<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
June 30, 1998 0-18880
-----------------------------
ATRIX INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1591075
(State of Incorporation) (I.R.S. Employer Identification No.)
14301 Ewing Avenue South
Burnsville, MN 55306
(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code: (612) 894-6154
-----------------------------
Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to Section
12(g) of the Act:
Common Stock, par value $.04 per share
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not 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. [X]
The Registrant's revenues for the fiscal year ended June 30, 1998 were
$4,199,116.
As of September 15, 1998, 1,413,449 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant (based upon the average closing bid and asked prices of the
Common Stock at that date, as reported by NASDAQ), excluding shares owned
beneficially by officers and directors, was approximately $1,855,152.
================================================================================
<PAGE>
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS REPORT THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "ESTIMATE," OR "CONTINUE," OR COMPARABLE
TERMINOLOGY, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, AND
ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS,
INCLUDING THE COMPANY'S ABILITY TO SUBSTANTIALLY INCREASE SALES OF ITS COPY
MANAGEMENT PRODUCTS AND ITS OMEGA VACUUM, LOSS OF, OR SIGNIFICANT REDUCTION IN,
SALES TO A MAJOR CUSTOMER, OR OTHER EVENTS.
PART I
ITEM 1. BUSINESS
INTRODUCTION
------------
The Company was formed in 1987 under the name Tiempo Equities, Inc. for
use as a vehicle to raise capital for investment in an operating business. In
October 1990, Tiempo completed a merger with Atrix Tool, Inc., in which Atrix
Tool was merged into Tiempo, and Tiempo changed its name to Atrix International,
Inc. Atrix Tool was incorporated in Minnesota in 1981 and, prior to the merger,
was privately held. Prior to the merger, Tiempo had no business operations. As
used in this report the term "Company" or "Atrix" refers to the combined entity
and its predecessors.
The Company manufactures and markets a modular device, called the R3
Copy Control System, that is installed on a copy machine to remotely read,
record or report a number of specific events and automatically transmit the data
to a central computer or a standard telephone line. This product serves a market
which the Company believes is generating approximately $100 million in sales
annually. The Company also sells two software packages which enhance the sales
and reporting capabilities of the R3 Copy Control System. WinTrax - TR is a
transactional based software system for the legal, public relations and Copy
Center markets. WinTrax - PNP is a notebook software package allowing the user
to automatically retrieve, format and report data from R3 Copy Control modules.
The Company negotiated a five year non-exclusive agreement with Pitney Bowes for
the R3 Copy Control System which has a term through September, 1995. Atrix has
been issued a U.S. patent application covering certain aspects of the R3 Copy
Control System.
1
<PAGE>
The Company has developed and is marketing the A-Trax Production
Monitoring System, a new remote metering and monitoring product for the plastics
molding industry. This product is a retro-fit system permitting plastic plants
to install units onto existing molding machines. Up to 128 units can be
networked together with the Company's unique A-Trax software package. The A-Trax
software is a Windows 95 based system, that is in real time communication with
the remote M1 meters. It gathers information regarding production counts,
pressure or temperature alarms, and start or stop times. From this information
A-Trax generates real time reports for operation productivity, plant efficiency,
and parts count. Because it was developed from the R3 copy technology the
Company believes it is very competitively priced and will provide a platform to
expand into this estimated $40 million annual plastics monitoring market. The
Company filed a U.S. patent application covering certain aspects of this system
in April of 1997 and was notified by the U. S. Patent and Trademark office in
July of 1998 that its patent has been approved to issue.
The Company has developed and is currently manufacturing and marketing
a line of field service vacuum cleaners for capturing toner from copy machines.
Atrix currently has five models of vacuum cleaners which vary in size and
capacity. All of the models are available with a rubber flex neck, crevice tool,
detachable crevice tool brush and stretch hose, which are statically dissipate
for maximum static protection. The Company believes that its Omega vacuum is the
lowest price full sized field service vacuum available in the market.
Additionally, the Omega vacuum offers finer filtration, and is quieter and more
durable than competitive models. The Company also manufactures and markets a
Universal Filter for toner vacuums that is compatible with 3M, Eltrex, and Ulti
Vac vacuums. This unique product has better retention than the competitors
products and is priced aggressively. The Company has been issued a design patent
covering this filter by the U.S. Patent and Trademark Office.
Since 1981, Atrix has distributed tools, custom tool kits and related
products to field service technicians for servicing office machines, computers,
and telecommunication products. The Company has developed what it believes to be
a unique procedure for supplying customers with specialized tools by providing
custom catalogs with competitive pricing for Fortune 2000 Companies.
PRODUCT AND SERVICES
The Company's products and services consist of the following:
o R3 Copy Control System and Software
o A-Trax Production Monitoring System
o Vacuum Cleaners, Cleaning Equipment and Supplies
o Hand Tools and Custom Tool Kits
o Static Protection Products
o Instrumentation
o Specialty Tools
2
<PAGE>
R3 COPY CONTROL SYSTEM
----------------------
The R3 Copy Control System is a modular device that is installed on a
copy machine to remotely read, record and report a number of specific events and
automatically transmit the data to a central computer over a standard telephone
line. The copy control system is available in four configurations. Depending on
the model, the copy control system can provide some or all of the following
functions:
o Meter reading for reporting the number of copies made for
billing purposes, scheduling preventive maintenance and/or
measuring usage of supplies
o Service enable/disable to permit an operator to remotely
disable and enable the machine
o Control the access and to account for copy usage by user,
group and division
Selected configurations communicate over existing telephone lines,
without the need for a dedicated line, and multiple monitors may share the same
telephone line. Also, the communication can be initiated by either the host
computer or the monitor. The device consists of hardware, software and firmware
including a complete set of scheduling and reporting software. The R3 Copy
Control products are generally marketed in two formats: stand-alone and
networked. The stand-alone version is more of a commodity product that lends
itself to mass marketing. The networked version requires extensive marketing
training. Both types are targeted towards facilities management companies and
large copy equipment dealers.
In April of 1994, Atrix completed a study of the remote metering market
and decided to start an effort to develop products, based in its R3 technology,
for the Copy Control market which the Company believes is generating
approximately $100 million in sales annually. The Company negotiated a five year
non-exclusive agreement with Pitney Bowes for its new copy management system
which has a term through September, 1999. Atrix has been issued a U.S. patent
application covering certain aspects of the R3 Copy Control System .
During fiscal 1996, the Company introduced two new software packages to
enhance the sales of the R3 Copy Control product line. WinTrax - TR, a
transactional based system for the legal, public relations, and copy center
market was released in March of 1996. Atrix has installations at several large
commercial customers and numerous federal government departments. This unique
software package permits end users to automatically extract data from Copy
Control units and formats the data into meaningful reports for the user. The
Company believes that this provides a strong competitive edge over known
competition.
In March of 1998, the Company shipped its initial order of R3 Copy
Control products including a new automated proximity card input to the U.S.
Department of Agriculture. This initial product shipment was for 48 units, and
the Company believes that the account has the potential to grow significantly.
The R3 copy control system is priced competitively over traditional
copy machine control devices. The retail price ranges from $175 to $930,
depending on the configuration.
Copy Control products accounted for approximately 5% of net sales in
fiscal 1998 and 6% in fiscal 1997.
3
<PAGE>
A-TRAX PRODUCTION MONITORING SYSTEM
- -----------------------------------
The A-Trax Production Monitoring System is a "real time" system
designed for the plastics molding industry. It consists of a remote metering
hardware module (M1) that attaches directly to injection and/or blow molding
machines. This meter monitors the machines to measure startup times, report
units produced, and alerts the operator and/or production supervisor of quality
problems associated with pressure or temperature deviations. These alarms are
highlighted on the monitor at the molding machine and are also displayed on the
screen of a personal computer that monitors the entire network of M1s. In
addition, the operator can enter either the number of good or bad parts produced
so the inventory is always current.
The A-Trax software package can monitor up to 128 remote M1s in one
facility. It is a Windows 95 application. The production supervisor can monitor
the complete plant by viewing the PC monitor. Information regarding machine
number, mold number, job status, units produced, alarm status, average cycle
times, and operator efficiency is displayed. All of these fields are updated as
new information is transmitted from the factory floor to the central personal
computer utilizing the A-Trax software.
Additionally, the A-Trax software package includes reporting modules
that highlight unit and plant productivity reports. It uses full color "state of
the art" graphics to display pressure and or temperature curves. These can be
used to provide quality reports to customers of the molding company.
The Company filed a U.S. patent application covering certain aspects of
the A-Trax System in April of 1997, and was notified by the U.S. Patent and
Trademark office in July of 1998 that its patent has been approved to issue.
Atrix believes that the A-Trax System will be competitively priced in
this estimated $40 million annual market. The suggested retail price for an M1
is $1,495 and the A-Trax software sells for $7,500 per installation.
Presently, the Company has two installations operating at plastic
injection molding facilities in the Minneapolis, Minnesota area. At the original
beta site installation, 34 M1's are networked together and communicating with
one central personal computer. The second installation site currently has 8
units networked together.
VACUUM CLEANERS, CLEANING EQUIPMENT AND SUPPLIES
------------------------------------------------
Every equipment service business needs cleaning supplies and equipment
for the maintenance of office equipment and other products. These supplies
include vacuum cleaners, solvents, detergents, towels and optical cleaners.
4
<PAGE>
The Company has developed and is currently manufacturing and marketing
a line of field service vacuum cleaners for capturing toner from copy machines
and laser printers. Atrix currently has five models of vacuum cleaners which
vary in size and capacity. The Atrix Express model is the smallest vacuum and is
designed for small offices or field service technicians who generally walk from
job to job. The AAA model is a medium-sized vacuum and is one of the Company's
more popular models. The HCTV is a large capacity vacuum for use with large
volumes of toner or developer and is designed for use by in-house servicing
technicians. The HCTV has 3.5 or 5 gallon disposable toner filter. The UK model
is a medium-sized vacuum designed for the European market and targeted to high
volume service and laser cartridge recyclers. The three domestic models have
high capacity filters that are able to trap particles as small as 0.3 micron.
All of the models are available with a rubber flex neck, crevice tool,
detachable crevice tool brush and stretch hose, which are statically dissipate
for maximum static protection. Atrix also sells these utensils separately. The
personal, AAA and UK models have UL, CSA, CE, and TUV approval.
In March of 1996 Atrix began developing a vacuum based on the
experience it gained from the Porous Media acquisition in November 1995. This
vacuum line -The Omega Series - combines the best features of the Atrix AAA
vacuum, the Porous Media vacuum, and other vacuums being marketed. The Company
believes that the Omega vacuum is the most efficient, safest, and quietest
vacuum available within its price range. Additionally the Company has added
features that position the new Omega series to be sold into the asbestos and
lead abatement markets as well as the industrial vacuum markets. The Omega is
now the most popular model of the Atrix product line.
Along with vacuum cleaners, the Company also supplies the other
expendable cleaning supplies used by service technicians, such as solvents,
detergents, towels and optical cleaners. These items are readily available from
numerous alternative sources. Atrix has introduced a line of "universal" filters
that can be used in toner vacuums of its major competitors, including 3M
Corporation.
The suggested retail prices for the Company's vacuum cleaners range
from $150 to $465, depending on the model. Atrix believes that its personal
model is the lowest priced static-free, micro toner vacuum on the market.
Vacuums, cleaning equipment and supplies accounted for approximately
46% and 34%, respectively, of net sales in fiscal 1998 and 1997.
HAND TOOLS AND CUSTOM TOOL KITS
-------------------------------
The Company distributes hand tools and assembles and distributes
customized hand tool kits to businesses engaged in servicing office and
telecommunication equipment. These tools are generally manufactured by a third
party and include such tools as screwdrivers, pliers, wire strippers, wrenches,
files, chisels, crimpers, gauges, hammers, knives and ratchets. Customers that
purchased more than $50,000 of products in fiscal 1998 include Avnet Industrial,
Unisys, OCE Office Systems, Sears, Hewlett Packard, Longs Ltd., Ames Supply, and
Ikon Office Solutions. Sales to these customers currently comprise approximately
80% to 90% of the Company's sales of tools and tool kits. For many of these
customers, servicing of their products has become and is an important part of
their revenues.
5
<PAGE>
The Company's marketing strategy for its tools and tool kits is to
assist its customers in maintaining a high level of quality and service, while
offering improved cost control. Atrix has been selling tools and tool kits since
1981 and, during that time, has developed the knowledge and experience necessary
to provide its customers with high quality tools and kits while controlling
costs. Whenever possible, the Company assists its customers in the selection of
individual tools and in the design and selection of a tool kit. The Company is
also able to provide most replacement tools the same day ordered. In addition,
the Company monitors the performance of the various tools that it provides to
its customers. The Company works with its suppliers and customers to minimize
problems with tools and provide the best tool for the task to be performed.
Atrix also works directly with the customer's tool committee or engineering
group to assist the customers in finding appropriate solutions or substitutions
for tools that are not satisfactory. The Company believes that this strategy
helps customers reduce their tool costs and avoid costly mistakes.
The Company has developed a specialized tool support system for Unisys.
Atrix provides storage for the tools to be purchased by Unisys on a consignment
basis and provides detailed reporting, including product description, unit
quantity, unit cost and total cost.
Tools and tool kit revenues accounted for approximately 33% and 38%,
respectively, of net sales in fiscal 1998 and 1997.
STATIC PROTECTION PRODUCTS
--------------------------
In response to the problems associated with static electricity, the
Company has developed and supports many products which protect expensive
electronic components from damage caused by static electricity. One of the
products that the Company markets is a complete line of storage cases which are
used by field service personnel to carry static sensitive electronic components,
such as printed circuit boards, to and from service sites. Another static
protection product offered by the Company is the Field Service Workstation. The
Workstation consists of a mat along with an anti-static wrist strap, which
provide for the safety of technicians as well as the static sensitive
components. The mat and wrist strap enables the technician to ground himself and
allows for static to dissipate into the workstation mat for proper grounding.
The Company also sells an anti-static watch that combines the function of a
wrist strap with a digital chronograph. The anti-static watch encourages
technicians to wear a wrist strap when servicing a machine, and the Company
believes that it is the only one of its kind.
Static protection products accounted for approximately 5% and 4%
respectively, of net sales in fiscal 1998 and fiscal 1997. Sales of static
protection products have increased recently as the computer industry has
improved and manufacturers seek to comply with ISO 9000 standards.
INSTRUMENTATION
---------------
At the present time, the Company markets recognized brand names in
meters and other instrumentation, such as Fluke, Beckman and Simpson. The
Company also markets a number of diagnostic instruments for electronic equipment
such as EPROM duplicators, telephone test sets, hard and floppy disk analyzers,
break out boxes, electrometers and power surge suppressers. Atrix supplies
meters to field service technicians directly and also handles warranty repair on
behalf of the manufacturers to reduce down time to the technician.
6
<PAGE>
Instrumentation accounted for approximately 4% and 14%, respectively,
of net sales in fiscal 1998 and 1997.
SPECIALTY TOOLS
---------------
The Company also has the expertise to design and manufacture specialty
and custom tools to meet customer needs in unique or problem areas. Specialty
tools are designed by the Company's engineers along with the customer to the
customer's specifications and are purchased and assembled by the Company. For
example, Atrix assisted Xerox in designing a tool called the RHHD which is a
remote hand-held device used by the technician to enable and disable various
copier functions. Atrix is currently producing and selling approximately ten
specialty tools.
The Company's gross margins on specialty tools range from 40% to 60%.
Specialty tools accounted for approximately 5% and 3% respectively, of net sales
in fiscal 1998 and 1997.
MARKETS
- -------
The Company believes there is a developing market in several industries
for the technology used in the new R3 Copy Control System. Initially, Atrix has
focused on the copy machine market. In July of 1995, the Company introduced a
new version of the R3 Copy Control System at the NOMDA show in Las Vegas. This
new product features the ability to accumulate date stamped transactions for
detailed billing and accounting. It is estimated that over $100 million of copy
control products are shipped annually, and Atrix began shipping product into
this market in March of 1995.
Based on the number of field service technicians and an assumed usage
rate of vacuum cleaners, Atrix estimates the world-wide market for vacuum
cleaners and filters used in the maintenance of office equipment to be
approximately $15 - $20 million annually.
The A-Trax Production Monitoring System was developed as a spin-off
from the R-3 Copy Control technology to serve the needs of the plastic injection
molding industry. The market focus for the A-Trax System targets smaller molding
operations with a mixture of five to forty injection or blow molding machines by
various equipment manufacturers and typically more than five years old.
According to industry surveys, there are over 12,000 custom or captive injection
molding facilities in the United States. The industry is very competitive and
production costs are a great concern to owners and managers. Additionally, Atrix
is identifying alliances with Enterprise Requirement Planning (ERP) software
firms that require more specific shop floor productivity and cost data for
plastics processes to complement their own systems.
The Company markets tools and tool kits, instrumentation, repair and
replacement parts, and cleaning equipment and supplies to field service
technicians for servicing office products, computers, and telecommunication
equipment. This market has continued to grow as the use of copy machines,
printers, FAX machines, personal computers, digital key sets and other office
and telecommunication equipment has increased throughout the workplace. The
growth of this market must be supported with trained field service technicians
who are generally responsible for installation and removal, maintenance and
repair, rehabilitation and upgrading, parts and consumable supplies, and
operator training and technical support. Atrix believes that as the U.S. economy
grows and shifts to a service economy, the opportunities for companies that
provide office machine service and support, like Atrix, will increase.
7
<PAGE>
Currently, emerging service market opportunities exist in the
telecommunication industry, office automation and the personal computer
industry. In the past, manufacturers of office equipment generally included
field service as a function of sales and marketing and treated service as an
overhead cost of doing business. Today it is emerging as its own industry. This
emergence evolved through the development of high technology electronic products
such as personal computers, peripherals (such as printers and data storage
devices) copying machines and FAX machines, which are now used extensively in
day-to-day business operations. Today, field service has attained departmental
status and has become its own profit center within manufacturers of this type of
equipment.
According to industry estimates, there are approximately 1,100,000
field service technicians in the U.S., approximately 5,900 field service
organizations servicing office equipment and approximately 3,300 field service
organizations servicing telecommunications equipment.
SALES AND MARKETING
- -------------------
The Company's customers include manufacturers, dealers and purchasers
of office equipment. The Company maintains active personal contact with its
current customers, as well as prospective customers, by telephone, through
personal visits and at trade shows. Atrix also occasionally places
advertisements in trade journals, such as Field Service Manager and Business
Technology Association. Atrix also sells certain of its products through major
office supply catalogs; currently products are sold through eight domestic
catalogs and six European catalogs. The Company's sales strategy is to persuade
potential customers that the Company's products and services will benefit the
customer's present method of doing business, and that the Company's products and
services have significant advantages over the products and services of
competitors.
Atrix has invested in a desk top publishing system to produce
customized catalogs for large customers. The customized catalogs typically
contain tools, vacuum cleaners, cleaning supplies, instrumentation and various
other products which are frequently purchased by the customer. The Company has
produced customized catalogs for Ricoh, Alco Standard, Danka, Diebold and
Unisys. The Company also plans to offer customized catalogs to other large
customers.
Atrix currently employs six people in sales and marketing positions,
all of whom are located in the Minneapolis, Minnesota area. Three of the six are
outside salespeople who are responsible for calling directly on larger customers
to stimulate business using outside catalogs. Atrix has also appointed nine U.S.
distributors and seven international distributors for distribution of the Omega
vacuum for maintenance of office equipment and seven distributors for
distribution of the Omega vacuum for the asbestos and lead abatement industry.
8
<PAGE>
In Europe, sales are made through seven independent European
distributors and two sales representatives in Germany. Atrix has also appointed
nonexclusive distributors covering Australia, Canada, Korea and South America.
Atrix had foreign sales of approximately $749,000 (approximately 18% of net
sales) and approximately $757,000 (approximately 13% of net sales) respectively,
in fiscal 1998 and 1997. Since May 1994, the Company's vacuums have been carried
in one of Europe's largest office equipment catalogs, MICROWAREHOUSE. In
September of 1997, the Company added a part-time sales person specializing in
international sales. Effective July 1998, the Company's vacuums are also
included in the Global catalog which has a distribution of 35,000,000 catalogs
in seven different countries. The Company anticipates that foreign sales will
continue to be a significant part of its business.
MAJOR CUSTOMERS AND DISTRIBUTORS
- --------------------------------
In fiscal 1997, the Company had one customer that accounted for 11% of
total sales. The loss of this customer could have a material adverse effect on
the Company. Important customers and distributors include: Ames Supply, Aramsco,
Pitney Bowes, Hewlett Packard, FSI, Inmac Corporation, Ipco, Leco, Katun
Corporation, McMaster Carr, OCE, Sears, Global Directmail, Unisys Corporation,
Mills, Seldrum, Longs International and Xerox.
The Company generally conducts business with its customers with letter
agreements, contracts and/or purchase orders.
COMPETITION
- -----------
The Company's R3 Copy Control System faces substantial competition in
this area of its business from companies seeking to provide automated billing
and tracking of office machine usage using other technologies.
The A-Trax System is competitively positioned to offer many data
gathering features offered by competitors, but at a significant cost savings.
Competitve systems range from $5,000 to $12,000 per molding machine and require
technical personnel to monitor, gather and interpret data. The A-Trax System
varies from $2,000 to $3,000 per machine and is designed to be used by machine
operators with little computer savvy. Competitors include Hunker Labs, RKG,
Solid Controls and Nicollet Process Engineering.
At the present time, there are a few other U.S. companies which sell
vacuum cleaners for use in the maintenance of office equipment and other
products, including 3M Corporation and Eltrex Corporation. The Company's AAA and
Omega model compete directly with a product manufactured by 3M Corporation. In
the European market, Convac is the Company's most significant competitor.
There are many national, regional and local companies which assemble and
sell hand tools and hand tool kits to businesses engaged in servicing office
equipment. The Company's primary competitors on a national basis are Jensen
Tool, Arizona; Marshall Industries, California; Kaufman Distributing Company,
Georgia; Ames Supply Company, Illinois; and Katun, Minnesota. In addition, any
one of the many companies that manufacture and sell hand tools could develop
hand tools kits that would directly compete with Company products and services.
Similarly, companies or persons not now recognized in the industry may design
and develop products and services which are competitive with and superior to the
Company's products and services.
9
<PAGE>
Some of the present and potential competitors of the Company have
greater manufacturing and marketing capabilities than the Company and greater
research, development, financial, and personnel resources and more extensive
business experience than the Company. Although the Company believes that its
products and marketing system possess advantages over competing products
currently being marketed, there can be no assurance that Company will be able to
continue to compete effectively in the marketplace as its present and potential
competitors are able to duplicate or improve upon its products, marketing
system, or other services.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development activities are generally focused
in two areas: designing specialty tools and cleaning equipment in response to
specific customers or industry needs, and the design and development of software
and hardware to further the acceptance of the R3 Copy Control System and the
A-Trax Production Monitoring System. The demand for these products continue to
grow for the following reasons:
o New and existing electronic equipment generates demand for new
servicing tools And equipment
o New products and technology for the office environment, such
as laser printers, fax machines, and multi-purpose copiers,
printers, fax machine create a demand for new real time
reporting systems.
Atrix has developed several new products, including:
o The Universal toner filter that can be used in 3M, Eltrex,
Ulti Vac and Atrix AAA Vacuums.
o The Omega vacuum cleaner introduced in June of 1996.
o The copy management system packages WinTrax - TR and WinTrax - PNP.
o The new A-Trax Production Monitoring System for the plastics
industry.
The Company believes that its ability to develop specialty products for
its customers and to develop its own products is important to the success of its
business operations. However, there can be no assurance that the Company will be
able to continue to develop such products, or that such products will achieve
any degree of market acceptance.
10
<PAGE>
PATENTS AND PROPRIETARY PROTECTION
- ----------------------------------
The Company has been issued a U.S. design patent relating to certain
features of its universal vacuum filter product. In addition, in September 1997,
the Company was issued a utility patent covering certain aspects of the
Company's R3 Copy Control System. In May 1997, the Company applied for a U.S.
patent covering certain aspects of its new A-Trax Production Monitoring System.
In July of 1998, the Company was notified by the U.S. Patent and Trademark
Office that a utility patent covering certain aspects of the Company's A-Trax
System has been approved to issue. There can be no assurance, however, that any
patents granted will be valid or otherwise of value to the Company. The Company
currently relies on trade secret law to protect its rights to proprietary
information. No assurance can be given, however, that the Company will be
successful in maintaining the confidentiality of its proprietary information. In
the absence of valid patent or trade secret protection, the Company may be
vulnerable to competitors who could lawfully attempt to copy the Company's
products. Moreover, there can be no assurance that other competitors may not
independently develop the same or similar technology. Similarly, while the
Company believes that is has all rights necessary to manufacture and sell its
products without infringement of patents or other rights held by others, the
Company has not conducted a formal infringement search and there can be no
assurance that such conflicting rights do not exist.
SUPPLIERS
- ---------
The Company believes that supplies and component parts for all of the
products that it distributes (but does not manufacture) are available from a
number of suppliers and subcontractors and that the loss of any one supplier or
subcontractor would not have a material adverse effect on the Company.
The Company has single-source suppliers for three of the components
used in products that the Company manufactures and multiple suppliers for the
remaining components. One of these single-source suppliers has a named back-up
supplier, and the other two make plastic parts with tooling that is owned by the
Company. Although the loss of one of these suppliers could take up to two months
to replace, the Company does not believe that the loss of any of these three
suppliers would have a material adverse effect on the Company.
EMPLOYEES
- ---------
As of June 30, 1998, the Company had 24 full-time employees, 3 in
management, 4 in administration, 3 in research and development, 8 in sales and
marketing and 6 in manufacturing and warehouse. In addition, the Company had 5
part-time employees, 1 in sales and 4 in manufacturing and warehouse. The
Company is not subject to any collective bargaining agreement and believes that
its employee relations are good.
11
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
- ----------
The Company's facilities are located at 14301 Ewing Avenue South,
Burnsville, Minnesota 55306, and consist of approximately 37,500 square feet of
office, manufacturing and warehouse space. The Company leases this space
pursuant to a lease which provides for rent of approximately $16,616 per month
(including operating expenses and real estate taxes). The lease expired in 1998,
and is currently being extended on a month to month basis. The Company
anticipates that it will be able to find suitable space at another location on
satisfactory terms if it chooses not to extend the lease.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market. The table below sets forth, for the periods indicated, the high and low
bid prices for the Company's common stock as reported by the Nasdaq Small Cap
Market. Such quotations represent interdealer prices, without retail markup,
markdown or commission, and do not necessarily represent actual transactions.
FISCAL YEAR 1998 HIGH LOW
---- ---
First Quarter (from July 1, 1997) 2 1/2 1 7/8
Second Quarter 3 1/2 1 1/4
Third Quarter 3 1/2 1 3/8
Fourth Quarter 3 1/8 1
FISCAL YEAR 1997 HIGH LOW
---- ---
First Quarter (from July 1, 1996) 3 1/2 2 1/4
Second Quarter 3 1/4 2
Third Quarter 3 1/4 2
Fourth Quarter 3 2
Common Stock prices for fiscal year 1997 and first and second quarter of fiscal
year 1998 have been restated to reflect 1- for- 4 reverse stock split, effective
December 16, 1997. See Note 9 to the Company's financial statements. The Company
has not declared or paid any cash dividends on its Common Stock since its
inception and does not intend to pay any dividends for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
NET SALES
- ---------
Net sales decreased by $1,602,184 or approximately 28% to $4,199,116 in fiscal
1998 from $5,801,300 in fiscal 1997 and $6,028,427 in 1996. The primary reason
for the decrease in sales during 1998 was a decrease in the lower margin
distribution sales, as discussed below.
Sales of manufactured products were $2,399,671, $2,377,175, and $2,268,508 in
1998, 1997 and 1996, respectively. The primary reason for the increase in
manufacturing sales was increased shipments of special assemblies, as the
Company expands its product offerings in this area. The Company anticipates
manufactured product sales will increase in fiscal 1999.
Distribution sales were $1,563,771, $3,048,152, and $3,384,882 in 1998, 1997 and
1996, respectively. The decrease in fiscal 1998 was primarily due to a
significant reduction in sales of both loose tools and instrumentation to Avnet
and AT&T, both formerly major customers. The Company does not anticipate
significant sales to either of these customers in the foreseeable future. See
discussion in other income
13
<PAGE>
regarding the Avnet arbitration settlement. The reduction in distribution sales
from fiscal 1996 to fiscal 1997 was also due to reduced sales to these two
customers. The Company believes distribution sales will increase in fiscal 1999,
over the fiscal 1998 level, but does not expect sales to increase to the level
of prior years in the foreseeable future.
For fiscal 1998, sales of Copy Management products fell by 33% over sales of
$322,246 in the prior year. Sales of Copy Management products decreased in
fiscal 1998 as a result of decreased sales to Pitney Bowes, a major copy control
customer which reduced inventory levels for a variety of products. The decrease
in sales in fiscal 1997 from 1996 was due to sales in fiscal 1996 including a
nonrecurring inventory stocking shipment of approximately $100,000 from Pitney
Bowes that was not replicated in fiscal 1997. The company expects sales of Copy
Management products to increase in fiscal 1999.
Sales of M1 systems were $19,902, $53,727 and $20,000 in 1998, 1997 and 1996,
respectively. The sales decrease in fiscal 1998 results from fiscal year 1997
including a large initial beta site shipment. Product definition and development
continued through fiscal 1998, which included one additional installation. The
Company expects M1 sales to increase in fiscal year 1999 as it continues to
implement marketing strategies for this product.
The following table shows the Company's revenues for the periods indicated by
product line, total manufactured products and total distributed products.
YEARS ENDED JUNE 30,
PRODUCT LINE 1998 1997 1996
---------- ---------- ----------
Vacuums and Supplies $1,932,164 $1,955,070 $1,759,366
ESD Equipment 226,270 216,461 234,285
Circuit Board Cases 23,287 29,057 67,935
Special Assemblies 217,950 176,587 206,922
---------- ---------- ----------
TOTAL MANUFACTURING 2,399,671 2,377,175 2,268,508
---------- ---------- ----------
Loose Tools 1,063,175 1,930,572 2,292,800
Tool Kits 324,113 296,325 376,869
Instrumentation 176,483 821,255 715,213
---------- ---------- ----------
TOTAL DISTRIBUTION 1,563,771 3,048,152 3,384,882
---------- ---------- ----------
Copy Control Monitor 215,772 322,246 348,598
Royalties 0 0 6,439
Injection Molding Monitor 19,902 53,727 20,000
---------- ---------- ----------
Total Sales $4,199,116 $5,801,300 $6,028,427
---------- ---------- ----------
GROSS PROFIT
- ------------
The gross profit margin as a percentage of sales was 32% in 1998 and 29% in both
1997 and 1996.
The gross profit margin increased in 1998 from 1997 due primarily to changes in
the Company's product mix, changing from the less profitable distribution to the
more profitable manufactured products. The gross profit margin on manufactured
products increased 2% in fiscal 1998 over fiscal 1997. The gross
14
<PAGE>
margin on total distribution sales increased 4.2% in fiscal 1998 as low margin
sales to Avnet and AT&T, both former major customers, were reduced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses were $1,571,274, $1,642,760 and
$1,630,934 in 1998, 1997 and 1996, respectively, which were 37%, 28%, and 27% of
sales for the years 1998, 1997 and 1996, respectively. Selling, general and
administrative expenses as a percentage of sales, increased due to the decline
in sales as discussed above. The primary components of selling, general and
administrative expense are salaries, commissions, employee benefits, research
and development, retirement benefits, rent and insurance.
The decrease in expenses in fiscal 1998 was due to a decrease of $90,000 in
retirement benefits as fiscal 1997 expenses included a one-time charge for
future retirement benefits for a retired executive. Sales commissions and
catalog expense also decreased $35,000 and $21,000, respectively from the prior
fiscal year. These expense reductions were partially offset by an increase in
legal and investor relations expenses of $62,000. Research and development costs
also increased $25,000 in fiscal 1998 due to increased development of new and
existing products. The Company expects operating expenses as a percentage of
sales to be lower in fiscal 1999 due to a combination of increased sales and
lower expenses.
INCOME/LOSS FROM OPERATIONS
- ---------------------------
The Company incurred a loss from operations in 1998 of $211,105, compared to
income from operations of $57,813 and $142,896 for 1997 and 1996, respectively.
The 1998 loss from operations is attributed primarily due to decreased
distribution sales to Avnet and AT&T, both formerly major customers. The
decrease in income from operations in 1997 over 1996 is primarily due to
decreased revenues and slightly higher expenses.
INTEREST INCOME/(EXPENSE), NET
- ------------------------------
Net interest income/(expense) was $26,320, $18,540 and ($2,227) in 1998, 1997
and 1996, respectively. The increases in net interest income in fiscal 1998 and
1997, is primarily due to minimizing line of credit draws by applying available
cash balances against the line of credit on a daily basis.
15
<PAGE>
OTHER INCOME
- ------------
Other income in 1998, consists primarily of income of $176,750 from a settlement
that the Company reached regarding a breach of contract action filed in
December, 1997 against its formerly largest customer. In addition to a cash
settlement, the Company retains ownership of most of the inventory it purchased
for the customer and will realize additional cash as the inventory is sold.
INCOME TAXES
- ------------
At June 30, 1998, the Company has net operating loss and tax credit
carryforwards of $1,340,975 for income tax purposes which expire in the years
2003 to 2008. The Company did not recognize any significant income tax expense
during 1996 or 1997 due to utilization of available net operating loss
carryforwards.
NET INCOME
- ----------
The net loss in 1998 was $62,970 compared to net income of $200,870 and $144,041
for 1997 and 1996, respectively. The decrease in net income from fiscal 1997 to
1998 of $263,840 was due to the factors discussed above. The increase in net
income from 1996 to 1997 of $56,829 was primarily due to the tax carryforward
benefit of $124,000 which the Company recognized in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and marketable securities at June 30, 1998 were $1,484,758
compared to $1,715,571 at June 30, 1997. Working capital increased to $1,791,067
from $1,766,717 at June 30, 1997. The current ratio as of June 30, 1998 and 1997
was 2.4 and 2.2, respectively.
In October 1997, the Company renewed its working capital line of credit with
Riverside Bank at an interest rate of prime. The borrowing base under the line
of credit is the lesser of (a) $1,000,000 or (b) the sum of (I) 75% of eligible
accounts receivable plus (ii) 50% of eligible inventory. As of June 30, 1998,
credit line advances were $775,000. The terms of the line of credit require the
Company to maintain tangible net worth of at least $1,900,000 and a liabilities
to tangible net worth ratio of less than 1.5. The line of credit is secured by
the Company's assets. The line of credit has an initial term that expires in
October 1998, but is due on demand at any time. The Company is required to pay
accrued interest on a monthly basis. As of June 30, 1998, the remaining
borrowing availability was $33,744.
Cash used by operations was $33,757 in fiscal 1998, as compared to cash provided
by operations of $521,358 in 1997. The decrease in 1998 was due primarily to the
net loss incurred and an increase in accounts receivable resulting from the
breach of contract settlement, which was recorded but not received in fiscal
1998. The Company also used cash in fiscal 1998 as it reduced both long term
debt and its bank line of credit utilization.
The Company's plans for the fiscal year ending June 30, 1999 do not call for
additional capital. The Company plans to finance its operations for the fiscal
year ending June 30, 1999 with working capital and bank borrowing, if necessary.
The Company expects to generate cash from operations during fiscal 1999 by
increasing sales, improving gross profit margins and controlling operating
expenses. The
16
<PAGE>
Company believes that funds generated from operations and borrowings available
under the line of credit will be adequate to meet the Company's working capital
requirements for the foreseeable future.
YEAR 2000 COMPLIANCE
Atrix is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. The Company's internal accounting
systems are year 2000 compliant. The new release of the Company's Wintrax III
product which is in Beta testing, is also Year 2000 compliant. Additional tests
are being made on internal personal computers, phone system, and alarm system to
verify compliance. Atrix does not expect the cost to modify its information
technology infrastructure to be Year 2000 compliant to be material to its
financial condition or results of operations.
Atrix uses outside vendors to supply its most significant data processing
software. These vendors have indicated their products are Year 2000 compliant or
will be Year 2000 compliant in the near future. Atrix does not currently have
any information concerning the Year 2000 compliance status of its key suppliers
and customers. In the event that any of Atrix's key suppliers or customers do
not successfully and timely achieve Year 2000 compliance, Atrix's business or
operations could be adversely affected. Atrix's Year 2000 compliance plan will
address the Year 2000 compliance status of key suppliers, customers and other
third parties.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements and Independent Accountants Report thereon
are included in this report on the pages indicated:
Page
----
Report of Independent Accountants 31
Balance Sheets as of June 30, 1998 and 1997 32
Statements of Operations for the years ended June 30, 1998, 1997, and 1996 33
Statements of Shareholders' Equity for the years ended June 30, 1998, 1997,
and 1996 33
Statements of Cash Flows for the years ended June 30, 1998, 1997, and 1996 34
Notes to Financial Statements 35 - 42
17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A. Directors of the Company.
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- -----
W. William Bednarczyk 54 Chairman of the Board of Directors 1984
Clifford B. Meacham 64 Vice Chairman of the Board of 1981
Directors
Steven D. Riedel 55 President, Chief Executive Officer, 1993
and Director
William E. Bennett 52 Director 1986
Charles J. B. Mitchell, Jr. 57 Director 1992
Les Eck 65 Director 1996
John C. Hey 53 Director 1997
W. WILLIAM BEDNARCZYK has been director of Atrix Tool, Inc. since 1984
and has been Chairman of the Board since 1991. Since 1988, Mr. Bednarczyk has
been president of Bednarczyk Business Services, which is engaged in management
consulting and private investment activities. From 1984 to 1988, Mr. Bednarczyk
was president of Human Asset Management, Inc. an employee/labor relations
consulting firm in Edina, Minnesota.
CLIFFORD B. MEACHAM founded the Company and has been a Director of the
Company since that time. In April of 1996, Mr. Meacham retired from active
employment with the Company. Mr. Meacham is an engineer, having graduated from
the Utica Institute of Technology, Utica, New York in 1952. Prior to founding
Atrix Tool, Inc., Mr. Meacham was the President and General Manager of CACO
Incorporated and Airport Industrial Machine Corporation (AIMC) in Lakeville,
Minnesota for 16 years. CACO was a general-line tool distributor and AIMC was a
manufacturer job shop engaged in the design and manufacture of special tools,
vacuum tables and concrete scarifies.
18
<PAGE>
STEVEN D. RIEDEL joined Atrix International as president on December 8,
1992. He became Chief Executive Officer and was elected to the Board of
Directors in May of 1993. He also was served as Chief Financial Officer from
November, 1993 to August, 1997. Prior to that he was President and Chief
Executive Officer of Enercon Data, an energy management and lighting control
company located in Edina, Minnesota. Mr. Riedel also was employed by Northern
Telecom as Vice President of Product Management for IOS division in Minneapolis.
Previously, he held numerous management positions with Burroughs Corporation
with the most recent being Regional Sales Manager for the 15 state Midwest
region. He is also an active member of Norex, an organization for CEO's of
companies within the greater metropolitan area. Mr. Riedel is also a principal
owner of SCI Enterprise, a personal computer VAR located in Edina, MN.
WILLIAM E. BENNETT has been a Director of the Company since January
1986. Mr. Bennett is licensed as an attorney and as a certified public
accountant in Minnesota and has acted as an independent consultant since August
1991. Mr. Bennett was general counsel and chief financial officer of I.C.
Systems, Inc. of St. Paul, Minnesota, a collections agency, from October 1985 to
August 1991. Prior to that time, he was a partner in the accounting firm of Main
Hurdman (now KPMG Peat Marwick) of Minneapolis, Minnesota.
CHARLES J.B. MITCHELL, JR. has been a director of the since April 1992.
Mr. Mitchell is currently President and CEO of Automotive Systems International,
Inc., a major manufacturer of metal exhaust and safety components for the OEM
automotive manufacturing industry. From 1985 to 1991, Mr. Mitchell was president
and chief operating officer of Alta Acquisition Corporation. From 1973 to 1985,
Mr. Mitchell was with Wheelabrator-Frye, Inc. as president of Sinclair and
Valentine Worldwide and Fry Copysystems.
LES ECK has been a Director of the Company since October 1996. Mr. Eck
is the former President and Chairman of the Board of Directors of
Haldeman-Homme, Inc., a distributor of industrial and institutional products,
and through their Anderson-Ladd division, a provider of commercial and
residential hardwood flooring. Mr. Eck was employed by Haldeman-Homme for 39
years in a variety of sales and management roles. During his business career, he
also served in the Army Reserve Command. Mr. Eck has been active in a number of
civic and professional organizations and served on the dealer advisory councils
of several of his company's suppliers. Mr. Eck has a degree in Forestry from the
University of Minnesota and is a graduate of the Army Command and General Staff
College.
JOHN C. HEY is President of Ikon OfficeSolutions-Minnesota. Mr. Hey has
been in the office products industry in a variety of sales and management roles
for 25 years. He began his career with D. C. Hey Company in 1973 and became
President in 1984. In 1988, D. C. Hey was acquired by Alco Standard Corporation.
Recently, Alco changed its name to Ikon Office Solutions. Prior to that, he was
employed by the Campbell Soup Company. In addition, Mr. Hey has been active in a
number of civic and professional organizations located in the Twin Cities area.
19
<PAGE>
B. Executive Officers of the Company.
The Company's executive officers and their ages along with the offices held as
of September 15, 1998, are as follows:
NAME AGE POSITION
- ---- --- --------
Steven D. Riedel 55 President, Chief Executive Officer,
and Director
Clifford B. Meacham 64 Vice Chairman of the Board of Directors
Dean L. Gerber 42 Vice President and Chief Financial Officer
STEVEN D. RIEDEL joined Atrix as President on December 8, 1992. He
became Chief Executive Officer and was appointed to the Board of Directors in
May of 1993. He also was appointed Chief Financial Officer from November 1993 to
August 1997. Prior to joining Atrix, he was President and Chief Executive Office
of EnerconData. Mr. Riedel was also employed by Northern Telecom as Vice
President of Product Management for IOS division in Minneapolis. Previously, he
held numerous management positions with Burroughs Corporation with the most
recent being regional sales manager for the 15 state Midwest region.
CLIFFORD B. MEACHAM was the President and Treasurer of Atrix Tool,
Inc., as well as one of the directors and the majority shareholder of Atrix
Tool, Inc. from the date of its incorporation in 1981. He was elected as a
member of the Board of Directors and as an officer and as president of the
Company effective with the merger of Atrix Tool, Inc. into Tiempo Equities, Inc.
on October 17, 1990. In April 1996, Mr. Meacham retired from active employment
with the Company. Mr. Meacham is an engineer, having graduated from the Utica
Institute of Technology, Utica, New York in 1952.
DEAN L. GERBER joined Atrix as Controller in September 1996. He became
Vice President and Chief Financial Officer in August 1997. Mr. Gerber, a
Certified Public Accountant, was previously employed for fifteen years by Unisys
Corporation and by the Arizona Country Club prior to that, as Controller.
C. Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Act of 1934, as amended, requires the Company's
directors and executive officers and all persons who beneficially own more than
10% of the outstanding shares of the Company's Common Stock to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of the Company's Common Stock. Executive officers,
directors and greater than 10% beneficial owners are also required to furnish
the Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based upon a review of the copies of such reports furnished to the
Company and written representations that no other reports were required, during
the year ended June 30, 1998, all directors, officers or beneficial owner of
greater than 10% of the Company's Common Stock filed on a timely basis the forms
required by Section 16 of the Exchange Act.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION AND OTHER BENEFITS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the cash and non-cash compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive Officer
of the Company. No other executive officer of the Company earned over $100,000
in the fiscal year ended June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Shares
Name and Other Annual Underlying
Principal Position Fiscal year Salary Bonus Compensation Options (#)
- ------------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Steven D. Riedel 1998 $117,000 $ 0 $4,800(1) 2,500
President and Chief Executive Officer
1997 $111,300 $ 0 2,500
1996 $104,583 $19,500 1,250
</TABLE>
(1) Consists of a car allowance of $400 per month.
OPTION GRANTS AND EXERCISES
The following table summarizes option grants during fiscal 1998 to the
executive officer named in the Summary Compensation Table above.
21
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
% OF TOTAL
NUMBER OF OPTIONS
SHARES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#)(1) YEAR ($/SH) DATE
- ---- ------------- ---- ------ ----
Steven D. Riedel 2,500 11.1% $2.24 July 1, 2007
(1) The options were granted under the Company's 1994 Stock Option Plan.
The foregoing options become exercisable at the rate of 20% of the
number of shares covered by such option on the date of grant and 20% on
each of the next four anniversary dates of the grant of such option, so
long as the executive remains employed by the Company or one of its
subsidiaries. To the extent not already exercisable, options under the
plan become immediately exercisable in full upon certain changes in
control of the Company and remain exercisable for the remainder of
their term. See "Compensation and Other Benefits Change in Control and
Severance Agreements."
The following table summarizes the options values held by the executive officer
named in the Summary Compensation Table at June 30, 1998.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
JUNE 30, 1998 JUNE 30, 1998
----------------- -------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Steven D. Riedel(1) 47,500 2,500 0 0
(1) No options were exercised by Mr. Riedel in the fiscal year ended June
30, 1998, and all of the options held by Mr. Riedel have an exercise
price greater than the fair market value of the Common Stock as of June
30, 1998. The exercise price may be paid in cash, or in the Board of
Director Committee's discretion, in shares of the Company's Common
Stock valued at fair market value on the date of exercise or pursuant
to a cashless exercise procedure under which the executive provides
irrevocable instructions to a brokerage firm to sell the purchased
shares and to remit to the Company, out of the sale proceeds, an amount
equal to the exercise price plus applicable withholding taxes. The
Board of Directors also has a discretion to grant a supplemental cash
bonus to an optionee in connection with the grant or exercise or an
option.
22
<PAGE>
DIRECTOR COMPENSATION
Directors who are not employees of the Company generally receive $350 per board
meeting and $200 per committee meeting for their services.
The 1994 Stock Option Plan also contains an automatic grant provision pursuant
to which non-employee directors are automatically granted options to purchase
shares of common stock. Any non-employee director who is initially elected to
the Board will receive an option to purchase 6,250 shares of common stock which
will vest, on a cumulative basis, with respect to 1,250 shares on June 30 first
following such initial election and one June 30 each year thereafter. William
Bednarczyk, in his capacity as Chairman of the Board, was also automatically
granted an option to purchase 2,500 shares of Common Stock which has vested with
respect to 2,000 shares and will vest, on a cumulative basis, with respect to
500 shares on June 30, 1999. In addition, each subsequent Chairman of the Board
(if such person is not an employee of the Company) will automatically be granted
an option to purchase 2,500 shares of Common Stock which will vest, on a
cumulative basis, with respect to 500 shares beginning on June 30 following such
election and on June 30 of each year thereafter. These options have a term of
ten years and an exercise price equal to 100% of the fair market value of the
Common Stock on the date of grant.
Effective April 1, 1996, the Company entered into a Supplemental Retirement
Benefit Agreement with Clifford Meacham, a director and former officer of the
Company. Under this agreement, the Company has agreed to pay Mr. Meacham $2,800
per month through February 1999. If Mr. Meacham dies prior to February 1999, the
remaining monthly payments will be made to his spouse. If Mr. Meacham is not
married at the time of his death, there is no further beneficiary.
In addition, the Company has granted in the past, and may grant in the future,
options to non-employee directors for service beyond that generally provided by
a non-employee director.
23
<PAGE>
CHANGE IN CONTROL AND SEVERANCE AGREEMENTS
Effective December 8, 1992, the Company entered into a letter agreement
with Steven D. Riedel, pursuant to which he agreed to be employed as the
president of the Company in December 1992 and Chief Executive Officer beginning
in May 1993. Mr. Riedel is currently paid an annual salary of $117,000 and
receives an automobile allowance of $400 per month. If the Company experiences a
"change in control" prior to June 30, 1999 and within one year of such "change
in control", either Mr. Riedel's employment is terminated by the Company, or Mr.
Riedel decides for "good reason" to terminate his employment with the Company,
then in either case, the Company is obligated to pay Mr. Riedel his then current
annual base salary over a twelve month period in severance pay.
On April 20, 1998, Mr. Dean Gerber, Vice President and Chief Financial
Officer of the Company, entered into a severance agreement with the Company with
terms similar to those described above for Mr. Riedel, except Mr. Gerber's
severance payments are limited to 2/3 of his then current annual base salary.
Under the Company's 1994 Stock Option Plan (the "Plan"), upon the
occurrence of a "change in control" all outstanding options granted under the
Plan will become and remain exercisable in full during their remaining terms
regardless of whether the plan participants thereafter remain employees of the
Company or a subsidiary. The acceleration of the exercisability of options under
the Plan may be limited, however, if the acceleration would be subject to an
excise tax imposed upon "excess parachute payments." Under the Plan, a "change
in control" has occurred in the event of (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company; (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company; (c) a
merger or consolidation to which the Company is a party if the stockholders of
the Company immediately prior to the effective date of such merger or
consolidation have "beneficial ownership", immediately following the effective
date of such merger or consolidation, of securities of the surviving corporation
representing 50% or less of the combined voting power of the surviving
corporation's then outstanding securities ordinarily having the right to vote at
elections of directors; (d) any person becomes the "beneficial owner," directly
or indirectly, of 50% or more of the combined voting power of the Company's
outstanding securities ordinarily having the right to vote at elections of
directors; (e) individuals who constitute the board of directors of the Company
on the effective date of the Plan cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
effective date of the Plan whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors comprising the board of directors of the Company on the effective date
of the Plan (either by a specific vote or by approval of the proxy statement of
the Company in which such person is named as a nominee for director, without
objection to such nomination) shall be considered as though such person were a
member of the board of directors of the Company on the effective date of the
Plan; or (f) a change in control of the Company of a nature that would be
required to be reported pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the
Company is then subject to such reporting requirement. In addition, the Board,
without the consent of any affected participant, may determine that some or all
of the participants holding outstanding options will receive cash in an amount
equal to the excess of the fair market value of such shares immediately before
the effective date of the change in control over the exercise price per share of
the options.
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 15, 1998, the beneficial
ownership of Common Stock by (i) each person who is known to the Company to be
the beneficial owner of more than 5% of the Common Stock of the Company; (ii)
each director and each nominee, (iii) each executive officer named in the
Summary Compensation Table above and (iv) all officers and directors of the
Company as a group. Securities reported as "beneficially owned" included those
for which the persons listed have, alone or together with others, voting power
or investment power. Voting power and investment power are not shared with
others unless so stated.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
NAME AND ADDRESS NO. OF SHARES PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------
Jerry Mathwig 345,500(2) 24.4%
9031 Avila Circle
Eden Prairie, MN 55347
Clifford B. Meacham 126,919(3) 8.9%
14301 Ewing Avenue South
Burnsville, MN 55306
Steven A. McMichael 78,125(4) 5.5%
C/O Anthony Atwater Ltd.
P.O. Box 28
Waconia, MN 55387
Steven D. Riedel 79,000(5) 5.4%
14301 Ewing Avenue South
Burnsville, MN 55306
W. William Bednarczyk 57,377(6) 4.0%
Bednarczyk Business Services
601 Lakeshore Parkway, Suite 1140
Minneapolis, MN 55305
Charles J.B. Mitchell, Jr. 41,833(7) 2.9%
Environmental Solutions
Wilson Ridge
7500 Flying Cloud Drive, Suite 740
25
<PAGE>
Minneapolis, MN 55344
William E. Bennett 13,094(8) *
4170 Myrle
White Bear Lake, MN 55110
Les Eck 2,500(9) *
Haldeman-Homme, Inc.
430 Industrial Boulevard
Minneapolis, MN 55413
John C. Hey 1,250(10) *
4610 Morrland Avenue
Minneapolis, MN 55424
All Directors and Officers as 327,973(11) 21.3%
a Group (8 persons)
(*) Less than 1% of the outstanding shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent
owned by such person or group.
(2) Based solely on a Schedule 13D/A dated May 22, 1998 as filed by Mr.
Mathwig with the Securities and Exchange Commission.
(3) Includes 2,500 shares which Mr. Meacham has the right to acquire
pursuant to outstanding options exercisable within 60 days; and 13,125
shares which he has the right to acquire pursuant to outstanding
warrants exercisable within 60 days.
(4) Based solely on Schedule 13G filed by Mr. McMichael with the Securities
and Exchange Commission on January 14, 1991.
(5) Includes 47,500 shares which Mr. Riedel has the right to acquire
pursuant to outstanding options exercisable within 60 days; and 4,375
shares which he has the right to acquire pursuant to outstanding
warrants exercisable within 60 days.
(6) Includes 21,625 shares which Mr. Bednarczyk has the right to acquire
pursuant to outstanding options exercisable within 60 days; and 5,208
shares which he has the right to acquire pursuant to outstanding
warrants exercisable within 60 days.
26
<PAGE>
(7) Includes 8,875 shares which Mr. Mitchell has the right to acquire
pursuant to outstanding options exercisable within 60 days; and 5,208
shares which he has the right to acquire pursuant to outstanding
warrants exercisable within 60 days.
(8) Includes 10,250 shares which Mr. Bennett has the right to acquire
pursuant to outstanding options exercisable within 60 days. (9)
Includes 2,500 shares which Mr. Eck has the right to acquire pursuant
to outstanding options exercisable within 60 days.
(10) Includes 1,250 shares which Mr. Hey has the right to acquire pursuant
to outstanding options exercisable within 60 days.
(11) Includes a total of 124,416 shares members of the group have the right
to acquire pursuant to outstanding options and warrants exercisable
within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
27
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-KSB pursuant to Item 14(c):
1. Supplemental Retirement Benefit Agreement between the Company and
Clifford Meacham, dated April 1, 1996. Incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996.
2. 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-KSB for the year ended June 30,
1994.
3. Letter agreement dated April 20, 1998 between Steven D. Riedel and the
Company regarding a change in control of the Company. Filed herewith.
4. Letter agreement dated April 20, 1998 between Dean L. Gerber and the
Company regarding a change in control of the Company. Filed herewith.
(b) Reports on Form 8-K: None during the fourth quarter of the
fiscal year ended June 30, 1998.
28
<PAGE>
ATRIX INTERNATIONAL, INC.
FINANCIAL STATEMENTS
29
<PAGE>
ATRIX INTERNATIONAL, INC.
FINANCIAL STATEMENTS
CONTENTS
==================================================================
REPORT OF INDEPENDENT ACCOUNTANTS 31
FINANCIAL STATEMENTS
Balance Sheets
September 30, 1998 and 1997 32
Statements of Operations
June 30, 1998, 1997 and 1996 33
Statements of Shareholders' Equity
Years ended June 30,1998, 1997, and 1996 33
Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996 34
NOTES TO FINANCIAL STATEMENTS 35-42
30
<PAGE>
Report of Independent Accountants
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ATRIX INTERNATIONAL, INC.
In our opinion, the accompanying balance sheet and related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Atrix International, Inc. at June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 30, 1998
31
<PAGE>
BALANCE SHEET
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,195,079 $ 1,386,514
Marketable securities 289,679 329,057
Accounts receivable, less allowance for doubtful accounts of
$27,000 at both dates 706,010 543,091
Inventories 802,138 918,493
Prepaid expenses 117,230 94,315
----------- -----------
Total current assets 3,110,136 3,271,470
----------- -----------
Deferred income taxes 124,000 124,000
Property and equipment, net 277,915 375,624
Intangible assets, net 73,362 82,381
Capitalized software development costs, net 230,166 231,249
----------- -----------
Total assets $ 3,815,579 $ 4,084,724
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 449,038 $ 494,766
Notes payable - bank 775,000 850,000
Current maturities of long-term debt 23,645 62,622
Accrued liabilities 71,386 97,365
----------- -----------
Total current liabilities 1,319,069 1,504,753
Long-term debt, net of current maturities 90,803 111,294
----------- -----------
Total liabilities 1,409,872 1,616,047
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 3,000,000
shares authorized, no shares issued
Common stock, $0.04 par value, 12,500,000
shares authorized, 1,413,449
shares issued and outstanding, at both dates 56,536 56,536
Additional paid-in capital 3,276,969 3,276,969
Accumulated deficit (927,798) (864,828)
----------- -----------
Total shareholders' equity 2,405,707 2,468,677
----------- -----------
Total liabilities and shareholders' equity $ 3,815,579 $ 4,084,724
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
32
<PAGE>
STATEMENT OF OPERATIONS
FOR YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 4,199,116 $ 5,801,300 $ 6,028,427
Cost of sales 2,838,947 4,100,727 4,254,597
----------- ----------- -----------
Gross profit 1,360,169 1,700,573 1,773,830
Selling, general and administrative expenses 1,571,274 1,642,760 1,630,934
----------- ----------- -----------
Income (loss) from operations (211,105) 57,813 142,896
Interest income/(expense), net 26,320 18,540 (2,227)
Other income 125,802 1,990
----------- ----------- -----------
Income (loss) before income taxes (58,983) 76,353 142,659
Income tax expense/(benefit) 3,987 (124,517) (1,382)
----------- ----------- -----------
Net income (loss) $ (62,970) $ 200,870 $ 144,041
=========== =========== ===========
Net income (loss) per share -
basic and diluted $ (0.04) $ 0.14 $ 0.10
Weighted average number of
common shares outstanding 1,413,449 1,413,449 1,385,374
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
STATEMENT OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30 1995 1,300,533 $ 52,019 $ 2,957,736 $(1,209,739) $ 1,800,016
Warrants converted, net of related 112,916 4,517 319,233 323,750
expenses of $15,000
Net Income 144,041 144,041
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 1,413,449 56,536 3,276,969 (1,065,698) 2,267,807
Net Income 200,870 200,870
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 1,413,449 56,536 3,276,969 (864,828) 2,468,677
Net Loss (62,970) (62,970)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 1,413,449 $ 56,536 $ 3,276,969 $ (927,798) $ 2,405,707
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
33
<PAGE>
STATEMENT OF CASH FLOWS
FOR YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (62,970) $ 200,870 $ 144,041
Adjustments to reconcile net income (loss) to net
Cash provided (used) by operating activities:
Depreciation and amortization 170,399 226,952 244,968
Deferred income taxes (124,000)
Changes in current assets and liabilities
Accounts receivable (162,919) 214,559 (11,160)
Inventories 116,355 76,365 (143,187)
Prepaid expenses (22,915) (17,826) (42,511)
Accounts payable (45,728) (100,622) (66,252)
Accrued liabilities (25,979) 45,060 (39,653)
----------- ----------- -----------
Net cash provided (used) by operating activities (33,757) 521,358 86,246
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (7,931) (19,122) (74,880)
Purchase of product line (50,000)
Additions to capitalized software development (53,157) (106,098) (18,099)
costs
Purchases of marketable securities, net 39,378 364,591 (503,648)
Additions to intangible assets (1,500) (9,187) (18,067)
----------- ----------- -----------
Net cash provided (used) by investing activities (23,210) 230,184 (664,694)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) from notes payable - bank, net (75,000) (91,299) 128,646
Repayments of long term debt (59,468) (65,244) (49,688)
Decrease in restricted cash 250,000 150,000
Net proceeds from exercise of common stock warrants 323,750
----------- ----------- -----------
Net cash provided (used) by financing activities (134,468) 93,457 552,708
----------- ----------- -----------
Net increase (decrease) in cash
And cash equivalents (191,435) 844,999 (25,740)
Cash and cash equivalents - beginning of the year 1,386,514 541,515 567,255
----------- ----------- -----------
Cash and cash equivalents - end of the year $ 1,195,079 $ 1,386,514 $ 541,515
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 CORPORATE ORGANIZATION
- ------ ----------------------
Atrix International, Inc. (the Company) is a leading manufacturer of remote
metering and production monitoring hardware for the copy control and plastic
injection molding industries. The Company develops and writes propriety
monitoring software for these same industries. In addition, Atrix manufactures
industrial vacuums, vacuum filters and printed circuit board transport cases for
the office machine/computer industries. The Company also supplies tools and
instrumentation for field service organizations throughout the world.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ ------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with original
maturities of three months or less and are readily convertible to cash.
MARKETABLE SECURITIES
Marketable securities generally consist of certificates of deposits with
maturities over three months and up to one year. The Company's marketable
securities are classified as held to maturity and therefore, are carried at
amortized cost. Unrealized holding gains and losses were not significant.
REVENUE RECOGNITION
For sales of the Company's manufacturing and distribution products, the Company
recognizes revenue upon shipment of the product net of customer discounts. For
sales of the Company's machine monitoring products, revenue is recognized upon
shipment of the product, fulfillment by the Company of all of its significant
contractual obligations and when collection is probable.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. See Sales to Major Customers and Export
Sales in Note 3.
35
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
the weighted average method. Inventories are evaluated on a quarterly basis to
identify obsolete, slow moving and non-salable items. The Company establishes a
reserve to reduce the inventory to net realizable value when necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets of three to seven years. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
with any resulting gain or loss reflected in income for the period. Expenditures
for replacements and betterment's are capitalized, while maintenance and repairs
are charged against income as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs, other than capitalized software development
costs, are charged to expense when incurred. The costs were approximately
$103,000, $78,000 and $120,000 for 1998, 1997 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets relate to a patent for the Office Machine Management System,
goodwill, and other intangibles. The Company is amortizing the intangible assets
on a straight-line basis over the assets estimated useful lives of seven to
fifteen years. Periodically, management assesses whether there has been a
permanent impairment in the value of the intangible assets.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company develops software and firmware that is an integral part of certain
of its current products. Software development costs are capitalized only upon
the establishment of technological feasibility for the related product.
Capitalized costs consist mainly of salaries and programming fees related to the
development of software and firmware. The Company commences amortization when
the related product is available for general release to customers. The Company
assesses the realizability of the capitalized software development costs on a
quarterly basis by comparing the amount of capitalized software costs with the
expected future gross revenues of the related product. The annual amortization
for these capitalized costs reflects the greater of the proportion of the
current years' product revenues to total expected product revenues, or on an
straight-line basis over their estimated useful life of six years. Accumulated
amortization was $460,308 and $406,068 at June 30, 1998 and 1997 respectively.
Total amortization expense for each of the years ended June 30,1998, 1997, and
1996 of $54,240, $82,206, and $87,206 respectively, was recorded in cost of
sales.
36
<PAGE>
NET INCOME(LOSS) PER SHARE
In February, 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to entities with
publicly held common stock and is effective for financial statements issued for
periods ending after December 15, 1997. Under SFAS No. 128 the presentation of
primary earnings per share is replaced with a presentation of basic earnings per
share. SFAS No. 128 requires dual presentation of basic and diluted earnings per
share for entities with complex capital structures. Basic earnings per share
includes no dilution and is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. The Company has adopted SFAS No. 128 in the quarter
ended December 31, 1997, and all net income (loss) per share data presented
complies with this statement. There is no difference between basic and diluted
earnings per share data as presented, as the impact from stock options is either
anti-dilutive for fiscal 1998 due to the net loss, or there was no additional
dilution from stock options for the other periods, due to stock option exercise
prices exceeding the average common stock price for the periods.
CASH FLOWS
The Company paid interest of $13,328, $25,551 and $62,326 during the years of
1998, 1997 and 1996, respectively. No income taxes were paid in 1998, 1997 and
1996.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which uses an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future consequences of events that have been recognized in the Company's
financial statements or tax returns.
NOTE 3 SALES TO MAJOR CUSTOMERS AND EXPORT SALES
- ------ -----------------------------------------
In fiscal years 1998, 1997 and 1996, sales to major customers that exceeded 10%
of total net sales were as follows:
1998 1997 1996
---- ---- ----
Customer A 23% 23%
Customer B 11%
Accounts receivable from Customer A represented approximately 27% and 8% of
total receivables at June 30, 1998 and 1997 respectively. Receivables at June
30, 1998 include a settlement from a breach of contract action which was reached
in June 1998. Accounts receivable from Customer B represented approximately 9%
and 8% of total receivables at June 30, 1998 and 1997 respectively. There were
no other significant concentrations of receivables.
Export Sales were approximately $749,000, $757,000, and $829,000 in fiscal years
1998, 1997 and 1996, respectively. Substantially all of the Company's export
sales are negotiated, invoiced and paid in U.S. dollars, and were generated from
customers primarily in Europe and Asia.
37
<PAGE>
NOTE 4 INVENTORIES
- ------ -----------
Inventories are comprised of the following at June 30:
1998 1997
---- ----
Raw materials $336,649 $355,165
Finished Goods 465,489 563,328
------- -------
Total $802,138 $918,493
======= =======
NOTE 5 PROPERTY AND EQUIPMENT
- ------ ----------------------
Property and equipment are comprised of the following at June 30:
1998 1997
---- ----
Tooling and Molds $ 1,102,289 $ 1,101,689
Office Furniture & Fixtures 337,468 333,028
Manufacturing Equipment 145,636 151,036
Leasehold Improvements 82,054 81,186
Warehouse Equipment 56,722 50,066
----------- -----------
1,724,169 1,717,005
Accumulated Depreciation (1,446,254) (1,341,381)
----------- -----------
$ 277,915 $ 375,624
=========== ===========
NOTE 6 LINE OF CREDIT
- ------ --------------
The company maintains a line of credit with a commercial bank. The borrowing
base under the line of credit is the lesser of (a) $1,000,000 or (b) the sum of
(i) 75% of eligible accounts receivable and (ii) 50% of eligible inventory. In
addition, the Company is required to maintain tangible net worth of $1,900,000
and a liabilities to tangible net worth ratio of less of less than 1.5. The
interest rate is at prime. The line of credit has an initial term that expires
October 31, 1998 but is due on demand at any time. The Company is required to
pay accrued interest on a monthly basis.
NOTE 7 LONG-TERM DEBT
- ------ --------------
In November 1995, the Company issued acquisition notes payable totaling $275,000
which are payable in varying periodic installments based on the terms of the
agreement. The interest is at prime and the obligations will be paid through
December 2000. Estimated principal payments of long-term debt are as follows:
38
<PAGE>
Years Ending June 30,
1999 $ 23,645
2000 10,000
2001 80,803
--------
Total $114,448
========
NOTE 8 LEASES
- ------ ------
The Company leases office, warehouse and production facilities as well as
certain office equipment under uncancellable operating lease agreements. The
lease originally signed covering the facilities expired in April 1998 and is
currently being extended on a month to month basis at the rate in effect at
April, 1998.
Future minimum payments under the operating leases are as follows:
Years Ending June 30,
1999 $ 6,824
2000 6,824
2001 2,275
-------
Total $15,923
=======
Net rental expense for operating leases was approximately $154,500, $183,100 and
$198,200 for fiscal years 1998, 1997 and 1996, respectively.
NOTE 9 SHAREHOLDERS' EQUITY
- ------ --------------------
REVERSE STOCK SPLIT
On December 11, 1997, the Company announced a one-for-four reverse stock split,
effective December 16, 1997, for shareholders of record as of December 15, 1997.
The effect of the reverse stock split has been reflected for all periods
presented.
OPTIONS
The Company has 200,000 shares of Common Stock reserved for issuance under its
1994 Stock Option Plan. The plan provides for the issuance of options to
purchase Common Stock to directors, officers, employees and consultants of the
Company. Options granted under the plan may be either non-qualified stock
options or incentive stock options. Incentive options must have an exercise
price equal to at least 100% of the fair market value on the date of grant and
non-qualified options must have an exercise price equal to at least 85% of the
fair market value on the date of grant. Outstanding options are generally
exercisable over a five-year period, and expire five to ten years from the date
of grant. Canceled options are available for future grants.
39
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
plan. For purposes of the pro forma disclosures below, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock plan been determined based on the fair
value at the grant date for awards during fiscal 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net income (loss) would have
been adjusted to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
NET INCOME (LOSS) - as reported ($62,970) $200,870 $144,041
NET INCOME (LOSS) - pro forma ($81,891) $183,817 $141,171
NET INCOME (LOSS) PER SHARE - as reported ($.04) $.14 $.10
NET INCOME (LOSS) PER SHARE - pro forma ($.06) $.13 $.10
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1998: dividend yield of 0%; risk-free
interest rate of 6.2% expected life of 8 years; and expected volatility of 75%.
A summary of the activity of stock options is as follows:
Weighted
Shares Average Exercise
Under Exercise Price
Option Price Range
------ ----- -----
Outstanding June 30, 1995 123,100 $4.00 $3.52-$5.12
Granted 3,975 $4.00 $4.00
Canceled (6,375) $4.00 $4.00
-------
Outstanding June 30, 1996 120,700 $4.00 $3.52-$5.12
Granted 29,000 $2.64 $2.52-$2.84
Canceled (18,175) $3.64 $2.52-$4.00
-------
Outstanding June 30, 1997 131,525 $3.76 $2.52-$5.12
Granted 28,850 $1.93 $1.50-$2.24
Canceled (6,875) $3.23 $2.52-$4.00
-------
Outstanding June 30, 1998 153,500 $3.43 $2.00-$5.12
Exercisable stock options at June 30, 1998, 1997, and 1996 were 111,680, 93,175
and 90,070 respectively. The weighted average fair value of options granted
during fiscal 1998, 1997 and 1996 using Black-Scholes option-pricing model was
$1.50, $0.60 and $0.90, respectively.
40
<PAGE>
The following table summarizes information about fixed-price stock options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted
at Remaining Average at Average
Range of June 30, Contractual Exercise June 30, Exercise
Exercise Prices 1998 Life Price 1998 Price
- --------------- ---- ---- ----- ----- -----
$1.50-$2.84 51,600 8.57 $2.25 14,870 $2.37
$3.52 1,250 7.01 $3.52 1,250 $3.52
$4.00-$5.12 100,650 6.11 $4.03 95,560 $4.03
WARRANTS
In November 1993, the Company issued warrants to purchase an aggregate of 78,750
shares of Common Stock at a price of $5.50 per share, which expire on November
5, 1998. These warrants were issued to directors of the Company who had
guaranteed a portion of the Company's line of credit.
Certain warrants were exercised in connection with a private offering completed
on September 30, 1995 of 112,917 shares of common stock at $3.00 per share and
the Company received net proceeds of $323,750. The holders of the warrants that
were exercised were granted new warrants to purchase 112,917 shares of Common
Stock at $3.00 per share.
NOTE 10 INCOME TAXES
- ------- ------------
The Company has available net operating loss and tax credit carryforwards for
income tax purposes of $1,340,975 and $1,278,005 at June 30, 1998 and 1997
respectively. These carryforwards expire in the years ending June 30, 2003
through 2008. Utilization of the net operating loss and tax credit carryforwards
may be subject to certain limitations under Section 382 of the Internal Revenue
Code. A valuation allowance exists for a portion of the net tax benefit
associated with all carryforwards and temporary differences at June 30, 1998 and
1997, as their realization is not presently more likely than not.
Deferred tax assets (liabilities) consist of the following:
41
<PAGE>
JUNE 30, 1998 JUNE 30, 1997
Loss Carryforwards $ 503,659 $ 476,078
Research & Development Credits 83,688 83,688
Inventory 33,718 11,453
Bad Debts 11,767 5,671
Fixed Assets 70,649 77,121
Software Development Costs (211,377) (186,033)
--------- ---------
492,104 467,978
Less: Valuation Allowance (368,104) (343,978)
--------- ---------
$ 124,000 $ 124,000
========= =========
Income tax expense (benefit) recorded differs from the expected federal tax rate
primarily due to utilization of net operating loss carryforwards in 1997 and
1996, and to recognizing $124,000 in tax benefits in 1997. For 1998, income tax
expense (benefit) recorded differs from the expected federal tax rate primarily
as the tax benefit of the additional net operating losses generated has been
fully reserved as utilization is not considered more likely than not.
NOTE 11 OTHER INCOME
- ------- ------------
Other income includes a settlement from a breach of contract action, which the
Company had filed against its formerly largest customer. The settlement was
reached in June of 1998. Costs associated with the settlement have been netted
against the settlement.
NOTE 12 RETIREMENT SAVINGS PLAN
- ------- -----------------------
The Company maintains a defined contribution plan which qualifies under the
Internal Revenue Code Section 401(K). Substantially, all employees are eligible
to participate under the plan. Company contributions are discretionary and were
$5,000, $5,129 and $4,128 during 1998, 1997 and 1996 respectively.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 24, 1998 ATRIX INTERNATIONAL, INC.
By /s/ Steven D. Riedel
--------------------------------------
Steven D. Riedel
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on September 24, 1998 by the following persons
on behalf of the Company and in the capacities indicated.
Signature Title
--------- -----
/s/ Steven D. Riedel
- ---------------------------- President (Principal Executive Officer)
Steven D. Riedel and Director
/s/ Dean L. Gerber
- ---------------------------- Vice President and Chief Financial Officer
Dean L. Gerber (Principal Financial and Accounting Officer)
/s/ Clifford B. Meacham
- ---------------------------- Vice Chairman and Director
Clifford B. Meacham
/s/ W. William Bednarczyk
- ---------------------------- Chairman of the Board and Director
W. William Bednarczyk
/s/ Charles J.B. Mitchell, Jr.
- ---------------------------- Director
Charles J.B. Mitchell, Jr.
/s/ William E. Bennett
- ---------------------------- Director
William E. Bennett
/s/ Les Eck
- ---------------------------- Director
Les Eck
/s/ John C. Hey
- ---------------------------- Director
John C. Hey
43
<PAGE>
ATRIX INTERNATIONAL, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
ITEM
NO. ITEM METHOD OF FILING
- ---- ---- ----------------
3.1 Restated Articles of Incorporation,
as amended, of the Company ......... Incorporated by reference to
Exhibit 2C to the Company's
Registration Statement on Form
S-1 (File No. 33-40571).
3.2 Bylaws of the Company............... Incorporated by reference to
Exhibit 3B to the Company's
Registration Statement on Form
S-18 (File No. 33-2448C).
4.1 Specimen form of the Company's
Common Stock Certificate............ Incorporated by reference to
Exhibit 4B to the Company's
Registration Statement on Form
S-1 (File No. 33-40571).
4.2 Restated Articles of Incorporation,
as amended, of the Company.......... See Exhibit 3.1.
4.3 Bylaws of the Company............... See Exhibit 3.2.
10.1 Supplemental Retirement Benefit
Agreement between the Company and
Clifford Meacham dated
April 1, 1996....................... Incorporated by reference to
Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1996.
10.3 1994 Stock Option Plan.............. Incorporated by reference to
Exhibit 10.4 to the Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1994
(File No. 0-18880).
10.4 Form of Warrant dated
November 5, 1993.................... Incorporated by reference to
Exhibit 10.5 to the Company's
Registration Statement on Form
SB-2 (File No. 33-75092).
44
<PAGE>
10.5 Form of Warrant dated
September 30, 1995.................. Incorporated by reference to
Exhibit 10.5 to the Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1996
(File No. 0-18880).
10.6 Form of Investment Agreement,
dated September 30, 1995............ Incorporated by reference to
Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1996
(File No. 0-18880).
10.7 Loan Agreement dated
April 25, 1995 between
the Company and Riverside
Bank................................ Incorporated by reference to
Exhibit 10.7 to the Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1997
(File No. 0-18880).
10.8 Amendment to Riverside Loan
Agreement, dated
October 25, 1995.................... Incorporated by reference to
Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB
for the quarter ended December
31, 1995 (File No. 0-18880).
10.9 Amendment to Riverside Loan
Agreement, dated
May 21, 1997........................ Incorporated by reference to
Exhibit 10.9 to The Company's
Annual Report on Form 10-KSB for
the year ended June 30, 1997
(File No. 0-18880).
10.10 Lease Agreement dated
December 29, 1987 between
Paul and Lillian P. Strom and the
Company............................. Incorporated by reference to
Exhibit 10G tO Company's
Registration Statement on Form
S-18 (File No. 33-2448C).
10.11 Letter agreement dated
April 20, 1998 between Steven D.
Riedel and the Company ............. Filed herewith electronically.
10.12 Letter agreement dated
April 20, 1998 between
Dean L. Gerber and the Company...... Filed herewith electronically.
45
<PAGE>
23.1 Consent of Independent
Accountants......................... Filed herewith electronically.
27.1 Financial Data Schedule
for the fiscal year ended
June 30, 1998....................... Filed herewith electronically.
27.2 Amended Financial Data
Schedule for the fiscal
year ended June 30, 1997............ Filed herewith electronically.
46
<PAGE>
Exhibit 10.11
[LETTERHEAD OF ATRIX INTERNATIONAL INC.]
April 20, 1998
Steven D. Riedel
9299 Talus CircleE
Eden Prarie, MN 55347
Dear Steve:
This letter sets forth the agreement of Atrix International, Inc. (the
"Company") to pay severance benefits to you under the circumstances set forth in
this letter.
If your employment as the Company's President and Chief Executive Officer, with
the Company or any successor entity is terminated by the Company or any
successor for any reason other than death or "cause" as defined in the Company's
1994 Stock Option Plan (the "Plan"), within one (1) year after a "change in
control," as defined in the Plan, or (b) you terminate your employment with the
Company or any successor for "Good Reason" as defined below, within one (1) year
after such change in control, then in either such case the Company or any
successor shall be obligated to make severance payments to you in an amount
equal to 100% of your then current annual base salary, payable over a twelve
month period following such termination, in accordance with the Company's
standard payroll practices.
The Company's obligation to make severance payments pursuant to this letter
shall be effective with respect to any such change in control that occurs on or
before June 30, 1999. The Company shall have no obligation to make any severance
payment under this letter with respect to any such change in control that occurs
after June 30, 1999.
For purposes of this letter, "Good Reason" means (a) a change in your status,
position(s), duties or responsibilities as President and Chief Executive Officer
of the Company as currently in effect which, in your reasonable judgement, is
adverse (other than, if applicable, any such change directly attributable to the
fact that the Company is no longer publicly owned); provided, however, that Good
Reason does not include a change in your status, position(s), duties or
responsibilities caused by an insubstantial and inadvertent action that is
remedied by the Company promptly after receipt of notice of such change is given
by you; or (b) a reduction by the Company in your base salary.
<PAGE>
The severance benefits payable pursuant to this letter shall supercede and
replace the severance benefits payable pursuant to the July 1, 1997 Compensation
Committee Resolutions to the extent that such resolutions relate to severance
payments to be made to you if the Company were to be acquired. The severance
benefits payable pursuant to the July 1, 1997 Compensation Committee Resolutions
shall remain in full force and effect in accordance with their original terms in
all other respects.
Very truly yours,
/s/ W. W. BEDNARCZYK
W. William Bednarczyk
Chairman of the Board
<PAGE>
Exhibit 10.12
[LETTERHEAD OF ATRIX INTERNATIONAL INC.]
April 20, 1998
Dean Gerber
905 Rushmore Drive
Burnsville, Minn. 55306
Dear Dean:
This letter sets forth the agreement of Atrix International, Inc. (the
"Company") to pay severance benefits to you under the circumstances set forth in
this letter.
If your employment as the Company's Vice President and Chief Financial Officer,
with the Company or any successor entity is terminated by the Company or any
successor for any reason other than death or "cause" as defined in the Company's
1994 Stock Option Plan (the "Plan"), within one (1) year after a "change in
control," as defined in the Plan, or (b) you terminate your employment with the
Company or any successor for "Good Reason" as defined below, within one (1) year
after such change in control, then in either such case the Company or any
successor shall be obligated to make severance payments to you in an amount
equal to two-thirds (2/3) of your then current annual base salary, payable over
a twelve month period following such termination, in accordance with the
Company's standard payroll practices.
The Company's obligation to make severance payments pursuant to this letter
shall be effective with respect to any such change in control that occurs on or
before June 30, 1999. The Company shall have no obligation to make any severance
payment under this letter with respect to any such change in control that occurs
after June 30, 1999.
For purposes of this letter, "Good Reason" means (a) a change in your status,
position(s), duties or responsibilities as Vice President and Chief Financial
Officer of the Company as currently in effect which, in your reasonable
judgement, is adverse (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned);
provided, however, that Good Reason does not include a change in your status,
position(s), duties or responsibilities caused by an insubstantial and
inadvertent action that is remedied by the Company promptly after receipt of
notice of such change is given by you; or (b) a reduction by the Company in your
base salary.
Very truly yours,
/s/ STEVEN D. RIEDEL
Steven D. Riedel
President and Chief Executive Officer
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-00699) and
in the Registration Statement on Form S-8 (No. 33-80682) of Atrix International,
Inc. of our report dated July 30, 1998 appearing on page 31 of this Annual
Report on Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998
ATRIX ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,195,079
<SECURITIES> 289,679
<RECEIVABLES> 706,010<F1>
<ALLOWANCES> 0
<INVENTORY> 802,138
<CURRENT-ASSETS> 3,110,136
<PP&E> 277,915<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,815,579
<CURRENT-LIABILITIES> 1,319,069
<BONDS> 0
0
0
<COMMON> 56,536
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,815,579
<SALES> 4,199,116
<TOTAL-REVENUES> 4,199,116
<CGS> 2,838,947
<TOTAL-COSTS> 2,838,947
<OTHER-EXPENSES> 1,571,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,320)<F3>
<INCOME-PRETAX> (58,983)
<INCOME-TAX> 3,987
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,970)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<FN>
<F1>NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION
<F3>INTEREST EXPENSE IS NET WITH INTEREST INCOME
THE BOARD OF DIRECTORS APPROVED A ONE-FOR-FOUR REVERSE SPLIT OF THE COMPANY'S
COMMON STOCK, EFFECTIVE FOR SHAREHOLDERS OF RECORD AS OF DECEMBER 15, 1997.
PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE REVERSE
SPLIT.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
ATRIX ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,386,514
<SECURITIES> 329,057
<RECEIVABLES> 543,091<F1>
<ALLOWANCES> 0
<INVENTORY> 918,493
<CURRENT-ASSETS> 3,271,470
<PP&E> 375,624<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,084,724
<CURRENT-LIABILITIES> 1,504,753
<BONDS> 0
0
0
<COMMON> 56,536
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,084,724
<SALES> 5,801,300
<TOTAL-REVENUES> 5,801,300
<CGS> 4,100,727
<TOTAL-COSTS> 4,100,727
<OTHER-EXPENSES> 1,642,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (18,540)<F3>
<INCOME-PRETAX> 76,353
<INCOME-TAX> 124,517
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,870
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION
<F3>INTEREST EXPENSE IS NET WITH INTEREST INCOME
THE BOARD OF DIRECTORS APPROVED A ONE-FOR-FOUR REVERSE SPLIT OF THE COMPANY'S
COMMON STOCK, EFFECTIVE FOR SHAREHOLDERS OF RECORD AS OF DECEMBER 15, 1997.
PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE REVERSE
SPLIT.
</FN>
</TABLE>
