plan of Reorganization, Debenture Holders will
receive 1,446,284 newly-issued common shares, and 21,695 newly-issued
preferred shares.
Following the 3-for-1 reverse split of the no par common stock, 3,292,689
common shares will be canceled and replaced with 1,097,563 newly-issued
common shares.
The total outstanding common shares following the above common stock
adjustments will be 2,543,847. If the adjustments occurred on January 1,
1996, supplemental earnings per share for the first quarter of 1996 would
have been unchanged as reported at $.04.
The adjustments to reflect the consummation of the Plan have not been
recorded in the accompanying financial statements.
For the second quarter of 1996, the Company expects to record an
extraordinary gain in the amount of $2,154,746 from the conversion of
Subordinated Convertible Debentures into capital stock.
Upon emerging from Chapter 11, the reorganization value of the assets
immediately before the date of confirmation will be less than the total of
all postpetition liabilities and allowed claims, and since holders of
existing voting shares immediately before confirmation will receive less
than 50 percent of the voting shares of the emerging entity, the Company
will adopt Fresh-Start reporting in the second quarter, 1996.
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On February 1, 1996 the Company filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. As stated in Note 1, the Plan
of Reorganization was approved, as amended, on May 7, 1996. The Plan of
Reorganization provided that:
1. Subordinated Debenture Holders will receive one share of common stock for
each $1.50 owed by the Company. In addition, each debenture holder will
receive one share of convertible preferred stock at $0.01 par value, with
$25 redemption value for each $100 of debenture debt of the Company, and
2. Each existing equity holder will be issued one share of common stock in
return for the cancellation of three shares owned by the shareholder.
3. $500,000 of the line of credit borrowings would be converted to a five-year
note bearing interest at a rate of up to 12%, with the remainder, including
an additional $200,000 in financing which will become available upon
approval of the plan, being financed under a new line of credit at
comparable rates with required monthly reductions of $25,000 commencing May
1, 1996. It has been subsequently agreed to defer reduction of the line of
credit in $25,000 increments until August 1, 1996. On May 8, 1996 a note
was signed with the foregoing terms.
4. All other general creditors claims will be settled in full upon a schedule
to be agreed upon between the Company and its creditors.
Revenues of $1,394,512 reflect a decrease of 24% from the $1,838,998 in revenues
reported for the similar 3 month period in 1995. The revenue decline is offset,
however, by the higher gross profit orders completed in the 3 months ended March
31, l996. Gross profit improved 33% to 35% in l996 from 20% in l995. The primary
reason for the reduced gross profit in l995 were competitive pressures affecting
pricing and underutilization of production facilities which results in increased
inventory absorption of fixed costs per project. The order backlog at March 31,
1996 was $916,650 ($1,512,450 at April 26, 1996) compared to $1,036,000 at March
31, 1995.
Operating costs as a percent of revenues for the first quarter were 22% in l996
and 23% in l995. The relatively constant percentage comparison for the two
periods while experiencing a decrease in revenue reflects realization of cost
containment goals and productivity improvements.
Interest expense for the first quarter was $82,372 in 1996 and $105,284 in 1995.
The change of $22,912 is accounted for by approximately $41,500 in interest
expense on subordinated debentures which are subject to compromise, and an
increased borrowing level in the bank line of credit and mortgage loan (which
was executed in June, 1995).
The working capital position of the Company improved by $2,293,919 at March 31,
1996, which was almost solely accounted for by the reclassification of
Subordinated Debentures payable (and related interest) to liabilities subject to
compromise. This position will be improved further after rescheduling the bank
line of credit and mortgage loan (both in default at March 31, 1996) in the
combined amount of $1,833,890, as set forth in the Plan of Reorganization.
As of March 31, 1996, the Company was fully drawn on its available line of
credit in the amount of $1,450,000, which includes approximately $100,000 in
certain standby letters of credit. There are no assurances that any further
funding will be available from current sources, or that the current sources
(when renewed) will be sufficient. If these resources are insufficient, other
sources of funding would need to be developed. There are also no assurances that
such funding would be available or that the terms of such funding would be on
terms acceptable to the Company.
The Company's accumulated net losses have created a deficiency in stockholders'
equity in the amount of $3,574,795. The Company believes that the Plan of
Reorganization, specifically the conversion of the debentures to equity and the
cancellation of the debenture interest, and the improvement in the global
marketplace for its products will strengthen its position as a going concern.
However, the Company's ability to operate as a going concern is subject to a
number of risks and uncertainties including the Company's ability to generate
sufficient funds from operations and the demand for the Company's products,
which is subject to general economic, competitive and industry-specific
conditions.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 1, 1996, North Atlantic Technologies, Inc. (the "Company")
filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court, District of Minnesota
(the "Bankruptcy Court"), case No. 3-96-0526. On April 19, 1996, the Bankruptcy
Court entered an Order confirming the Company's Amended Plan of Reorganization
dated March 8, 1996 (the "Plan"), and the Company's Second Amended Disclosure
Statement dated March 13, 1996 (the "Disclosure Statement"). On April 26, 1996,
the Company filed a Motion to Amend the Plan of Reorganization which was granted
by the Bankruptcy Court on May 7, 1996. The amendment was not substantive, and
dealt only with the mechanics of the contemplated reorganization transactions.
Item 2. Changes in Securities.
On April 19, 1996, the Bankruptcy Court entered an Order confirming the
Plan and approved on May 7, 1996, a Motion to Amend the Plan. Under the terms of
the Plan the Company will effect a 1-for-3 reverse split of its no par common
stock ("Old Common Stock"), which is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, issued and outstanding as of the
date of the Plan's confirmation. In accordance with the Plan, on May 9, 1996 the
Company declared the reverse split which will become effective at the close of
business on May 31, 1996 for shareholders of record as of the close of business
on May 21, 1996. The 3,292,689 shares of Old Common Stock which were issued and
outstanding as of the record date will become approximately 1,097,563 shares of
newly-authorized $0.01 par value common stock ("New Common Stock").
In addition, in accordance with the Plan, the Company's issued and
outstanding 12.5 percent Subordinated Convertible Debentures ("Debentures") will
be exchanged for a combination of New Common Stock and newly-authorized
preferred stock ("Preferred Stock"). On May 9, 1996 the Company declared the
exchange which will become effective at the close of business on May 31, 1996
for Debenture holders of record as of the close of business on May 21, 1996. In
exchange for their Debentures, holders will receive a total of approximately
1,446,284 shares of New Common Stock and a total of approximately 21,695 shares
of Preferred Stock. Each share of Preferred Stock will be convertible into one
share of New Common Stock voluntarily through June 1, 1999, and will
automatically become New Common Stock after June 1, 1999. Holders of shares of
Preferred Stock will have one vote for each share of Preferred Stock held, and
will be entitled to cast that vote as a class on all matters brought to a vote
before the holders of Preferred Stock, and with all other capital stock holders
on all matters brought before the Company's shareholders generally.
After giving effect to the Plan, the collective ownership interest in
the Company of holders of shares of the Company's Old Common Stock will
effectively decrease from 100% to approximately 43%. In the case of a
liquidation of the Company, holders of Preferred Stock will be entitled to
receive up to $25 in value from the assets available for distribution to equity
stock holders before any distribution may be made to holders of New Common
Stock. Dividends will be paid on the Preferred Stock at the discretion of the
Board of Directors. However, dividends may not be paid on New Common Stock
unless like dividends per share are paid on Preferred Stock.
Item 3. Defaults Upon Senior Securities.
Upon confirmation of the Plan by the Bankruptcy Court the Company's two
defaults have been eliminated. From November 15, 1995 through the Plan
confirmation date the Company had been in default under the terms of the
Indenture dated December 31, 1985 which governs the Company's outstanding
Debentures. From November 15, 1995 through the Plan confirmation date the
Company had also been in default under the terms of the Company's Line of Credit
Agreement with First Bank, N.A., as amended.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
On February 13, 1996 the Company filed a Current Report on Form 8-K
reporting the filing by the Company on February 1, 1996 of a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. No
financial statements were included in the filing of the Current Report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
North Atlantic Technologies, Inc.
/s/ Bruce A. Watson May 14, 1996
Bruce A. Watson
Chief Executive Officer
(principal executive officer) and Chief Financial
Officer (principal financial officer and principal
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 44,092
<SECURITIES> 0
<RECEIVABLES> 1,425,670
<ALLOWANCES> (339,440)
<INVENTORY> 149,458
<CURRENT-ASSETS> 1,733,549
<PP&E> 2,163,689
<DEPRECIATION> 1,344,542
<TOTAL-ASSETS> 2,565,095
<CURRENT-LIABILITIES> 3,930,507
<BONDS> 0
0
0
<COMMON> 3,056,804
<OTHER-SE> (6,606,599)
<TOTAL-LIABILITY-AND-EQUITY> 2,565,095
<SALES> 1,394,512
<TOTAL-REVENUES> 1,394,512
<CGS> 883,617
<TOTAL-COSTS> 310,996
<OTHER-EXPENSES> (16,595)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,372
<INCOME-PRETAX> 108,556
<INCOME-TAX> 0
<INCOME-CONTINUING> 108,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,556
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>