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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to _____________
Commission file number 0-24212
PRODUCTIVITY TECHNOLOGIES CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3764753
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
509 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 843-1480
Securities registered pursuant to Section 12(b)
of the Exchange Act: None Securities registered
pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
Redeemable Common Stock Purchase Warrants Units, each consisting of one share
(Title of class) of Common Stock and two Redeemable
Common Stock Purchase Warrants
(Title of Class)
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 preceding 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-K 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-K or any amendment to this
Form 10-K. [ ]
As of September 23, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $4,950,000.
As of September 23, 1999, there were 2,475,000 shares of the
Registrant's Common Stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Productivity Technologies Corp. (formerly named Production Systems
Acquisition Corporation), a Delaware corporation ("Company"), was organized in
June 1993 as a Specified Purpose Acquisition Company(R) ("SPAC(R)"), with the
objective of acquiring an operating business in the production systems industry
("Production Systems Industry"). The Production Systems Industry consists of
companies which produce the machinery, components and systems for manufacturing.
On May 23, 1996, the Company acquired Atlas Technologies, Inc. ("Atlas"), a
Michigan-based corporation incorporated in 1974 and engaged in the manufacture
and sale of equipment to automate metal stamping press operations. The
acquisition was accomplished through the merger of a wholly-owned subsidiary of
the Company into Atlas, with Atlas being the surviving company and becoming a
wholly-owned subsidiary of the Company. The Company has no other subsidiaries or
operations.
Business of Atlas
Metal stamping presses are used to form a wide variety of sheet metal
components used in automobiles, appliances and other consumer and industrial
products. Atlas operates in a single industry segment, the manufacture of metal
forming and handling automation equipment. Atlas offers a complete range of
products within three categories critical to the operation of metal stamping
presses: quick die changing equipment, press automation equipment, and stacking
and destacking equipment, which, together, have historically accounted for
approximately 85% to 90% of its sales revenues. It also sells material handling
product lines and, on a turnkey basis, fully integrated metal stamping systems
comprised of components provided by Atlas and other manufacturers. During 1998,
Atlas also began producing and selling finger tooling for use with its and third
party transfer press automation equipment.
Metal stamping involves setting pieces of flat sheet metal over a shaped
die which is set in a press and then lowering a matching die onto the sheet
metal to form it into the desired shape. The sheet metal pieces typically pass
through several stamping press operations, each performing a different shaping
function. Atlas' products stack cut sheet metal blanks for feeding into the
presses, move components from one press station to another within a
multi-station transfer press or between presses within a tandem line of presses
and facilitate the changing of dies on a press.
In recent years, the increasing complexity and precision required in
stamped metal components, such as automobile body and appliance parts, coupled
with the large variety of such components necessary to meet consumer
preferences, has required manufacturers of such products to increase the
flexibility and efficiency of the machinery used in their manufacture. The
presses must accommodate rapid changes in production schedules and produce
profitable batch runs of varying sizes. Equipment such as that made by Atlas is
important to meet the needs of the manufacturers.
Sales of Atlas products have principally been to two customer markets -
automobile and automotive parts manufacturers, and, to a lesser extent,
appliance manufacturers. Other customers include manufacturers of garden and
lawn equipment, office furniture, heating, air conditioning and ventilation
(HVAC) equipment and aircraft. In Atlas' 1997, 1998 and 1999 fiscal years,
automotive industry customers accounted for approximately 90%, 90%, and 96% of
sales, respectively. For such fiscal years, sales by Atlas to General Motors
Corporation represented 12%, 27%, and 14%, respectively, sales to
DaimlerChrysler Corporation (formerly Chrysler Corporation) represented 3%, 10%,
and 7%, respectively, and sales to The Ford Motor Company represented 9%, 14%,
and 8%, respectively, of total sales. Sales are predominantly in the United
States and Canada but, in recent years, Atlas has targeted sales efforts in
Mexico, Europe and Asia. International sales for the 1997, 1998 and 1999 fiscal
years represented approximately 30%, 30% and 40%, respectively, of total sales
in such years.
Page 2
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Atlanta, Georgia, Porthcawl, South Wales,
U.K., and Beijing, China; commissioned sales representatives; and original
equipment manufacturers (OEMs) specializing in metal presses and related
equipment. Order backlogs were approximately $19,000,000, $17,000,000, and
$16,000,000 at June 30, 1997, 1998, and 1999, respectively. The Company believes
substantially all of the June 30, 1999 backlog will be produced during fiscal
2000.
Products
Atlas offers critical, high technology products based on proven designs and
engineering, which it believes offer superior technology, engineering and
features to those offered by its competitors. Atlas products are modular and may
be used with existing systems as well as with completely new systems. As a
result of their modular design, a variety of pieces of equipment can be combined
to form an appropriate solution for a customer's metal stamping needs. Virtually
all of its products are manufactured on a made-to-order basis. Because of their
many desirable features, Atlas products are positioned at an above-average price
comparative to its competitors. The raw materials and components used by Atlas
in the manufacturing process are readily available and, generally, there are
numerous suppliers that are capable of providing these materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues to
implement a program to achieve greater standardization in the engineering and
design of its products. To date, the program has resulted in faster order
fulfillment and production, and improved fabrication. Atlas believes that
significant cost-reducing improvements can still be made in the manufacturing
process, particularly from further standardization.
Quick die change equipment made by Atlas includes automated die carts, die
tables and high rise automated storage-retrieval systems which are used to
maneuver stamping press dies and molds weighing up to 100 tons. The
Atlas-developed products allow die swapping to be accomplished in minutes as
compared to hours if conventional equipment is used. Atlas storage-retrieval
systems permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured for
use with either manually controlled or fully automated presses. Atlas believes
that its equipment is instrumental in increasing the "up-time" of presses while
also facilitating short run capability, gentle die handling, safer and improved
ergonomics and easier and more efficient die maintenance.
Transfer press automation equipment is sold by Atlas under the names Flex
2000 and Flex 5000(R). Transfer presses use as many as ten dies within a single
press to progressively form the component (typically including tasks such as
drawing or forming, trimming, piercing and flanging). Unlike tandem press lines,
which use multiple presses arranged in a line and require multiple devices to
move a component, transfer presses move the component being processed from one
die station to another using a single automation device. Compared to tandem
presses, transfer presses generally operate at higher production rates, require
less floor space, consume less energy and allow more component processes per
press. Because of this, and because they have fewer parts and require less
expensive quick die change equipment than tandem presses, transfer presses have
become the preferred type of press for new purchases although many tandem
presses will remain in use for many years and can be refitted with automation
equipment.
Stacking and destacking automation equipment is used to handle the sheet
metal in the initial stages of the stamping process. Stackers stack flat blanks
cut from the coiled rolls which are delivered to the manufacturer. Destacking
equipment feeds the flat blanks into the press and includes functions to
wash/scrub or roll-coat the metal blanks and to queue them to assure a steady
flow.
Competition
Atlas management believes Atlas' products are sold in specialized markets
that have limited customers and few competitors. In many instances, Atlas
products are procured through competitive bidding. Because of the capital cost
and the need for skilled personnel, such as engineers, designers, mechanics and
sales persons, entry into this industry is expensive and difficult to achieve
and Atlas does not expect competition to increase significantly over
Page 3
present levels. Primary competitors of Atlas include ABB Flexible Automation
(Sweden), Herwo Die Changing (Sweden), Orchid International (Canada), Hirotec
(Japan), Verson All Steel Press, a division of Allied Products Corp., HMS
Products Co. and Aisaku (Japan). Each of these companies offers components which
compete with certain components manufactured or sold by Atlas. A number of the
competitors are well established with substantial financial resources,
recognized brand names, customer loyalty and established market positions,
capable engineering, strong distribution networks and comprehensive
manufacturing capabilities.
Trademarks and Patents
Atlas has an agreement to use components in the FLEX 5000(R) transfer press
automation equipment that it manufactures and sells that are based on patents
owned by the estate of Mr. John Maher. The agreement grants Atlas an exclusive
worldwide license to use the patents for a term equal to the life of the
patents, including any extensions as a result of modifications to the patents.
Currently, the patents registered with the United States Patent and Trademark
Office expire on various dates between June 23, 2005 and June 21, 2007. Atlas is
obligated to pay the estate of Mr. Maher a royalty based on a portion of the
sales price of the FLEX 5000(R) as it relates to the value of the patented
components. For Atlas' fiscal years ended June 30, 1997, 1998, and 1999 Atlas
expensed approximately $270,000, $202,000, and $241,000, respectively, in
license fees under this agreement. The agreement also provides that the estate
of Mr. Maher is responsible for defending Atlas for any patent infringements. [A
patent infringement suit brought by Atlas and the estate of Mr. Maher, as
plaintiffs, currently is in process against Orchid International, as defendant.
See Item 3, Legal Proceedings, below.] Atlas believes that the terms of the
agreement with the estate of Mr. Maher are industry competitive.
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)."
Atlas owns and has registered with the United States Patent and Trademark
Office four patents, one for a power and free roller conveyer, one for a
transfer arm for supporting workpieces, one for a magnetic sheet separator
construction, and one for apparatus and methods for forming workpieces. Atlas
also has registered patents for the first of these in Canada and Great Britain.
Atlas has applied for three United States patents for certain apparatus and
methods for forming workpieces, magnetic sheet separator constructions, a
tooling gage, and finger tooling for transfer press automation equipment.
Atlas Management and Employees
Atlas employs approximately 185 persons. None of these persons is a member
of a union. Atlas believes that its employee relations are good. Atlas believes
that its location in Michigan is beneficial in its access and ability to hire
qualified personnel because of the highly industrialized nature of the area.
ITEM 2. PROPERTIES
Atlas operates from manufacturing facilities in Fenton, Michigan. It has
approximately 94,200 square feet of space in two facilities which it owns in
Fenton. One of the Fenton facilities, built in 1997, has higher roofs and
heavier cranes to facilitate manufacturing of larger equipment and provides
approximately 51,000 square feet of manufacturing space and 8,000 square feet of
office space. This facility also is capable of expanding at a later date to
approximately 130,000 square feet of manufacturing and 25,000 square feet of
office space. Operations performed in the two Fenton facilities include
fabrication, machining, assembly, electrical panel construction and testing.
Project management, engineering, Atlas finance, service, quality, purchasing and
sales offices are also located in Fenton.
The principal executive office of Atlas is located at 201 South Alloy
Drive, Fenton, Michigan 48430, and its telephone number is (810) 629-6663.
ITEM 3. LEGAL PROCEEDINGS
Page 4
In 1996, Atlas and the estate of John Maher, the owner of the patent for
the FLEX 5000(R) Transfer which is licensed to Atlas, initiated an action
against Orchid International Group Inc. ("Orchid") in the Federal Court of
Canada, Trial Division, claiming infringement and wrongful sale, manufacture and
use by Orchid of the inventions protected by such patent and seeking, among
other relief, a declaration that the patents are valid and have been infringed
by Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). The
defendant has filed an answer denying the material allegations of the complaint
and asserting a counterclaim requesting that the patents be declared invalid.
Currently, the case is moving through the discovery phase which is scheduled to
be completed by December 30, 1999. Trial is expected during the calendar year
2000.
Except for the action against Orchid, neither the Company nor Atlas is
currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
Page 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (Symbol: PRAC) and Warrants (Symbol: PRACW) are listed for
trading on the Nasdaq SmallCap Market. The Company's Units (Symbol: PRACU) are
quoted on the OTC Bulletin Board. The following table sets forth the range of
high and low closing bid prices for Common Stock and Warrants, as reported by
the Nasdaq Small Cap Market. As measured by daily volume, there has been no
material trading in the Units since the quarter ended June 30, 1996. The OTC
Bulletin Board is an inter-dealer automated quotation system sponsored and
operated by the NASD for equity securities not included in the Nasdaq Stock
Market. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily reflect
actual transactions.
Units Common Stock Warrants
----- ------------ --------
High Low High Low High Low
---- --- ---- --- ---- ---
Year ended June 30, 1998:
-- -- 4 5/8 1 3/4 1 3/8
First Quarter
6 5/8 6 3/8 5 3 7/16 1 1/2 5/8
Second Quarter
-- -- 5 7/8 3 3/4 1 9/16 1 3/16
Third Quarter
-- -- 6 7/16 3 1/2 1 3/4 5/8
Fourth Quarter
Year ended June 30, 1999:
-- -- 4 1/4 2 3/8 1 1/2
First Quarter
-- -- 3 1 5/8 5/8 1/4
Second Quarter
-- -- 2 3/4 1 7/8 3/8 1/4
Third Quarter
-- -- 2 5/8 1 5/8 1/4 1/8
Fourth Quarter
As of September 13, 1999, the Company had 12 holders of record of its
Common Stock. The Company believes that there are in excess of 500 beneficial
holders of the Company's Common Stock.
The Company has not declared or paid any dividends on its Common Stock
since its inception.
Page 6
Recent Sales of Unregistered Securities
During the quarter ended March 31, 1999, the Company negotiated with
Messrs. William Rogner and David Hense for their employment at Atlas. Under
their employment agreements, the Company issued to each of Messrs. Rogner and
Hense up to 25,000 shares of common stock restricted from transfer or resale for
a period of two years. These securities were not registered under the Securities
Act of 1933, as amended (the "Act"). Each of the transactions is claimed to be
exempt from a registration under the Act pursuant to Section 4(2) of the Act as
a transaction by an issuer not involving a public offering.
Page 7
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's
and its predecessor's consolidated financial statements which have been audited
by BDO Seidman, LLP, independent certified public accountants, at June 30, 1999,
1998, 1997, and 1996, for the periods July 1, 1995 to May 23, 1996, May 24, 1996
to June 30, 1996, and for the years ended June 30, 1997, 1998 and 1999. Dupuis &
Ryden, independent certified public accountants, audited the year ended June 30,
1995. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Report.
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data
The Company Predecessor
-------------------------------------------------- ----------------------
July 1
Year Year Year May 24, 1995 Year
Ended Ended Ended to to Ended
June 30, June 30, June 30, June 30, May 23, June 30,
1999 1998 1997 1996 1996 1995
-------- -------- -------- -------- ------- --------
Net sales $ 34,001 $ 36,040 $ 34,438 $ 4,404 $ 31,598 $ 29,077
Cost of sales 24,610 27,563 24,825 3,029 21,773 21,034
Gross profit 9,391 8,478 9,613 1,375 9,825 8,043
Selling, general and administrative 7,526 8,538 7,081 729 6,007 5,119
Officers' bonuses -- -- 711 197 2,117 --
Bonus restructuring expense -- 2,132 -- -- -- --
Income (loss) from operations 1,865 (2,192) 1,821 448 1,701 2,924
Net income (loss) 974 (2,012) 593 204 762 2,219
Net income per share of common stock $ .40 ($ 0.95) $ .28 $ .10
Weighted average common shares 2,432 2,125 2,125 2,125
Consolidated Balance Sheet Data
The Company Predecessor
-------------------------------------- -----------------------
June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Current assets 19,148 $15,272 $22,627 $18,690 $11,423
Current liabilities 5,330 5,470 7,284 13,642 8,321
Working capital 13,818 9,802 15,343 5,048 3,102
Property, plant and equipment, net 7,844 8,289 7,667 4,240 2,517
Total assets 30,108 26,809 33,410 26,023 14,550
Long-term debt, less current maturities 13,951 11,254 15,327 2,228 2,717
Total liabilities 20,391 18,160 23,444 16,650 11,037
Stockholders' equity 9,717 8,649 9,966 9,373 3,513
Page 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The fiscal year ended June 30, 1999 is the third full year of consolidated
activities for Productivity Technologies Corp. and its wholly owned subsidiary,
Atlas Technologies, Inc. Currently, automotive and auto related suppliers
account for approximately 96% of new orders and receive most of Atlas' marketing
efforts. Atlas also continues to serve its customer base in the non-automotive
sector, including producers of home appliance and heating and air conditioning
systems, off-road vehicles and construction equipment, and other manufacturers
which utilize significant amounts of sheet metal to mass produce their products.
Results of Operations
The Company's consolidated net earnings were $974,290 or $0.40 per share
for the fiscal year ended June 30, 1999. Slow order bookings in the first two
quarters of the fiscal year contributed to softer than anticipated revenues and
earnings during the first three quarters of the fiscal year. In response to
slower than anticipated order bookings, the Company initiated a cost reduction
program in January 1999 and further accelerated this program in April 1999.
During the third and fourth quarters, order bookings substantially improved.
Atlas also improved the cost of many of its products during the year through
increased standardization and other product development activities. Higher
bookings in the second half of the fiscal year, combined with the lower
operating costs achieved as a result of the cost reduction program, provided
strong fourth quarter revenues and net earnings.
In general, order bookings during the year continued to be uneven due to
the nature of the business. A significant amount of business derives from large
contracts which are placed with Atlas on a periodic basis. In fiscal 1999, a
greater percentage of orders derived from larger sized orders.
Sales (Revenue and Cost Recognition)
Sales are recognized using the percentage-of-completion method, which
measures the percentage of contract costs incurred to date and compares these
costs to the total estimated costs for each contract. The Company estimates the
status of individual contracts when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract costs
include all direct material and labor costs, and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
condition, estimated profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the period in which such
revisions are determined.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net sales revenues for the fiscal year ended June 30, 1999 were
$34,001,248, a decrease of 6% compared to net sales of $36,040,278 for the
fiscal year ended June 30, 1998. Approximately 40% of Atlas' sales were to
foreign customers during this period, compared to approximately 30% during the
previous year. Atlas' backlog as of June 30, 1999 approximated $16,000,000, a 6%
decline versus the $17,000,000 backlog at June 30, 1998.
Atlas management believes the declines in revenues and order bookings
during fiscal 1999, and backlog at June 30, 1999, were due to a lack in growth
of capital spending by North American automakers including General Motors
Corporation, Ford Motor Company, and DaimlerChrysler Corporation. Atlas
management believes other factors included Atlas' slower than expected market
entry into certain geographic markets in Europe, continued economic difficulties
and depressed market conditions in certain Asian markets which the Company
serves, and a general slowdown in domestic capital spending activity for machine
tools and equipment due to the uncertain outcome of Autumn 1999 contract
negotiations in the U.S. and Canada between members of the United Auto Workers
(UAW) and GM, Ford, and DaimlerChrysler.
Page 9
Cost of products sold for the fiscal year ended June 30, 1999 were
$24,609,631, a level approximating 72% of net sales revenues, compared to
$27,562,608, or 76% of net sales revenues, for the 1998 fiscal year. Cost of
sales relative to sales revenues improved by 4% and was due to an increase in
Atlas product line standardization and an operating cost reduction program begun
in January 1999.
Gross profits for the year ended June 30, 1999 were $9,391,617, an 11%
increase from the $8,477,670 gross profit of a year earlier. The increase in
gross profits is related to the above described decline in costs of products
sold from fiscal 1998 to 1999. Atlas engineered, designed, and obtained greater
product line standardization in fiscal 1999 than existed for its product lines
in fiscal 1998, and implemented an operating cost reduction program beginning in
January 1999. The decline in costs of products sold and the related increase in
gross profits in fiscal 1999 would have been greater if Atlas had not incurred
expenses to obtain, in December 1998, ISO 9001 certification and additional
quality related awards, implement a new enterprise resource planning ("ERP")
computer system, and higher warranty costs associated with the launch of several
new products. A portion of ISO 9001 certification and ERP implementation costs
were charged to specific products being delivered and therefore to cost of sales
in 1999
Selling, general and administrative (SG&A) expenses in fiscal 1999 were
$7,526,448 compared to $8,538,166 in fiscal 1998, a decrease of 12%. The
decrease primarily resulted from the non-recurrence of approximately $750,000 in
legal expenses associated with a lawsuit settlement in fiscal 1998, the cost
reduction program initiated in the third and fourth quarters of fiscal 1999, and
cost savings associated with the retirement of Ronald M. Prime, former Atlas
CEO, in December 1998.
A bonus restructuring expense of $2,131,903 was incurred in 1998. There was
no such expense in fiscal 1999.
Income from operations were $1,865,169 in fiscal 1999 as compared to a loss
from operations of $2,192,399 in fiscal 1998. As part of the 1998 bonus
restructuring plan, Atlas made distributions to Messrs. Prime and Michael D.
Austin in fiscal 1999 as follows: (1) 300,000 shares of common stock restricted
from transfer or resale for a period on three years, and (2) payment of the
first of four equal payments of deferred compensation which equal, in the
aggregate, $1,660,564. In addition, $560,000 held in escrow was released to
Messrs. Prime and Austin during fiscal 1999. The escrow related to a dispute
between Atlas and the Internal Revenue Service (IRS) related to research and
experimentation credits claimed by Atlas for fiscal years ended June 30, 1991
though 1995. As noted above, Atlas resolved the dispute with the IRS during the
fiscal year.
Interest expense during fiscal 1999 was $835,619, compared to $1,057,725 in
fiscal 1998, a decrease of 21%. The decrease in interest expense for the period
was due to an overall reduction in use of Atlas' working capital line of credit
and slightly lower interest rates during the fiscal year.
Income before tax during fiscal 1999 was $1,074,290 as compared to a loss
before tax of $2,962,350 for fiscal 1998. The increase in pre-tax income was due
to the factors described above, including higher gross margins from product
standardization, lower fixed and interest costs, and non-recurrence of lawsuit
and bonus restructuring charges. Income tax for the fiscal year 1999 was
$100,000 as compared to an income tax benefit of $950,000 for fiscal year 1998.
Included in the tax for 1999 were tax credits of approximately $246,000
associated with research and development activities. As outlined in detail in
the Company's Form 10K for the fiscal year ended June 30, 1998, Atlas reported
charges in fiscal 1998 related to legal settlements and bonus restructuring. In
the fiscal year ended June 30, 1999, the Company incurred none of these charges
against earnings. In addition, the Company settled a dispute with the IRS during
the fiscal year in connection with credits which Atlas claimed previously for
fiscal years ended June 30, 1991 through 1996. As a result of the settlement
with the IRS, the Company utilized available tax credits in fiscal 1999 which
improved net earnings relative to those reported in 1998.
Net income during the fiscal year 1999 was $974,290, as compared to a net
loss of $2,012,350 for fiscal 1998. Fiscal 1999 earnings per share were $0.40
based upon 2,431,986 weighted average shares outstanding, compared to a loss per
share in fiscal 1998 of ($0.95) based upon 2,125,000 weighted average shares
outstanding.
Page 10
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for the fiscal year ended June 30, 1998 were $36,040,278, an
increase of 5% over net sales of $34,437,625 for the fiscal year ended June 30,
1997. During the first half of fiscal 1998, new order closings improved
slightly, which contributed to the overall 5% increase in revenue recognized
during fiscal 1998. Atlas' backlog as of June 30, 1998 approximated $17,000,000,
a 10% decline versus the $19,000,000 backlong at June 30, 1997. Atlas management
believed the decline in backlog as of June 30, 1998 was primarily caused by
order postponements due to the GM strike and the delay in capital spending
leading up to the completion of the merger of Daimler Benz and Chrysler Corp.
Cost of products sold for the fiscal year ended June 30, 1998 were
$27,562,608, a level approximating 76% of net sales, compared to $24,824,582, or
72% of net sales, for the 1997 fiscal year. Cost of sales margins increased due
to a less favorable product mix during fiscal 1998, foreign sales at lower
margins, and to a less efficient use of production and labor resources
necessitated by the higher concentration in required product delivery dates
relative to fiscal 1997. Included in cost of sales during fiscal 1998 were
expenses related to ISO 9000 certification efforts, employee computer and other
training, a one time write down of work-in-process and finished inventories
approximating $447,000, and research and development costs in connection with
the final design phase of new automation and material handling products.
Gross profits for the year ended June 30, 1998 were $8,477,670 compared to
$9,613,043 in fiscal 1997, a decrease of 12%, principally due to the reasons
cited in the immediately preceding paragraph. Approximately 30% of Atlas' sales
in fiscal 1998 were foreign. In general, Atlas foreign sales during fiscal 1998
were at lower gross margins due to higher costs associated with foreign
marketing efforts, foreign redesign requirements, travel and shipping expenses.
Selling, general and administrative (SG&A) expenses were $8,538,166 in
fiscal 1998 compared to $7,081,273 for fiscal 1997, an increase of 21%. The
increase was primarily due to expenses of approximately $750,000 in connection
with the legal defense costs and settlement of a lawsuit, higher commission
expenses related to Atlas' increased volume, and travel and sales related costs
associated with the first full year of Atlas' sales and marketing efforts in the
United Kingdom and China.
The bonus restructuring plan agreed to between Atlas and Messrs. Prime and
Austin, senior executives and former owners of Atlas, during fiscal 1998
resulted in a charge of $2,131,903. Under the bonus restructuring plan, Atlas
agreed to pay to the senior executives the following in the aggregate: (1)
300,000 shares of common stock restricted from transfer or resale for a period
of three years, (2) deferred compensation of $1,660,564 which is to be paid in
four equal annual installments in arrears, and (3) cash of $810,000 (earned in
previous years under their employment agreements), of which $560,000 was placed
in an escrow account pending the subsequent resolution of a dispute between
Atlas and the IRS related to research and experimentation credits claimed by
Atlas for the fiscal years ended June 30, 1991 through 1995.
Interest expense during fiscal 1998 was $1,057,725, an increase of 13%
compared to $933,632 for 1997. The increase in interest expense for the period
was due to greater utilization of Atlas' line of credit to finance
work-in-process, increased accounts receivable, and the first full year of
interest payments on the $4,500,000 Industrial Revenue Bond issued by Atlas in
December 1996 for building construction and the purchase of equipment and other
assets.
The net loss during fiscal year 1998 was $2,012,350 compared to 1997 net
income of $592,730. The reasons for the net loss are provided in the above
paragraphs of this section.
Liquidity and Capital Resources
The Company believes it has sufficient capital to meet short and long term
funding needs. Management expects the financing facilities currently in place,
including the Company's $16,000,000 revolving line of credit, along with
anticipated cash available from operations, will be sufficient for funding
general operations and any required
Page 11
current year asset purchases. Atlas borrowing requirements from the line of
credit ranged from $6,500,000 to $10,200,000 during the year ended June 30, 1999
The Company's working capital at June 30, 1999 was $13,818,002 compared to
$9,801,888 at June 30, 1998 and the current ratio at June 30, 1999 was 3.6 to 1
compared with 2.8 to 1 at June 30, 1998. Increases in work-in-process and
accounts receivable (coupled with the long-term classification of the Company's
revolving line of credit) and increased operating income contributed to the
improved ratios versus those of the prior year.
The Company's operations utilized cash of $4,483,461 during the fiscal year
ending June 30, 1999. Cash was used primarily to fund an increase in
work-in-process and accounts receivable which in turn resulted from large
customer orders with shipping requirements between April and September 1999. Net
cash provided by investing activities of $25,812 resulted from collection of a
note receivable from the sale of property and short term investments less
expenditures made for property plant and equipment. Net cash provided by
financing activities of $2,529,592 was used to fund increases in accounts
receivable and work-in process.
During the fiscal year ended June 30, 1999, Atlas entered into a new debt
financing agreement with Bank One N.A., the successor to the recent merger of
Bank One and First Chicago NBD. The bank consolidated all of Atlas' long and
short term debts, bundling the various notes and lines of credit into one new
three year committed line of credit, with increased maximum debt usage of
$16,000,000 based on collateral including the company's receivables,
work-in-process inventories, and other assets.
At June 30, 1999 Atlas had borrowings outstanding of $15,835,779, compared
to $13,306,187 at June 30, 1998. Borrowings at June 30, 1999 included:
(i) Outstanding borrowings under a revolving line of credit of
$10,186,140. This borrowing was under the Company's $16,000,000
revolving credit agreement expiring in January 2001. As noted,
collateral for this facility includes Atlas' receivables,
work-in-process, and other assets and Atlas' compliance with certain
financial covenants. The interest rate on this facility is, at the
Company's option, either (a) the bank's prime rate less 1/4%, or (b)
the 30, 60,or 90 day London Inter-Bank Overnight Rate (LIBOR) rate
plus 230 basis points. No principal payments on outstanding borrowings
are due until January 31, 2002.
(ii) Outstanding borrowings of $4,100,000 relating to the issuance of
Industrial Revenue Bonds. The bonds are state and federal tax exempt
and, consequently, the floating rate of interest is reduced compared
to conventional construction or real estate financing. IRB terms are
as follows for each fiscal year:
1999-- 2001 $400,000 annual principal payments plus quarterly interest
payments.
2002-- 2012 $300,000 annual principal payments plus quarterly interest
payments.
(iii) A note with Bank One for specific production machinery. The note
balance at fiscal June 30, 1999 was $105,907. The note bears interest
at bank prime rate. The final note is due January 2002.
(iv) Other borrowings outstanding of $7,349 at 8.7% interest from Concord
Commercial
(v) Deferred compensation due officers of $1,436,383 payable in annual
installments with 6.1% interest with final payment due July 2002.
The Company believes that, as a result of its loan facilities, its
short-term credit availability is adequate to support Atlas' business operation
at current and near-term anticipated sales levels.
Page 12
Contingencies
Atlas has accrued certain financial reserves for contingencies of bad
debts, product warranty and health insurance run off costs. The latter is for
Atlas' partially self-funded health claims incurred prior to June 30, 1999 but
not yet paid.
Year 2000 Compliance
The Company is installing an enterprise resource planning ("ERP") system at
Atlas, which includes computer systems for its internal accounting and reporting
activities and its manufacturing operations and processes which are "Year 2000
compliant" (which means that such computer systems and other information
technology will accurately process date/time data regardless of whether the date
is in the twentieth or twenty-first century). The acquisition and installation
of the system are expected to cost approximately $340,000, of which
approximately $290,000 was expended through June 30, 1999. Because the system is
being implemented as an overall upgrade to Atlas's operations and not
specifically to address Year 2000 compliance concerns, management has not
estimated the portion of the cost which may be allocable to Year 2000
compliance. Atlas management has not yet assessed whether or not the failure of
Atlas's internal information technology to be Year 2000 compliant would have a
material adverse effect upon the Company's financial position, liquidity or
results of operations since it believes that installation and operation of the
new system will be accomplished in advance of December 31, 1999.
The Company is also assessing its major vendors, customers, utilities,
banks and others with whom it does business to determine if their failure to be
Year 2000 compliant would have a material adverse effect upon the Company or its
financial position, liquidity or results of operations. To date, nothing has
come to the attention of management that leads it to conclude that the
likelihood of such adverse effect reasonably exists. The Company's and Atlas'
operations utilize relatively little electronic data interchange with vendors,
customers and other third parties. However, to the extent that such third
parties, particularly utilities and banks, may not be Year 2000 compliant, the
Company and Atlas may be adversely affected, although the magnitude of such
effect cannot be estimated. The cost to the Company of making its third-party
Year 2000 compliance assessment is not expected to be material.
Certain Atlas products contain processors which address and utilize
date/time data. Management believes that such processors incorporated in
equipment sold within the past five years are virtually all Year 2000 compliant.
However, it is not able to determine the compliance status of processors used in
equipment sold in earlier periods with any reasonable degree of certainty.
Although such equipment is beyond the warranty periods applicable to Atlas'
products, it is possible that customers who purchased equipment from Atlas which
is not Year 2000 compliant may nevertheless assert claims against Atlas to
correct the compliance deficiencies or for resulting damages. While management
believes that Atlas would not be legally responsible to such persons, based on
the terms of its purchase orders and warranties, there can be no assurance that
this position would prevail if challenged. Management is unable to estimate the
potential cost that the Company might incur if such claims are made and
successfully sustained or whether or not such cost would have a material adverse
effect upon its financial position, liquidity or results of operations.
Recent Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement of
Position (SOP) 98-5, "Reporting on the Cost of Start-Up Activities", in April
1998 and SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", in June 1998. These statements are effective in fiscal 2000 and are
not expected to have a material impact on the Company's consolidated financial
statements.
Forward-Looking Statements
Various statements in this Report concerning the manner in which the
Company intends to conduct its future operations and potential trends that may
affect future results of operations are forward-looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors. These factors include but are not limited to the potential softening of
the domestic and foreign markets for automobiles and automotive parts
Page 13
resulting in reduced demand for the Company's automation equipment; potential
technological developments in the metal forming and handling automation
equipment markets which render the Company's automation equipment noncompetitive
or obsolete; the Company's failure to prevail in its patent suit against Orchid;
the failure of the Company's older automation equipment to be Year 2000
compliant; and the tightening of credit availability generally or under the
Company's credit facility which renders the Company unable to access needed
working capital.
Page 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company does not enter into financial instrument
transactions for trading or speculative purposes or to manage interest rate
exposure. Therefore, a 10% adverse change in interest rates on the portion of
the Company's debt bearing interest at variable rates would result in an annual
increase in interest expense of approximately $100,000 at June 30, 1999
borrowing levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements of the Company as set forth on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Page 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as follows:
Director
Nominee Age Since Position
- ------- --- ----- --------
Ray J. Friant, Jr......... 68 1993 Chairman of the Board
Samuel N. Seidman......... 65 1993 President and Director
Michael D. Austin......... 47 1999 Director, Atlas President and CEO
Joseph K. Linman.......... 60 1993 Director and Vice President
John S. Strance........... 74 1993 Director and Vice President
Jesse A. Levine........... 32 1993 Director, Chief Financial Officer,
Vice President, Secretary and
Treasurer
Alan H. Foster............ 73 1993 Director
Alan I. Goldman........... 62 1993 Director
Ray J. Friant, Jr. has been Chairman of the Board of the Company since its
inception. Between 1988 and 1996, Mr. Friant was Managing Director of Seidman,
Friant, Levine Ltd., a crisis management company, where he specialized in
corporate restructuring and reorganization. In this capacity, he had management
control, and successfully restructured and/or stabilized the operations, of
three public companies, CMI Corp., Mr. Gasket Co. and Advanced Semiconductor
Materials International N.V. ("ASM"), which companies have manufacturing
operations in road building equipment, automotive aftermarket products and
semiconductor production equipment, respectively. Since 1982, Mr. Friant has
also been President and Director of Friant Associates, Inc., specializing in
corporate turnarounds. Mr. Friant was Group Vice President and General Manager
of Gulf+Western Industrial Products Group (IPG) from 1978 to 1982. IPG was a
group of ten companies involved in electronic systems, electronic connectors,
electronic components, electro-mechanical components, wire and cable, cutting
tools and hardware manufacturing. From 1973 to 1978, as an employee of ITT
Corp., Mr. Friant successfully reorganized several multi-million dollar
subsidiaries. In addition, he had a number of special worldwide assignments
involving ITT Corp. headquarters organization, resource allocation for product
development, and management succession. At Western Union Corp. from 1969 to
1972, Mr. Friant developed and implemented the business of teleprocessing at a
non-regulated subsidiary. From 1953 to 1969, Mr. Friant was employed by General
Electric Co. ("GE"), where he was responsible for initiating GE's phased array
radar business, for designing and implementing GE's Program Management System
for managing large, complex military contracts and for the business turnaround
of several unsuccessful organizations. Mr. Friant earned B.S. degrees in both
Mechanical Engineering and Electrical Engineering from West Virginia University.
He also graduated from General Electric's three-year graduate level Advanced
Engineering program and General Electric Management School.
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking and economic consulting firm, and serves as its President. In this
capacity, he has provided a broad range of investment banking services,
including financial analysis and valuations, private financings, and corporate
recapitalizations and debt restructurings. Mr. Seidman also serves as a director
of AMREP Corp., a real estate development corporation listed on the New York
Stock Exchange. He has acted as financial advisor to manufacturers of various
kinds of production systems and components for a number of industries, including
ASM, a multi-national producer of automated equipment and systems for the
production of semiconductors, traded on the Nasdaq National Market. Mr. Seidman
advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national
manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman
was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of
Sharon Steel Corp., an integrated manufacturer of finished steel products, and
served as financial advisor in Chapter 11 to Chyron Corp., a specialized
production systems company for video productions listed on the New York Stock
Exchange, and Mr. Gasket Co., a manufacturer of automobile aftermarket products.
Prior to founding Seidman & Co., Mr. Seidman worked in corporate finance at
Lehman Brothers. Mr. Seidman has served as director of numerous public and
private companies,
Page 16
including Penn Engineering Corporation, a manufacturer of equipment for steel
production and metal processing which had been listed on the American Stock
Exchange. Mr. Seidman earned a B.A. degree from Brooklyn College and a Ph.D. in
economics from New York University. He was a Fulbright Scholar and a member of
the graduate faculty of the City University of New York. Mr. Seidman's nephew,
Jesse A. Levine, is Vice President, Secretary, Treasurer and a Director of the
Company.
Michael D. Austin is currently the President and Chief Executive Officer of
Atlas. From 1996 to 1998, Mr. Austin held the position of Atlas President, and
was primarily responsible for directing the marketing and sales activities of
the company, for determining the overall product directions, managing product
research and development, and managing the application engineering department.
From 1977 to 1996, Mr. Austin held various other management positions at Atlas,
including Vice President of Operations, Vice President of Sales and Marketing,
Sales Manager, and Controls Manager. From 1973 to 1977, Mr. Austin held various
controls engineering and management positions at Fluid & Electric Control Co.,
including Chief Engineer. Mr. Austin serves on the Board of Advisors for the
Society of Manufacturing Engineers, the Board of Directors of the Precision
Metalforming Association, the Flint-Genesee Economic Growth Alliance, the
Genesee Area Focus Council, the Manufacturer's Innovation Council, and several
regional universities and colleges. Mr. Austin holds a U.S. patent for certain
apparatus and methods for forming workpieces.
Joseph K. Linman has been Vice President and a Director of the Company
since its inception. Mr. Linman retired from the Ford Motor Company ("Ford") in
1989 after 25 years with that company, preceded by two years with RCA Defense
Electronics. During his career with Ford, Mr. Linman held numerous managerial
and executive positions in financial, marketing, technical, governmental
relations and external affairs capacities, including Chief Financial Officer of
Ford Latin America, S.A. de C.V., a wholly-owned Ford subsidiary responsible for
automotive operations in Latin America, South Africa and Egypt. Mr. Linman
served as a member of the boards of directors or executive committees of Ford
subsidiary companies in nine countries and as a member of the advisory committee
of the Council of the Americas and the Mexico-U.S. Business Committee that
pioneered the North American Free Trade Agreement. Mr. Linman earned a B.S.
degree from Oregon State University and an M.B.A. degree from Indiana
University.
John S. Strance has been Vice President and a Director of the Company from
its inception. He is currently a private investor. From 1986 to 1992, he was the
President of Star Controls Corporation, a provider of sophisticated
microprocessor control products for process control and automation systems,
which he founded. From 1983 to 1986, Mr. Strance was an independent consultant
assessing technology and market trends and identifying and evaluating companies
for acquisition. From 1980 to 1983, Mr. Strance performed the same services as
Director of Planning and Development for Gulf+Western Manufacturing, responsible
for product development using new technology. From 1954 until 1980, Mr. Strance
held management positions as president of several subsidiaries of Gulf+Western.
Mr. Strance has been granted 13 U.S. letters patent for new products and
production systems. Mr. Strance earned B.S. and M.S. degrees in Mechanical
Engineering from the University of Oklahoma and the Carnegie Institute of
Technology, respectively.
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company
since its inception, Chief Financial Officer since June 1995 and a Vice
President since May 1996. Since January 1992, Mr. Levine has been Vice President
and then Senior Vice President of Seidman & Co., Inc., specializing in financial
and business analysis, corporate finance, private placements and corporate
advisory services. From January 1991 to December 1991, Mr. Levine was Contracts
Administration Manager of The Newman Group Computer Services Corp., Inc., a
computer systems supplier. Previously, Mr. Levine served as a commercial credit
analyst for Society Bank, Michigan. Mr. Levine earned a B.A. degree in economics
from the University of Michigan and has been elected a chartered financial
analyst. Samuel N. Seidman, the President of the Company, is Mr. Levine's uncle.
Alan H. Foster has been a Director of the Company since its inception.
Since 1986, he has been an Adjunct Professor of Finance and Corporate Strategy
at the University of Michigan. In conjunction with the University of Michigan
School of Engineering, Mr. Foster is engaged in the study of the future of
"agile machines." Since 1978, Mr. Foster has been the principal of A.H. Foster &
Company, a consulting firm which serves as a consultant in corporate finance to
foreign governments and domestic and international clients. Currently, Mr.
Foster is a director of Code-Alarm, Inc., a manufacturer of automobile security
systems traded on the Nasdaq National Market. For the last 12
Page 17
years, Mr. Foster has served numerous times as a court-appointed trustee in
bankruptcy for both Chapter 7 and Chapter 11 cases. He was employed by the
American Motors Corporation from 1963 to 1978, where he first served as
Director, Financial Planning and Analysis and then as Vice President and
Treasurer for the last ten of those years. From 1953 to 1963, Mr. Foster worked
at Sylvania Electric Products in various capacities, including Manager,
Corporate Planning and Control. Mr. Foster is the author of Practical Business
Management, published in 1962. Mr. Foster earned a B.S.B.A. degree from Boston
College and an M.B.A. degree from Harvard Business School.
Alan I. Goldman has been a Director of the Company since its inception.
Since 1985, Mr. Goldman has been self-employed as an investment banker and
management consultant, specializing in mergers and acquisitions, private
placements and business and organization consulting. From 1975 to 1985, Mr.
Goldman was Senior Vice President, Finance and Chief Financial Officer of
Management Assistance, Inc., a multi-national computer manufacturing, marketing
and maintenance company and a purchaser and user of productions systems and
components. From 1970 to 1974, Mr. Goldman was Vice President, Finance,
Treasurer and Chief Financial Officer of Interway Corporation, an international
company engaged in trailer and container leasing and fleet management. Mr.
Goldman is presently a director of Substance Abuse Technologies, Inc. Mr.
Goldman earned a B.A. degree from Cornell University and an M.B.A. degree from
New York University.
The Company's Board of Directors is divided into three classes, each of
which serves for a term of two years, with only one class of directors being
elected in each year. The term of office of the first class of directors,
consisting of Messrs. Goldman and Levine was elected for a three year term at an
annual meeting two years ago. The term of office of the second class of
directors, consisting of Messrs. Friant and Strance, was elected for a three
year term at the last annual meeting. Mr. Austin joined the Board of Directors
during fiscal 1999 as part of the second class of directors. The term of office
of the third class of directors, consisting of Messrs. Seidman, Linman and
Foster, will expire at the next annual meeting of stockholders. In each case, a
director will hold office until the next annual meeting of stockholders at which
his class of directors is to be elected.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires officers, directors and persons
who beneficially own more than 10% of a registered class of equity securities of
the Company ("10% stockholders") to file reports of ownership and changes in
ownership with the Commission. Officers, directors and 10% stockholders also are
required to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms furnished to it,
and written representations that no other reports were required, the Company
believes that during the fiscal year ended June 30, 1999, each of its officers,
directors and 10% stockholders complied with the Section 16(a) reporting
requirements, except that Michael D. Austin, the President and Chief Executive
Officer of Atlas, did not timely file a Form 4 to report his open market
purchases of 19,000 shares of the Company's common stock in November and
December 1998. His failure to timely file was inadvertent, he did not sell any
shares within six months before or after such purchases or otherwise during this
period of noncompliance, and he has since filed a Form 5 with the SEC to report
such purchases.
ITEM 11. EXECUTIVE COMPENSATION
In November 1997, the Board of Directors of the Company approved the
following annual salaries for its executive officers of the Company (excluding
direct employees of Atlas), effective as of December 1997: Chairman (presently
Mr. Friant), $40,000; President (presently Mr. Seidman), $65,000; Chief
Financial Officer, Secretary and Treasurer (presently Mr. Levine), $40,000; and
Vice Presidents (presently Messrs. Linman, Strance and Levine) $15,000. Such
salaries are payable in equal monthly installments. An officer holding more than
one office will receive only the salary of the highest paying office. All of
such officers, in their capacities as directors, participated in the
deliberations of the Board of Directors concerning executive officer
compensation. The Board also approved fees of $12,000 per year for each director
who is not an employee of the Company (presently Messrs. Foster and Goldman),
which is payable in equal quarterly installments. In addition, non-employee
directors and officers other than Messrs. Friant and Seidman will be paid at the
rate of $500 to $1,000 per day, as determined by the Chairman and the President,
for actual days spent by them in consulting or other special assignments for the
benefit of the Company or its subsidiaries. Officers and directors are also
eligible for other compensation and benefits as may be approved by the Board
from time to time, including benefits under the Company's 1996 Performance
Equity Plan which was adopted by the stockholders of the Company on May 21,
1996.
The Company has no employment agreements with its executive officers, each
of whom presently serves at the discretion of the Board of Directors.
Page 18
Atlas Employment Agreements
In May 1996, Mr. Michael D. Austin entered into an employment agreement
with Atlas (subsequently amended in June 1998) under which he currently serves
as the Chief Executive Officer and President of Atlas. The term of Mr. Austin's
agreement will terminate on December 31, 2001. The agreement requires Mr. Austin
to devote substantially all of his business time and attention to the affairs of
Atlas. The agreement provides for a base salary of $198,588 per year subject to
cost-of-living increases after December 31, 1998, for six weeks vacation per
year, reimbursement of business expenses, use of an automobile and mobile
telephone, medical and life insurance benefits and other benefits generally made
available to other employees.
As part of the fiscal 1998 bonus restructuring agreement, Atlas also is
scheduled to pay to Mr. Austin deferred compensation of $718,192 payable in
annual installments with 6.1% interest with final payment due July 2002. See
Liquidity and Capital Resources in Section 7 above.
The employment agreement also contains provisions restricting the
disclosure of confidential information and non-competition covenants.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Restricted Securities
Principal Position Period Salary ($) Bonus ($) Stock Awards (#) Underlying Options (#)
- ------------------ ------ ---------- --------- ---------------- ----------------------
Samuel N. Seidman 7/1/98 to 6/30/99 65,000 -- -- --
7/1/97 to 6/30/98 75,000 -- -- --
7/1/96 to 6/30/97 6,250 -- -- --
Michael D. 7/1/98 to 6/30/99 201,179 -- -- --
Austin 7/1/97 to 6/30/98 196,888 718,192 150,000 --
7/1/96 to 6/30/97 190,743 355,473 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATE YEAR-END OPTION VALUES
(June 30, 1999)
- ------------------------------------------------------------------------------------------------------------------------------------
Number of unexercised options at fiscal year end (#) Value of unexercised in the money options at
fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Samuel N. Seidman 70,833 -- 0 --
Michael D. Austin -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Page 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of September 13, 1999 by (i) each
stockholder known by the Company to be beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company and (iii) all
directors and officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Name of Beneficial Owner Number Percentage
of Shares Beneficially Owned
--------- ------------------
Michael D. Austin ..................... 268,900 9.8%
Ray J. Friant, Jr....................... 218,083(1) 8.1%
Samuel N. Seidman....................... 217,083(1) 8.1%
Ronald Prime (3)........................ 150,000 5.7%
Joseph K. Linman........................ 114,250(1) 4.4%
John S. Strance......................... 113,250(1) 4.4%
Jesse A. Levine......................... 91,583(1)(2) 3.6%
Alan H. Foster.......................... 21,250 0.9%
Alan I. Goldman......................... 21,250 0.9%
All Officers and Directors
as a group (8 persons) (3)............ 1,215,649(1) 45.9%
- ----------
(1) Includes shares of Common Stock issuable upon immediately exercisable
Warrants and options as follows: Mr. Friant--91,833 shares; Mr.
Seidman--90,833 shares; Mr. Linman--46,500 shares; Mr. Strance--44,500
shares; Mr. Levine--48,333 shares; Mr. Foster - 10,000 shares; Mr. Goldman
- 10,000 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
(3) Mr. Prime was formerly a principal of Atlas. Mr. Prime retired from Atlas
on December 31, 1998 and was and is not a Company director.
Page 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company office space, as well as certain office, administrative and secretarial
services as may be required by the Company. The Company paid Seidman & Co., Inc.
approximately $40,000 in fiscal years ended June 30, 1997, 1998, and 1999 for
such services. Samuel N. Seidman, a director and President of the Company, is
President of Seidman & Co., Inc., and Jesse A. Levine, a director, Chief
Financial Officer, Vice President, Secretary and Treasurer of the Company, is
Senior Vice President of Seidman & Co., Inc.
Page 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1999.
Page 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned herewith duly authorized.
September 13, 1999 PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
----------------------------
Samuel N. Seidman
President
Pursuant to the requirements of The Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
/s/ Ray J. Friant, Jr. Chairman of the Board September 13, 1999
- -----------------------
Ray J. Friant, Jr.
/s/ Samuel N. Seidman Chief Executive Officer, President September 13, 1999
- ----------------------- and Director (Principal Executive
Samuel N. Seidman Officer)
/s/ Michael D. Austin Director September 13, 1999
- -----------------------
Michael D. Austin
/s/ Joseph K. Linman Vice President and Director September 13, 1999
- -----------------------
Joseph K. Linman
/s/ John S. Strance Vice President and Director September 13, 1999
- -----------------------
John S. Strance
/s/ Jesse A. Levine Vice President, Secretary, September 13, 1999
- ----------------------- Treasurer and Director and Chief
Jesse A. Levine Financial Officer (Principal
Financial and Accounting Officer)
Page 23
Productivity Technologies Corp. and Subsidiary
Index
================================================================================
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts F-23
F-1
Report of Independent Certified Public Accountants
Productivity Technologies Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiary (the "Company") as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1999. We
have also audited the schedule listed in the accompanying index. These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
the schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Productivity
Technologies Corp. and Subsidiary at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, Schedule II presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
August 12 ,1999
F-2
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
================================================================================
June 30, 1999 1998
==================================================================================
Assets (Note 5)
Current Assets
Cash $ 244,400 $ 2,172,457
Short-term investments, including accrued interest 392,059 482,280
Contract receivables, net of allowance for doubtful
accounts of $110,000 (Note 3) 7,310,072 5,217,421
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 4) 9,714,477 5,435,957
Inventories 641,615 628,481
Prepaid expenses and other 414,366 859,937
Deferred income taxes (Note 8) 431,000 475,000
- ----------------------------------------------------------------------------------
Total Current Assets 19,147,989 15,271,533
- ----------------------------------------------------------------------------------
Property and Equipment
Land 591,514 591,514
Buildings and improvements 4,854,799 4,854,799
Machinery and equipment 3,848,921 3,676,415
Transportation equipment 31,500 31,500
- ----------------------------------------------------------------------------------
9,326,734 9,154,228
Less accumulated depreciation 1,483,000 865,473
- ----------------------------------------------------------------------------------
Net Property and Equipment 7,843,734 8,288,755
- ----------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization
of $340,521 and $237,561 (Note 2) 2,484,204 2,587,164
Other assets 632,053 661,936
- ----------------------------------------------------------------------------------
Total Other Assets 3,116,257 3,249,100
- ----------------------------------------------------------------------------------
$30,107,980 $26,809,388
==================================================================================
See accompanying notes to financial statements.
F-3
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
================================================================================
June 30, 1999 1998
==================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,879,817 $ 1,970,769
Accrued Expenses
Commissions payable 795,959 482,512
Payroll and related withholdings 239,536 240,329
Executive bonus agreement (Note 11) -- 810,000
Other 1,291,567 770,096
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 4) 348,049 580,262
Current maturities of executive deferred compensation
agreements (Note 11) 326,706 --
Current maturities of long-term debt (Note 5) 448,353 615,677
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 5,329,987 5,469,645
Executive Deferred Compensation Agreements, less current maturities
(Note 11) 1,109,677 1,436,383
Long-Term Debt, less current maturities (Note 5) 13,951,043 11,254,127
- --------------------------------------------------------------------------------------------------
Total Liabilities 20,390,707 18,160,155
- --------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 6 and 7)
Common stock; $.001 par value, 20,000,000 shares
authorized; 2,475,000 and 2,125,000 issued and outstanding 2,475 2,125
Common stock to be issued (Note 11) -- 695,520
Additional paid-in capital 9,966,408 9,177,488
Deficit (251,610) (1,225,900)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 9,717,273 8,649,233
- --------------------------------------------------------------------------------------------------
$ 30,107,980 $ 26,809,388
==================================================================================================
See accompanying notes to financial statements.
F-4
Productivity Technologies Corp. and Subsidiary
Consolidated Statements of Operations
================================================================================
Year Ended June 30, 1999 1998 1997
====================================================================================
Contract Revenues Earned $ 34,001,248 $ 36,040,278 $ 34,437,625
Cost of Revenues Earned 24,609,631 27,562,608 24,824,582
- ------------------------------------------------------------------------------------
Gross Profit 9,391,617 8,477,670 9,613,043
Selling, General and
Administrative Expenses (Note 10) 7,526,448 8,538,166 7,081,273
Officers' Bonuses (Notes 2 and 11) -- -- 710,946
- ------------------------------------------------------------------------------------
Income (Loss) From Operations Before
Bonus Restructuring Expense 1,865,169 (60,496) 1,820,824
Bonus Restructuring Expense (Note 11) -- (2,131,903) --
- ------------------------------------------------------------------------------------
Income (Loss) From Operations 1,865,169 (2,192,399) 1,820,824
- ------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (835,619) (1,057,725) (933,632)
Interest income 82,466 141,707 134,312
Gain on disposal of assets -- 89,628 --
Miscellaneous (37,726) 56,439 21,226
- ------------------------------------------------------------------------------------
Total Other Expense (790,879) (769,951) (778,094)
- ------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,074,290 (2,962,350) 1,042,730
Income Tax Expense (Benefit) (Note 8) 100,000 (950,000) 450,000
- ------------------------------------------------------------------------------------
Net Income (Loss) $ 974,290 $ (2,012,350) $ 592,730
====================================================================================
Basic Earnings Per Share (Note 1) $ .40 $ (.95) $ .28
====================================================================================
Diluted Earnings Per Share (Note 1) $ .40 $ (.95) $ .28
====================================================================================
See accompanying notes to financial statements.
F-5
Productivity Technologies Corp. and Subsidiary
Consolidated Statements of Stockholders' Equity
================================================================================
Common Stock Common Additional Retained Total
-------------------- Stock To Paid-In Earnings Stockholders'
Shares Amount Be Issued Capital (Deficit) Equity
===============================================================================================================
Balance, July 1, 1996 2,125,000 $ 2,215 $ -- $ 9,177,488 $ 193,720 $ 9,373,333
Net income -- -- -- -- 592,730 592,730
- ---------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 2,125,000 2,125 -- 9,177,488 786,450 9,966,063
Common stock to be issued
(Note 11) -- -- 695,520 -- -- 695,520
Net loss -- -- -- -- (2,012,350) (2,012,350)
- ---------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,125,000 2,125 695,520 9,177,488 (1,225,900) $ 8,649,233
Common stock issued 350,000 350 (695,520) 788,920 -- 93,750
Net income -- -- -- -- 974,290 974,290
- ---------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,475,000 $ 2,475 $ -- $ 9,966,408 $ (251,610) $ 9,717,273
===============================================================================================================
See accompanying notes to financial statements.
F-6
Productivity Technologies Corp. and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
Year Ended June 30, 1999 1998 1997
======================================================================================================
Cash Flows From Operating Activities
Net income (loss) $ 974,290 $(2,012,350) $ 592,730
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Depreciation 617,527 544,990 346,873
Amortization 171,827 250,829 119,961
Provisions for losses on contract receivables -- 64,500 (117,971)
Inventory net realizable value reserve 100,000 80,000 (80,000)
Deferred income taxes 44,000 (685,000) (89,000)
Gain on disposal of assets -- (89,628) --
Changes in operating assets and liabilities
Contract receivables (2,092,651) 3,917,381 (1,123,172)
Inventories, prepaid expenses and other 279,106 (187,691) (415,056)
Costs and estimated earnings in excess of
billings on uncompleted contracts-net effect (4,510,733) 2,619,765 (417,420)
Accounts payable, accrued expenses
and other (66,827) 1,000,604 (206,733)
- ------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Operating Activities (4,483,461) 5,503,400 (1,389,788)
- ------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Expenditures for property and equipment (including
capitalized interest of $75,699 in fiscal 1997) (172,506) (1,193,618) (4,554,364)
Collections on notes receivable 108,097 109,200 79,975
Proceeds from sale of short-term investments-net 90,221 446,924 36,051
Proceeds from sale of property and equipment -- 1,054,431 --
Purchase of Atlas -- (220,000) --
Issuance of notes receivable -- (200,000) --
- ------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities 25,812 (3,063) (4,438,338)
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
Productivity Technologies Corp. and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
Year Ended June 30, 1999 1998 1997
==================================================================================================
Cash Flows From Financing Activities
Net borrowings (payments) - revolving
credit agreement 2,986,975 (4,100,450) 262,751
Payments on long-term debt (457,383) (71,139) (222,006)
Proceeds from additions of long-term debt -- -- 5,255,000
Net borrowings - line-of-credit -- -- 863,911
- --------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities 2,529,592 (4,171,589) 6,159,656
- --------------------------------------------------------------------------------------------------
Net (Decrease) Increase In Cash (1,928,507) 1,328,748 331,530
Cash, at beginning of year 2,172,457 843,709 512,179
- --------------------------------------------------------------------------------------------------
Cash, at end of year $ 244,400 $ 2,172,457 $ 843,709
==================================================================================================
Supplemental Cash Flow Information
Cash Paid During the Year For
Interest, net of amounts capitalized $ 763,320 $ 1,058,114 $ 878,207
Income taxes 56,687 173,135 827,451
==================================================================================================
Supplemental Noncash Investing and
Financing Activities
Issuance of shares under employment contracts $ 93,750 $ -- $ --
Retirement of debt with proceeds from the
revolving credit agreement -- -- 11,036,864
Construction in progress financed
with accounts payable -- -- 157,000
==================================================================================================
See accompanying notes in financial statements.
F-8
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
1. Summary of Significant Accounting Policies
Formation of the Company and Basis of Presentation
Production Systems Acquisition Corporation ("PSAC") was incorporated in
June 1993 with the objective of acquiring an operating business engaged in
the production systems industry. PSAC originally selected March 31 as its
fiscal year-end. PSAC completed an initial public offering ("Offering") of
common stock in July 1994 and raised net proceeds of approximately $9.0
million.
In December 1995, PSAC entered into a Merger Agreement with Atlas
Technologies, Inc. ("Atlas") whereby Atlas would become a wholly-owned
subsidiary of PSAC. (The acquisition was consummated May 23, 1996 - see
Note 2). Subsequently, PSAC changed its corporate name to Productivity
Technologies Corp. ("PTC").
The accompanying consolidated financial statements include the accounts of
PTC and its wholly-owned subsidiary, Atlas (collectively, "the Company").
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery,
equipment, components and engineering services. It operates with two
manufacturing plants, sales and engineering offices. The manufacturing
plants are located in Fenton, Michigan.
Sales of products have principally been to automobile and automotive parts
manufacturers and appliance manufacturers. Other customers include
manufacturers of garden and lawn equipment, office furniture, heating,
ventilation and air conditioning equipment and aircraft. Sales to
automotive-related customers have accounted for the majority of total
annual sales. Sales are predominantly in the United States but, in recent
years, the Company has targeted sales efforts in Canada, Mexico, Europe and
Asia. Export sales during the twelve months ended June 30, 1999, 1998 and
1997 amounted to approximately 28%, 30%, and 20%, respectively, of annual
sales.
F-9
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
Short-term Investments
Short-term investments, representing U.S. Treasury Bills with maturities of
twelve months or less, are carried at cost, which approximates market.
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 (1) assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of
the financial statements, and (2) revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of contract receivables.
The Company attempts to minimize its credit risk by reviewing all
customers' credit histories before extending credit and by monitoring
customers' credit exposure on a continuing basis. The Company establishes
an allowance for possible losses on contract receivables, if necessary,
based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Fair Values of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, short-term
investments, contract receivables, accounts payable and accrued expenses
approximate fair value because of the short maturity of these items.
The carrying amounts of the revolving credit agreement and long-term debt
pursuant to the Company's bank credit agreements approximate fair value
because the interest rates on the majority of the loans outstanding change
with market rates.
F-10
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
Revenue and Cost Recognition
Contract revenues from fixed price contracts, and the related contract
costs, are recognized using the percentage-of-completion method, measured
by the percentage of contract costs incurred to date to total estimated
costs for each contract. The Company estimates the status of individual
contracts when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, repairs and depreciation costs. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated
profitability, and final contract settlement may result in revisions to
costs and income, and are recognized in the period the revisions are
determined.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include mainly raw materials and spare parts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method, generally using the following estimated useful lives:
Building and improvements 20 - 40 years
Machinery and equipment 3 - 10 years
Transportation equipment 2 - 5 years
Intangible Assets
Goodwill, representing the excess of cost over the fair value of net assets
acquired in the acquisition of Atlas, is being amortized over twenty-five
years using the straight-line method.
F-11
Warranty
The Company warrants under certain circumstances that its products meet
certain agreed-upon manufacturing and material specifications. The Company
records a warranty liability based on anticipated future claims.
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Earnings Per Share
Earnings per share reflected in the consolidated statements of operations
are presented in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The following table presents the earnings per share calculations:
Year Ended June 30, 1999 1998 1997
---------------------------------------------------------------------------
Numerator for Basic and Diluted
Earnings Per Share
Net Income (loss) $ 974,290 $(2,012,350) $ 592,730
===========================================================================
Denominator for Basic and Diluted
Earnings Per Share
Weighted average shares
outstanding 2,431,986 2,125,000 2,125,000
===========================================================================
Options to purchase shares of common stock were outstanding (see Notes 6
and 7) but were not included in the computation of diluted earnings per
share because (1) in fiscal 1999 and 1997, the options' exercise price was
greater than the average market price of the common shares, and (2) there
was a net loss in fiscal 1998 and therefore any additional shares would be
antidilutive.
F-12
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to fair
value. No impairment of the Company's long-lived assets has occurred
through June 30, 1999.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Recent Accounting Pronouncements
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998.
These statements are effective in fiscal 2000 and are not expected to have
a material impact on the Company's consolidated financial statements.
2. Acquisition
On May 23, 1996, PTC acquired all the outstanding shares of Atlas for cash
of $6,900,000, and related acquisition costs of approximately $337,060.
During fiscal 1998, a final purchase price adjustment resulted in $220,000
of additional goodwill. The acquisition, which was pursuant to a Merger
Agreement dated December 18, 1995, also included certain employment
agreements with bonus arrangements involving the principal shareholders of
Atlas (see Note 11).
F-13
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
3. Contract Receivables
The contract receivables consisted of:
June 30, 1999 1998
==========================================================================
Billed
Completed contracts $ 1,575,972 $ 2,816,422
Uncompleted contracts 5,577,034 2,276,987
Unbilled 267,066 234,012
--------------------------------------------------------------------------
Total Contracts Receivable 7,420,072 5,327,421
Less allowance for doubtful accounts (110,000) (110,000)
--------------------------------------------------------------------------
Total $ 7,310,072 $ 5,217,421
==========================================================================
4. Costs and Estimated Earnings on Uncomplete Contracts
Costs and estimated earnings on uncompleted contracts consisted of the
following:
June 30, 1999 1998
===========================================================================
Costs incurred on uncompleted contracts $19,018,174 $23,105,651
Estimated Earnings 8,649,123 7,762,175
---------------------------------------------------------------------------
27,667,297 30,867,826
Less billings to date 18,300,869 26,012,131
---------------------------------------------------------------------------
Total $ 9,366,428 $ 4,855,695
===========================================================================
The above totals are included in the accompanying balance sheets under the
following captions:
June 30, 1999 1998
===========================================================================
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 9,714,477 $ 5,435,957
Billings in excess of costs and estimated
earnings on uncompleted contracts (348,049) (580,262)
---------------------------------------------------------------------------
Total $ 9,366,428 $ 4,855,695
===========================================================================
F-14
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
5. Long-Term Debt
Long-term debt consisted of:
June 30, 1999 1998
===========================================================================
$16,000,000 revolving credit agreement with a
bank. The amount that may be borrowed under
this agreement is limited to specified
percentages of contract receivables, work in
process and property and equipment of Atlas.
The revolving credit agreement provides for
outstanding borrowings to bear interest at a
rate equal to (a) the bank's prime rate
(which was 8% at June 30, 1999) less 1/4%, or
(b) the 30, 60, or 90 day LIBOR rate plus 230
basis points, at the Company's option. No
principal payments on outstanding borrowings
are due until January 31, 2002, at which time
the entire balance is due. Borrowings under
this agreement are collateralized by
substantially all assets of Atlas. The
revolving credit agreement also contains
various financial covenants.
$10,186,140 $ 7,199,165
First mortgage note payable (1) 4,100,000 4,500,000
Other 113,256 170,639
---------------------------------------------------------------------------
Total 14,399,396 11,869,804
Less current maturities 448,353 615,677
---------------------------------------------------------------------------
Long-Term Debt $13,951,043 $11,254,127
===========================================================================
F-15
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
(1) In January 1997, the Company borrowed $4,500,000 in connection with
variable rate industrial revenue bonds issued by The Economic
Development Corporation of the County of Genesee. The note is payable
in amounts of $400,000 per year for fiscal years 1999-2001 and then
$300,000 per year through fiscal 2012. Interest is payable quarterly
and is set weekly by the remarketing agent at a level which allows the
bonds to be sold at par. The interest rate at June 30, 1999 was
approximately 4.0%. To enhance the marketability of the bonds and
guarantee payment of the bonds on the Company's behalf, a bank has
issued its letter of credit through December 2001, whereby a fee of 1%
is charged annually. Also, the bonds are secured by a first mortgage
note collateralized by substantially all assets of the Company.
Scheduled maturities of long-term debt for future years ending June 30 are
as follows: 2000 - $448,353; 2001 - $441,004; 2002 - $10,510,039; 2003 -
$300,000; 2004 - $300,000 and $2,400,000 thereafter.
6. Stockholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units ("Units").
(425,000 shares had been previously issued for $25,000.) Each Unit
consisted of one share of PTC's common stock, $.001 par value, and two
Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant
entitles the holder to purchase from PTC one share of common stock at an
exercise price of $5.00 during the period commencing May 24, 1996, and
ending June 24, 2001. The Warrants will be redeemable at a price of $.01
per Warrant upon 30 days notice at any time, only in the event that the
last sale price of the common stock is at least $8.50 per share for 20
consecutive trading days ending on the third day prior to date on which
notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are identical
to the Warrants discussed above. No Warrants have been exercised or granted
subsequent to May 23, 1996.
At June 30, 1999, 3,700,000 shares of common stock were reserved for the
issuance upon exercise of the warrants described above.
The Company is authorized to issue 1,000,000 shares of preferred stock
($.001 par value) with such designations, voting and other rights and
preferences as may be determined from time to time by the Board of
Directors. No preferred stock has been issued by the Company.
F-16
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
7. Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. The
plan allows for eligible employees to defer a portion of their salary. In
addition, discretionary contributions may be made by the Company. The
Company contributed $154,400 and $148,700 for the years ended June 30, 1999
and 1997, respectively. The Company made no contribution for the year ended
June 30, 1998.
PTC adopted a Performance Equity Plan in 1996 to enable the Company to
offer to selected personnel an opportunity to acquire an equity interest in
the Company through the award of incentives such as stock options, stock
appreciation rights and/or other stock-based awards. The total number of
shares of common stock reserved and available for distribution under the
Plan is 330,000 shares.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized for the Plan. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123, net income and income per
share amounts would have been the pro forma amounts indicated below:
Year Ended June 30, 1998 1997
===========================================================================
Net income (loss) - as reported $ (2,012,350) $ 592,730
Net income (loss) - pro forma (2,081,456) 259,445
Basic earnings per share - as reported (.95) .28
Basic earnings per share - pro forma (.98) .12
===========================================================================
No data has been presented for the year ended June 30, 1999 because there
were no options granted during the year.
The fair value of each option grant is established on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions
for 1998 and 1997, respectively: dividend yield of 0% for both years;
expected volatility of 68% and 23%; risk-free interest rate of 6.0% and
5.4%; and expected lives of 2 years for both years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not necessarily indicative of future amounts.
F-17
A summary of the status of the Company's stock options is as follows:
Weighted-
Average
Exercise
Shares Price
===========================================================================
Outstanding and exercisable at July 1, 1996 -- $ --
Granted 255,000 5.00
Expired -- --
Exercised -- --
---------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1997 255,000 5.00
Granted 40,000 4.13
Expired -- --
Exercised -- --
---------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1998 295,000 4.88
Granted -- --
Expired -- --
Exercised -- --
---------------------------------------------------------------------------
Outstanding and Exercisable at June 30, 1999 295,000 $4.88
===========================================================================
The weighted-average grant date fair value of options during fiscal 1998
and 1997 was approximately $1.73 and $1.31, respectively.
The following table summarizes information regarding stock options
outstanding and exercisable at June 30, 1999:
Weighted Average
Options -----------------------------
Outstanding Remaining
Range of And Contractual Exercisable
Exercise Prices Exercisable Life Price
$4.125-$5.00 295,000 2 years $ 4.88
-==========================================================================
F-18
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
(liabilities) are as follows:
June 30, 1999 1998
===========================================================================
Current
Inventory net realizable value reserve $ 102,000 $ 68,000
Research credit carryforward - net 100,000 34,000
Accrual for executive bonus agreement -- 237,000
Other 229,000 136,000
---------------------------------------------------------------------------
Net Current Deferred Tax Asset $ 431,000 $ 475,000
===========================================================================
Non-Current
Depreciation and basis of assets $(582,000) $(569,000)
Executive deferred compensation agreement 377,000 488,000
Research credit carryforward - net 210,000 30,000
Other (5,000) 51,000
---------------------------------------------------------------------------
Net Non-Current Deferred Tax Liability $ -- $ --
===========================================================================
Significant components of income tax expense (benefit) are as follows:
Year Ended June 30, 1999 1998 1997
===========================================================================
Federal
Current $ 41,000 $(315,000) $ 481,000
Deferred 44,000 (685,000) (89,000)
State
Current 15,000 50,000 58,000
--------------------------------------------------------------------------
Total $ 100,000 $(950,000) $ 450,000
==========================================================================
F-19
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
The reconciliation of income tax computed at the federal statutory rate
(34%) to income tax expense (benefit) is as follows:
Year Ended June 30, 1999 1998 1997
===========================================================================
Tax expense (benefit)
at statutory rate $ 365,000 $(1,007,000) $ 355,000
Goodwill amortization
and other non-deductible
items 59,000 62,000 55,000
State income taxes, net of
federal income tax benefit 10,000 33,000 38,000
Research credit - net (246,000) -- (40,000)
Other - net (88,000) (38,000) 42,000
---------------------------------------------------------------------------
Income Tax Expense
(Benefit) $ 100,000 $ (950,000) $ 450,000
===========================================================================
During fiscal 1999, the Internal Revenue Service (IRS) completed its audit
for the fiscal year ended June 30, 1995. The main area of review was
research and experimentation (R&E) tax credits the Company had calculated
and filed for in fiscal years 1990 through 1995. Due to this ongoing IRS
audit and the uncertainty of its outcome, the Company included significant
reserves when estimating R&E tax credits to be realized in fiscal 1998 and
1997. As a result of the IRS audit completed during the current fiscal
year, the Company believes it can more accurately estimate its R&E tax
credits. As a result, management has reduced its reserves related to the
prior years' R&E tax credits by $141,000, and recorded this change in
estimate during 1999 as a reduction in income tax expense.
Atlas has tax research credit carryforwards totaling approximately $618,000
that will begin to expire in 2012. Based on management's, estimates, these
credit carryforwards have been reduced by 50% for financial statement
purposes to reflect their estimated future value.
F-20
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
9. Major Customers
For the twelve months ended June 30, 1999, 1998 and 1997, the Company's
sales to its major customers (each representing more than 10% of total net
sales) amounted to approximately 30%, 50% and 44% of total annual sales,
respectively. During 1999, there were two major customers each representing
15% of total net sales; during 1998, there were three major customers
representing 27%, 13% and 10% of total net sales; and during 1997 there
were three major customers representing 20%, 12% and 12% of total net
sales.
10. Arbitration Settlement
On October 1, 1996, the Company received a "Demand For Arbitration" by a
former customer that alleged, among other issues, a $15,400,000 claim for
damages resulting from a breach of contract and breach of warranties
related to the design and manufacture of certain industrial equipment.
During fiscal 1998, a "Settlement Agreement and Release Of All Claims" was
executed. The Company settled with the former customer for $700,000, of
which $210,000 was recovered from insurance coverage. The net expense of
$490,000 has been included in selling, general and administrative expenses
during fiscal 1998.
11. Bonus Restructuring
During fiscal 1998, the Company amended the employment agreements of two
executive officers of Atlas that were previously entered into in connection
with the Merger Agreement (see Note 2). These amended employment agreements
are identical except that one agreement expired on December 31, 1998, and
the other expires on December 31, 2001. Each agreement requires the
executive to devote substantially all of his business time and attention to
the affairs of the Company. Annual compensation under each agreement is
$198,588, subject to cost of living increases for one of the officers. The
amended agreements also provide that each executive, regardless of future
employment, will receive four annual payments of $207,571 commencing July
30, 1999. Each executive also received 150,000 shares of restricted common
stock of the Company issued during fiscal 1999. The restricted common stock
has been valued at market value less a 30% discount for lack of
marketability. Included in the accompanying financial statements as of and
for the years ended June 30, 1999 and 1998 related to these amended
agreements are the following:
F-21
Productivity Technologies Corp. and Subsidiary
Notes to Financial Statements
================================================================================
1999 1998
===========================================================================
Balance Sheet
Current maturities of executive
deferred compensation agreement $ 326,706 $ --
Executive Deferred Compensation
Agreement, less current maturities 1,109,677 1,436,383
Common stock to be issued -- 696,520
===========================================================================
Statement of Operations
Bonus restructuring expense $ -- $2,131,903
===========================================================================
The amended agreements described above superseded two previously existing
employment agreements, which provided for two bonus calculations based on
earnings of the Company. As of June 30, 1998, there was $810,000 to be paid
under these superseded agreements; this amount was paid in fiscal year
1999, and no future amounts are payable.
F-22
Productivity Technologies Corp. and Subsidiary
Schedule II - Valuation and Qualifying Accounts
================================================================================
Additions
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1999
Allowance for doubtful accounts
(deducted from contract receivables) $ 110,000 $ -- $ -- $ 110,000
Inventory net realizable value reserve 200,000 100,000 -- 300,000
Warranty reserve 119,190 960,499(3) (879,689) 200,000
====================================================================================================================================
Year Ended June 30, 1998
Allowance for doubtful accounts
(deducted from contract receivables) $ 45,500 $ 64,500 $ -- $ 110,000
Inventory net realizable value reserve 120,000 80,000 -- 200,000
Warranty reserve 24,078 622,717(3) (527,605) 119,190
====================================================================================================================================
Year Ended June 30, 1997
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 $ (78,753)(1) $ (39,218) $ 45,500
Inventory net realizable value reserve 200,000 -- (2) (80,000) 120,000
Warranty reserve 25,000 364,823 (3) (365,745) 24,078
====================================================================================================================================
(1) Accounts deemed to be uncollectible (net of accounts collected that were
previously deducted).
(2) Inventory disposed of, charged to reserve.
(3) Actual warranty charges incurred, charged to reserve.
F-23
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation*
3.1.1 Amendment to Certificate of Incorporation filed May 28,
1996**
3.2 By-laws*
4.1 Form of Common Stock Certificate of the Company*
4.2 Form of Warrant Certificate of the Company*
4.3 Unit Purchase Option between GKN Securities Corp. and the
Company*
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company*
10.1 Employment Agreement dated May 23, 1996 between Atlas
Technologies, Inc. ("Atlas") and Ronald M. Prime***
10.2 Employment Agreement dated May 23, 1996 between Atlas
Technologies, Inc. and Michael D. Austin***
10.3 Bonus Restructuring Agreement dated June 30, 1998 between
Atlas Technologies, Inc. and Messrs. Michael D. Austin
and Ronald Prime****
10.4 1996 Performance Equity Plan of the Company***
27 Financial Data Schedule *****
- ----------
* Filed as Exhibits to Registration Statement on Form S-1, No. 33-78188,
and incorporated herein by reference.
** Filed as Exhibit to Report on Form 8-K filed June 7, 1996, and
incorporated herein by reference.
*** Filed as Exhibits to Report on Form 10-K for fiscal year ended March 31,
1996 and incorporated herein by reference
**** Filed as Exhibits to Report on Form 10-K for fiscal year ended March 31,
1998 and incorporated herein by reference
***** Filed herewith.
E-1