SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the fiscal year ended June 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 For the transition period from ________ to
_______
Commission file number 0-24242
PRODUCTIVITY TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3764753
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3100 Copper Avenue, Fenton, Michigan 48430
(Address of Principal Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code (810) 714-0200
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)
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 No _X_
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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant at January 20, 2004: $1,600,000
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at January 20, 2004
----------------------------- --------------------------------
Common stock, $.001 par value 2,475,000 shares
Documents Incorporated by Reference: Not applicable
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Productivity Technologies Corp. (the "Company") was incorporated in June 1993
under the name Production Systems Acquisition Corporation with the objective of
acquiring an operating business engaged in the production systems industry. The
Company completed an initial public offering ("IPO") of common stock in July
1994 and raised net proceeds of approximately $9.0 million. In May 1996, the
Company changed its name to Productivity Technologies Corp. and acquired,
through a merger, Atlas Technologies, Inc. ("Atlas") as a wholly owned
subsidiary. On February 23, 2000, the Company purchased, through a wholly owned
subsidiary formed for this purpose, substantially all of the assets of Westland
Control Systems, Inc. ("Westland"). The Company has no other subsidiaries or
operations. The Company, which produces industrial machinery, operates in a
single segment through its Atlas and Westland subsidiaries.
Atlas sells products to automobile and automotive parts manufacturers and
appliance manufacturers. Other customers include steel service centers and
manufacturers of lawn and garden equipment, office furniture, heating,
ventilation and air conditioning equipment, and large construction equipment.
Automotive related customers account for the majority of sales. Westland's
customers participate in the automotive, food processing, adhesive and sealant,
and other industries.
Atlas is a leading innovator and supplier of quick die change, flexible
transfer, and stacking/destacking equipment used to automate automotive and
other metal stamping operations. Atlas operates two manufacturing plants in
Fenton, Michigan and has sales and engineering offices in Michigan, Europe and
China.
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 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, on a turnkey basis, fully integrated metal stamping systems
comprised of components provided by Atlas and other manufacturers. During 1998,
Atlas began producing and selling finger tooling for use with its and third
party transfer press automation equipment. Atlas offers standard transfer press
cells where Atlas acts as the systems integrator.
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 forming 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, facilitate the
changing of dies on a press and subsequent die handling operations (storage,
retrieval, and maintenance) and handle stamped parts at the end of the press
lines.
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.
Westland designs, manufactures and field installs custom electrical control
panels primarily for use in production machinery and machine tools utilized in
automotive, adhesive & sealant, food processing, and other industrial
applications. Westland operates one manufacturing plant in Westland, Michigan,
which is located one hour from Atlas' plants in Fenton, Michigan. Westland's
plant comprises approximately 34,000 square feet of manufacturing space and
4,000 square feet of offices. Its Westland location is centrally located in
Southeastern Michigan nearby numerous machinery manufacturers.
The manufacture of control panels for industrial machinery often but not always
occurs in the latter stages of construction. Machinery typically is first built
and subsequently wired. Machine wiring is conducted through the control panel.
While machine wiring and control panels are manufactured in the latter stages of
machine production, they are essential to effective machinery operation as they
turn stationary metal into functional machines. As a result, management believes
control panels are considered a higher value added machinery module.
Management believes the Company has been a leader in the refinement of the
processes by which custom electrical panels are built. In particular, management
believes it has effective internal processes to convert the production of a
custom panel into more of a mass production process. At many stages in the panel
build process, Westland has reduced or eliminated certain steps, which incur
costs or extend production time. Management believes Westland's processes help
its customers. A number of Westland's customers seek to outsource a substantial
portion of their panel building requirements. Often, machinery builders, which
outsource the production of their control panels, are focused on machinery
construction first, while the outsourcing of panel design and production remains
a secondary concern. This can lead to a situation where panels are required
within shorter lead times. Management believes Westland's streamlined production
processes allow the Company to satisfy rapid delivery requirements of customers.
Customers and Marketing
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. Westland's products are utilized in machinery for
automotive adhesive and sealant, engine part machining, food processing and
other industrial applications.
In the 2001, 2002 and 2003 fiscal years, automotive industry customers for the
Company accounted for approximately 68%, 84% and 89% of sales, respectively. For
such fiscal years, sales by the Company to the Ford Motor Company represented
24%, 22% and 31%, respectively, of total sales. Sales are predominantly in the
United States and Canada but, in recent years and especially for the second half
of fiscal year 2001, the Company targeted sales efforts in Mexico, Brazil,
Europe and Asia. International sales for the 2001, 2002 and 2003 fiscal years
represented approximately 24%, 23% and 17%, respectively, of total sales in such
years.
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Porthcawl, South Wales, U.K., and Beijing,
China; commissioned sales representatives; and original equipment manufacturers
(OEMs) specializing in metal presses and related equipment. Westland's sales are
primarily direct and on occasion it has utilized outside manufacturers' sales
representatives.
Atlas expects to incorporate and establish offices in Brazil and Germany in late
2003 and early 2004.
The order backlogs were approximately $17.0 million, $15.7 million and $14.9
million at June 30, 2001, 2002 and 2003, respectively. The Company believes
substantially all of the June 30, 2003 backlog will be produced during fiscal
2004.
Products
Management believes that Atlas offers production critical, higher technology
products based on proven designs and engineering, which offer superior
technology, engineering and features compared to certain products 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 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 seeking
to achieve greater modularity in the engineering and design of its products. To
date, this focus has resulted in faster order fulfillment and production, and
improved fabrication. Atlas believes that meaningful cost-reducing improvements
can still be made in the manufacturing process, particularly from further
development of configurable modules.
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 each. 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,
Flex 3000, 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. Atlas offers standard Transfer Press Cells as a systems integrator,
comprised of Atlas equipment and presses made by other manufacturers to more
aggressively pursue the transfer press process market segment.
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 clean
or lubricate the metal blanks (or strips) and to queue them to assure a steady
flow. Atlas also produces and sells precision steel pallets for handling the
stacks of sheet metal so as to reduce handling damage and to eliminate the need
for strapping the stack of sheets together.
Westland designs, manufactures and field installs custom electrical control
panels primarily for use in production machinery and machine tools utilized in
automotive, adhesive and sealant, food processing, and other industrial
applications. The design and manufacture of control panels for machinery
occasionally occurs in the later stages of the machinery design and construction
process. Machinery must first be constructed, and then wired, where the wiring
is conducted through the control panel. The wiring and control panels are
essential to effective machinery operation, as the wiring and controls convert
the machinery from stationary metal to functional machines.
Westland's products range from small, single door electrical panels to larger
six door panels. Selling prices for Westland's products range from less than
$5,000 to more than $100,000 per unit. The electrical control panels are used by
customers to control the mechanical functions of machinery used in applying
adhesives and sealants in automobile production, material handling equipment for
metal forming for automobiles and appliances, the machining of cylinders for the
manufacture of vehicle engines, and the fabrication of containers for food and
juice packaging.
Competition
Atlas management believes Atlas' products are sold in specialized markets that
have limited customers and competitors. In any case, 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 present
levels. Primary competitors of Atlas include ABB Flexible Automation (Sweden),
Automatic Feed Company (U.S.A.), Binar (Sweden), Orchid International (Canada),
Linear Transfer Systems (Canada), Gudel/Rapindex (Switzerland, U.S.A.), Wayne
Trail (U.S.A.), HMS Products Co. (U.S.A.), Schuler Automation Group (Germany),
Strothmann GmbH (Germany), 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.
Westland management believes Westland's competitors sell their products
primarily regionally, and there are numerous competitors both regionally and
nationally. Typically, custom-built control panels are commodity type products
purchased by customers on the basis of quality and reliability, delivery timing,
and pricing. Westland's major competitors in the Southeast Michigan region
include Stegnar Electric, K-R Automation, Con-Syst-Int, JIC Electric, X-Bar
Automation and Control Technique.
In contrast to the possible regional focus of certain competitors, Westland is
focused on customers both within and outside its local region. Westland also
seeks to sell more than control panel building services. It seeks to educate
customers on how they can reduce their internal labor costs by having Westland,
at a cost lower than the customers' labor expenses, more fully prepare the
control panels for final, and more rapid, installation on the customers'
machinery.
Trademarks and Patents
Atlas owns exclusive rights to U.S. and foreign patents previously owned by the
deceased inventor, Mr. John H. Maher, having acquired assignment of these rights
in April 2002 from Mr. Maher's trust in a cash transaction in April 2002. The
patents are associated with the manufacture, sale, and use of Atlas FLEX 5000(R)
and related transfer press automation equipment products. The relevant patents
registered with the United States Patent and Trademark Office will expire on
June 23, 2008. As a result of the purchase of the patent rights in April 2002,
Atlas no longer pays any royalties to the former owner of the patents, but is
now fully responsible for all associated patent defense and maintenance costs.
The exclusive rights agreement covers three U.S. patents for a system for
transferring work pieces through a series of workstations, a fourth US patent
for a synchronized dual axis actuator, and a fifth U.S. patent for a transfer
system. The system for transferring work pieces through a series of workstations
is protected by foreign patents in Canada, China, France, Germany, Great
Britain, Japan, Republic of Korea, Russian Federation, Spain and Sweden. This
license agreement also encompasses rights to transfer system patents that are
pending in several foreign countries covered under the Patent Coordination
Treaty. A royalty bearing sub-license has been granted by Atlas to the Orchid
Automation Group (Canada).
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)" that it uses to market its line of transfer
equipment.
Atlas owns and has registered with the United States Patent and Trademark Office
eight (8) patents, one for an asynchronous conveyer construction, one for a
transfer arm for supporting work pieces, one for a magnetic sheet separator
construction, one for a workpiece transfer support apparatus, one for a magnetic
sheet fanner, one for an apparatus for supporting a workpiece for transfer, one
for a pallet cover, and one for apparatus and methods for forming work pieces.
Foreign patents for the latter are held in Australia, China, France, Germany,
Italy, Great Britain, Poland, Spain and Sweden with patent applications pending
in Canada, Korea, and Mexico. Atlas has applied for five United States patents
for an articulating work piece transfer apparatus, a magnetic sheet fanner, a
tooling gage, a finger tooling receiver for transfer press automation equipment
and a pin pallet cover. Foreign patent applications have been filed for the
articulating work piece transfer apparatus.
Atlas holds an exclusive license agreement that covers two more U.S. patents for
a system for transferring work pieces through a series of workstations and a
synchronized dual axis actuator. The system for transferring work pieces through
a series of workstations is protected by foreign patents in Canada, China,
France, Germany, Great Britain, Japan, Republic of Korea, Russian Federation,
Spain and Sweden. This license agreement also encompasses rights to transfer
system patents that are pending in the U.S. and several foreign countries
covered under the Patent Coordination Treaty.
Management and Employees
The Company employs approximately 190 persons. None of these persons is a member
of a union. The Company believes that its employee relations are good. The
Company's facilities are located in highly industrialized areas that benefit the
Company by reason of their proximity to customers and a skilled labor force.
ITEM 2. PROPERTIES
Atlas owns and operates two manufacturing facilities in Fenton, Michigan and
Westland leases and operates one manufacturing facility in Westland, Michigan.
The two Fenton facilities have an aggregate of 94,200 square feet of space. One
of these 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,
finance/human resources, service, quality, purchasing and sales offices are also
located in Fenton.
The Westland plant, which is leased, has approximately 34,000 square feet of
manufacturing and assembly space and 4,000 square feet for offices. Operations
performed in the Westland facility are manufacturing, assembly, quality control,
testing, field installation and service. Sales, operations, finance and
administration are all located in Westland, Michigan.
The principal executive offices of the Company are located at 3100 Copper
Avenue, Fenton, Michigan 48430.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation matters in the ordinary course of
its business. No such pending matters, individually or in the aggregate, if
adversely determined, are believed by management to be material to the business
or financial condition of the Company. The Company maintains general liability
insurance, workers' compensation insurance, property insurance, automobile
insurance, employee benefit liability insurance, fidelity insurance and
directors' and officers' liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In 2001, the Company's common stock was de-listed for trading on the NASDAQ
Small Cap Market. At that time, the Company's common stock became listed for
quotation on the NASD's electronic over the counter quotation system, the OTC
Bulletin Board (the "OTCBB"). In October, 2003, due to a delay in the Company's
filing this annual report on Form 10-K for the fiscal year ended June 30, 2003,
the Company's quotation on the OTCBB was suspended. Currently, the Company's
common stock is traded through the Pink Sheets LLC. The Company expects that,
with the filing of this 10-K and the forthcoming quarterly report on Form 10-Q
for the quarter ended September 30, 2003, which report is also delinquent, it
will once again be listed for quotation on the OTCBB. The over-the counter
quotations of the Company's common stock reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily reflect actual
transactions. The de-listing from the OTCBB could have a material adverse effect
upon the Company in a number of ways, including its ability to raise additional
capital. In addition, the absence of a trading system may adversely affect the
ability of broker-dealers to sell the Company's common stock, and consequently
may limit the public market for such stock and have a negative effect upon its
trading price. There can be no assurance that the Company's common stock will be
re-listed on the OTCBB.
The following table sets forth the range of high and low closing bid prices for
common stock as reported on the OTCBB. Within the last two fiscal years there
has been extremely limited trading in the Company's Units and Warrants and,
therefore, no trading information is provided. The Warrants expired effective on
June 24, 2002.
High Low
($) ($)
Year ended June 30, 2002:
First Quarter 0.50 0.20
Second Quarter 0.40 0.13
Third Quarter 0.35 0.20
Fourth Quarter 0.45 0.25
Year ended June 30, 2003:
First Quarter 0.17 0.07
Second Quarter 0.11 0.05
Third Quarter 0.15 0.05
Fourth Quarter 0.34 0.05
As of September 30, 2003, the Company had 16 holders of record of its common
stock. The Company believes that there are in excess of 300 beneficial holders
of the Company's common stock. The Company has not declared or paid any
dividends on its common stock since its inception.
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, as of and for June
30, 1999 and 2000; by Doeren Mayhew as of and for the years ended June 30, 2001
and 2002; and by Follmer Rudzewicz PLC as of and for the year ended June 30,
2003. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Report and the Consolidated Financial Statements and notes
thereto referenced in Item 8 of this Report included herein. See also Item 9 of
this Report.
(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data
Year ended June 30,
----------- -- ------------ -- ----------- -- ------------ -- --------------
2003 2002 2001 2000 1999
----------- -- ------------ -- ----------- -- ------------ -- --------------
Revenues earned $ 29,051 $ 24,768 $ 27,992 $ 33,230 $ 34,001
Cost of revenues earned 22,197 18,261 22,155 26,235 24,610
Gross profit 6,853 6,507 5,837 6,895 9,391
Selling, general and 6,004 6,453 8,004 6,333 7,526
administrative
Impairment of intangible assets -- 2,087 -- -- --
Bonus restructuring expense -- -- -- -- --
Income (loss) from operations 849 (2,033) (2,167) 562 1,865
Net income (loss) 361 (4,128) (3,114) (256) 974
Net income per share of common
stock $ 0.15 ($1.67) ($1.26) ($0.10) $0.40
Weighted average common shares 2,475 2,475 2,475 2,475 2,432
Consolidated Balance Sheet Data
June 30,
----------- -- ------------ -- ----------- -- ------------ -- --------------
2003 2002 2001 2000 1999
----------- -- ------------ -- ----------- -- ------------ -- --------------
Current assets $ 10,521 $ 11,639 $ 15,822 $ 22,972 $ 19,148
Current liabilities 16,388 18,474 17,355 8,155 5,330
Working capital (5,867) (6,835) (1,533) 14,817 13,818
Property, plant and equipment, net 6,159 6,711 7,231 7,708 7,844
Total assets 20,703 24,494 31,757 39,238 30,108
Long-term debt, less current
maturities 1,735 3,800 7,710 20,862 13,951
Total liabilities 18,123 22,274 25,410 29,777 20,391
Stockholders' equity 2,580 2,220 6,347 9,461 9,717
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Revenues at Atlas 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. Atlas 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. Sales at Westland are recognized when products are
shipped.
Recent Developments
Effective as of December 12, 2003, Merrill Lynch Business Financial Services
Inc. ("MLB") entered into a new credit facility with Atlas (the "MLB Credit
Facility") providing for borrowing availability of up to $8.0 million, of which
$7.4 million was funded at closing. The MLB Credit Facility consists of :
o a seven-year real estate term loan in the original principal amount of
$3.5 million, bearing interest at a variable per annum rate equal to
3.15% in excess of one-month LIBOR, payable in monthly installments of
interest plus 1/180th of principal (a 15-year amortization schedule)
with the balance of principal due at maturity in December 2010, and
secured by substantially all of the assets of Atlas;
o a three-year equipment term loan in the original principal amount of
$500,000, bearing interest at a variable per annum rate equal to 3.15%
in excess of one-month LIBOR, payable in monthly installments of
interest plus 1/36th of principal (full amortization), maturing in
December 2006, and secured by substantially all of the assets of
Atlas; and
o a one-year revolving working capital credit facility providing for
borrowing availability of up to $4.0 million based upon eligible
accounts receivable, bearing interest at a variable per annum rate
equal to 2.85% in excess of one-month LIBOR, payable in monthly
installments of interest only, maturing on December 31, 2004 and
secured by substantially all of the assets of Atlas.
The MLB Credit Facility is guaranteed by the Company and, in addition, the
Company has pledged all of the capital stock of Atlas to secure the guaranty.
The proceeds of the MLB Credit Facility were used to retire the revolving credit
facility and commercial mortgage loan from Bank One, NA to Atlas in the
aggregate outstanding principal amount of $7.4 million. Atlas continues to be
responsible for legal and professional field audit fees of Bank One in the
amount of approximately $60,000. As part of these financing transactions, Bank
One also agreed to release the liens on the assets of Atlas and the Company. In
addition, Bank One agreed to subordinate its rights with respect to Westland's
new lender, Spectrum Commercial Services, Inc. ("Spectrum"), in connection with
Bank One's term loan in the outstanding principal amount of approximately $2.2
million, bearing interest at 1.25% over Bank One's prime rate, which the Company
incurred in February 2000 to purchase Westland (the "Westland Loan").
In addition, also effective as of December 12, 2003, Spectrum entered into a
two-year credit facility with Westland (the "Spectrum Credit Facility")
providing for borrowing availability of up to $1.25 million based upon eligible
accounts receivable, bearing interest at a variable per annum rate equal to
5.25% in excess of the prime rate of Wells Fargo Bank, NA, (subject to certain
minimum payments of $5,575 per month, and subject to reduction by 0.5% if
specified profitability thresholds are met), maturing in December 2005 and
secured by substantially all of the assets of Westland.
Bank One agreed to subordinate its rights under the Westland Loan to Spectrum,
subject to restating the obligations under a new Guarantor Payment Agreement
effective as of December 12, 2003 under which Bank One will look to Westland to
repay the remaining obligations owed to Bank One (which continues to be $2.2
million in principal). Although the Company continues to be the primary obligor
under the Westland Loan as restated, the Company is prohibited from making
payments to Bank One so long as the MLB Loan to Atlas (as to which the Company
is a guarantor) remains outstanding, and, accordingly, Westland entered into the
new Guarantor Payment Agreement. Under the terms of the restated Westland Loan,
Westland is required to pay to Bank One $10,000 per month plus interest as well
as 25% of excess cash flow (as defined in the restated loan agreement) from
Westland's operations. Under the restatement, without expressly waiving the
previously existing covenant defaults under Westland Loan, Bank One has agreed
to honor the scheduled maturity date of the Westland Loan (February 23, 2005)
absent any further defaults. As restated, the Westland Loan bears interest at
the per annum rate of 3.0% in excess of Bank One's prime rate. Bank One
continues to hold a lien on substantially all of Westland's assets, subordinated
to the lien of Spectrum.
In connection with these financing transactions, the Company, Atlas and Westland
retired the remaining obligations to the former owner of Westland, Thomas Lee,
in consideration of a payment of $525,000, resulting in a gain on the
extinguishment of debt of approximately $125,000. Under agreements entered into
with Bank One in January 1999, Ronald Prime, formerly an owner and executive
officer of Atlas, and Michael Austin, formerly an owner and executive officer of
Atlas and currently a director of the Company, agreed to subordinate their
rights to receive payments for deferred executive compensation obligations of
approximately $974,000 (which were originally scheduled to be paid during the
period from July 2000 through July 2002). These executives agreed to continue to
subordinate their right to payment to MLB.
Impact of Recently Issued Accounting Standards
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both the annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The transitional requirements of SFAS 148
are effective for all financial statements for fiscal years ending after
December 15, 2002. The Company adopted the disclosure portion of this statement
for the quarter ended December 31, 2002. The application of the disclosure
portion of this standard did not have any impact on the Company's consolidated
financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS 150"). This accounting standard establishes
standards for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. It requires that certain
financial instruments that were previously classified as equity, now be
classified as a liability. This accounting standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of this statement did not have a material impact on the consolidated
financial statements.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others an interpretation of
SFAS No. 5, 57 and 107 and rescission of FASB Interpretation No. 34" was issued
in November 2002. FIN 45 clarifies the requirements of SFAS No. 5, " Accounting
for Contingencies," relating to a guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The adoption of FIN 45 related to
initial recognition and measurement of guarantees did not have an impact on the
net income or equity of the Company.
FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of
ARB 51," was issued. The primary objectives of FIN 46 are to provide guidance on
the identification and consolidation of variable interest entities, or VIE's,
which are entities for which control is achieved through means other than
through voting rights. The Company has completed an analysis of FIN 46 and has
determined that it does not have any VIE's.
Results of Operations
Fiscal Year 2003 Compared to Fiscal Year 2002
Revenues earned for the year ended June 30, 2003 were $29,050,542 as compared to
$24,767,655 for the year ended June 30, 2002, an increase of 17%. Atlas's
revenues were up 13% principally as a result of slightly greater business
activity. Westland's revenues increased 39% due to the addition of new customers
that began ordering from Westland, or ordered in greater volume, compared to one
year earlier.
Gross profit for the year ended June 30, 2003 was $6,853,324, representing a 5%
increase from the $6,506,891 gross profit for the year ended June 30, 2002. The
increase in gross profit was principally due to the volume increases at both
Atlas and Westland. Gross profit as a percentage of revenues earned for the year
ended June 30, 2003 as compared to prior fiscal year decreased from 26.3% to
23.6%, principally as the result of a change in the mix of products sold by
Westland and to continued competitive pricing pressures in the segments served
by Westland.
Consolidated selling, general and administrative (SG&A) expenses, were
$6,003,959, down 7% as compared to SG&A expenses of $6,452,908 for the year
ended June 30, 2002. The decrease was principally due to continued efforts by
management to contain expenses.
Income from operations for the year ended June 30, 2003 amounted to $849,365
compared to a loss from operations for the year ended June 30, 2002 of
$2,033,325. The loss in fiscal 2002 was principally attributable to the
write-off of $2,087,308 for impairment of intangible assets, including a patent.
The improvement in income from operations for fiscal 2003 resulted primarily
from higher sales volume and lower SG&A expenses noted above and the absence of
a write-off for impairment of intangible assets.
Interest expense for fiscal 2003 was $639,822 a decrease of 62% as compared to
$1,668,519 for fiscal 2002. The improvement was due principally to the Company's
continued focus on collections of receivables and inventory management at both
Atlas and Westland, which reduced borrowing needs. Interest also declined in
comparison as the 2002 figure included a one-time interest rate swap unwinding
fee of $388,000. Further, Westland's interest costs were lower in fiscal 2003
due to its litigation settlement on September 3, 2002, which resulted in the
extinguishment of $1.8 million of indebtedness owed to the former owner of
Westland.
The net income for fiscal 2003 was $360,574 as compared to net loss for the year
ended June 30, 2002 of $4,127,502. This improvement was due to the numerous
factors cited above including the absence of a charge for impairment of
intangible assets in 2003, higher sales volume, lower SG&A expense and lower
interest expenses.
Fiscal Year 2002 Compared to Fiscal Year 2001
Revenues earned for the year ended June 30, 2002 were $24,767,655 as compared to
$27,992,387 for the year ended June 30, 2001, a decrease of 12%, principally as
a result of lower order volume during fiscal 2002. The decline in revenues
earned was primarily due to the softness in capital goods demand in the
automotive industry. In addition, management believes the terrorist events of
September 11, 2001 adversely affected demand for Atlas' and Westland's products.
Gross profit for the year ended June 30, 2002 was $6,506,891, an 11% increase
from the $5,837,396 gross profit for the year ended June 30, 2001. Gross profit
increased during fiscal 2002 principally due to the restructuring efforts
undertaken at Atlas during the 2001 and 2002 fiscal years and to improved cost
controls and inventory management.
Consolidated selling, general and administrative (SG&A) expenses, were
$6,452,908, down 19% as compared to SG&A expenses of $8,004,219 for the year
ended June 30, 2001. The decrease was principally due to restructuring efforts
undertaken at Atlas during the 2001 and 2002 fiscal years.
The impairment of intangible assets amounted to $2,087,308, all of which was
attributable to Westland.
The loss from operations for the year ended June 30, 2002 of $2,033,325 is
principally attributable to the write-off of $2,087,308 for impairment of
intangible assets, including a patent. The Company recorded a loss from
operations of $2,166,823 for the year ended June 30, 2001. The improvement in
income from operations resulted primarily from the restructuring initiatives
discussed above, offset by the write-off for impairment of intangible assets.
Interest expense for fiscal 2002 was $1,668,519 as compared to $1,605,164 for
fiscal 2001. This increase in interest expense for fiscal 2002 was due to a
one-time $388,000 expense charged to the Company by its existing bank lender for
unwinding an interest rate swap entered into in 2000. The remaining interest
expense for fiscal 2002 was $1,280,519, which was $324,645 less than the total
interest expense for fiscal 2001, principally as a result of lower interest
rates and management's focus on accelerating receivables collections and on
improving other cash and inventory management procedures.
At June 30, 2002, the Company had aggregated net operating losses of
approximately $6,309,000 for income tax purposes, which begin to expire in 2020.
In addition, the Company had tax research credit carry forwards of approximately
$1,165,000, which will begin to expire in 2012. For financial reporting
purposes, due to prior year operating losses, and uncertainty in realization the
Company has increased its valuation allowance from $1,412,600 to $2,957,500
against the net operating loss carryforwards and other deferred tax assets. The
amount of the remaining deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
For the year ended June 30, 2002, the Company incurred a net loss of $4,127,502
as compared to net loss for the year ended June 30, 2001 of $3,113,741. The net
loss during fiscal 2002 includes $2,087,308 for the impairment of intangible
assets, $588,000 for the write-down of the Company's deferred tax asset, and
$388,000 for the swap fee charged by Bank One, which had been senior lender to
both Atlas and Westland prior to December 12, 2003. Excluding these write-downs
and non-recurring expenses, the Company's net loss for fiscal year 2002
approximated $1,064,194, an improvement of $2,049,547 as compared to the net
loss reported in fiscal 2001 of $3,113,741. This improvement was due to the
numerous factors cited above, including lower interest rates; considerable
management focus on accelerating receivables collections and on improving
inventory and cash management procedures; and restructuring efforts undertaken
at Atlas during fiscal years 2001 and 2002 which provided operating and
financial benefits in fiscal 2002.
Liquidity and Capital Resources
At June 30, 2003, the Company had (1) $2.7 million outstanding under a
commercial mortgage loan from Bank One, (2) $4.5 million outstanding under a
revolving credit facility with Bank One (the "Old Atlas Revolver"), (3) $974,933
due to Messrs. Prime and Austin under a deferred compensation arrangement, (4)
$2.2 million outstanding under the Westland Loan, and (5) $775,000 due to the
former owner of Westland, Thomas Lee. This total of $11.1 million compares to a
total combined indebtedness of $17.0 million as of June 30, 2002. The decrease
in indebtedness at June 30, 2003 is principally due to repayment of a portion of
the obligations to Bank One and Mr. Lee as well as the discharge of certain
indebtedness owed to Mr. Lee under the terms of a settlement agreement entered
into with him in September 2003. Under the terms of the settlement agreement
entered into with Mr. Lee, (i) $1,800,000 of the $3,200,000 of the principal and
accrued interest outstanding under the Company's note to Mr. Lee was
extinguished, (ii) the Company paid $458,000 of the obligation in September
2002, and (iii) the Company agreed to pay the remaining $950,000 on an
installment basis over a 40 month period.
Working capital deficit at June 30, 2003 was ($5,866,497) and the current ratio
was (.64) to 1, as compared to working capital deficit of ($6,835,443) and a
current ratio of (.63) to 1 for the Company at June 30, 2002.
Prior to the expiration of the Old Atlas Revolver in January 2002, the Company
was not in compliance with certain financial covenants and borrowing base
limitations thereunder. The Company also was not in compliance with certain
financial covenants under the Westland Loan. During fiscal year ended June 30,
2003, Bank One did not demand that the Company repay either the Old Atlas
Revolver or the Westland Loan. In the period following the January 2002 maturity
of the Old Atlas Revolver, the Company and Bank One engaged in discussions
concerning possible terms of forbearance, and Bank One consented to the
settlement with Mr. Lee; however, no formal forbearance arrangements were
entered into by the Company and Bank One. While Bank One was under no legal
obligation to continue to forbear in demanding payment of outstanding
obligations owed to it, it continued to do so through the Company's refinancing
of its various obligations in December 2003 as described under "Recent
Developments" in this Item 7.
Since the expiration of the revolving credit facility with Bank One on January
31, 2002, and during fiscal year ended June 30, 2003, the Company was able to
meet its working capital needs from cash generated from operations without
borrowing additional funds under a line of credit In addition, since such time,
the Company sought to pay down its borrowings from Bank One when and as cash was
available from operations. However, during the fiscal year ended June 30, 2003,
the Company did not have funds available to it from its operations or otherwise
to repay the amounts it owed to its creditors. As a result of the financing
transactions described under "Recent Developments" in this Item 7, and assuming
no adverse developments, management believes that it has sufficient funds
available to it under the various facilities and operations to provide for it
working capital needs at least through the end of the 2004 fiscal year.
Off Balance Sheet Arrangements
During fiscal 2003, the Company had no off-balance sheet arrangements other
than operating leases entered into in the normal course of business.
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 general economic and business
conditions, particularly in light of the recent economic malaise which has been
exacerbated by the war with Iraq, and high profile accounting scandals which
have raised questions as to the integrity of the stock markets, and in the
automotive and other industries principally served by the Company, including
continued volatile demand in the domestic and foreign markets for automobiles
and automotive parts resulting in reduced or uncertain demand for the Atlas'
automation equipment; potential technological developments in the metal forming
and handling automation equipment markets which may render Atlas' automation
equipment noncompetitive or obsolete; the risk that Atlas or Westland customers
may be unwilling or unable to continue ordering products; the potential
inability of the Company to achieve adequate operating results or the continued
volatility of credit and capital markets which could affect the Company's credit
and financing arrangements in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $11.1 million at June 30, 2003, obligations in
the amount of $2.7 million were fixed rate or fixed rate based obligations and
the balance of approximately $ 8.4 million, were variable rate obligations.
Assuming an immediate 10% increase, as of June 30, 2003, in the interest rates
on all of the Company's variable rate obligations, management has calculated
that the impact to the Company in annualized interest payable would approximate
$70,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules as listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported in the Company's current report on Form 8-K filed March 31, 2003,
Doeren Mayhew, then the Company's independent auditor ("Doeren") terminated its
client-auditor relationship with the Company effective March 24, 2003. Doeren's
resignation was based upon its decision to terminate its audit engagements with
all public companies. Doeren's report on the Company's financial statements as
of and for the year ended June 30, 2002 included an explanatory paragraph
regarding the Company's ability to continue as a going concern. The report did
not contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to any uncertainty or as to audit scope, or accounting
principles. In connection with the audits of the Company's financial statements
for fiscal year 2001 or fiscal year 2002 (the two most recent fiscal years prior
to its resignation), there have been no disagreements between the Company and
Doeren on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Doeren, would have caused Doeren to make reference to the matter
in its report. As reported in the Company's current report on Form 8-K filed on
July 23, 2003, the Company engaged Follmer Rudzewicz PLC ("Follmer") as its
independent auditor.
In addition, as reported in the Company's current report on Form 8-K filed on
July 31, 2001, the Company, in a cost-saving move, dismissed its former
auditors, BDO Seidman, LLP ("BDO") and appointed Doeren as its independent
auditor effective July 24, 2001. This change in auditors was made at the
recommendation of the Company's board. In connection with the audits of the
Company's financial statements for fiscal year 1999 and fiscal year 2000 (the
two most recent fiscal years prior to its dismissal), there have been no
disagreements between the Company and BDO on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to the satisfaction of BDO, would have caused BDO to make
reference to the matter in its report. BDO's report on the financial statements
for fiscal year 1999 and fiscal year 2000, contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
In its annual letter to management issued in November 2000, BDO identified two
material weaknesses in the Company's internal controls related to the timing of
the recordation of transactions and the need of the Company to take full
physical inventories. In its annual letter to management issued in October 1999,
BDO identified one material weakness in the Company's internal controls related
to general ledger accounts receiving little critical review during the year.
Management readily agreed with the recommendations of BDO and has eliminated
these weaknesses by taking the steps recommended by BDO.
ITEM 9A. CONTROLS AND PROCEDURES
The company's management evaluated, with the participation of the chief
executive officer and chief financial officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There has been no change in the Company's internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Set forth below is information concerning each director of the Company,
including his business experience during at least the past five years, his
positions with the Company, and certain directorships held by him. Except as
hereinafter described, there are no family relationships among any of the
directors or any arrangements or understandings between any director and another
person pursuant to which he was selected as a director.
Director
Director Age Since Current Position
Class I Director
Jesse A. Levine 36 1993 Director, Chief Financial Officer,
Vice President, Secretary and
Treasurer
Class II Director
Michael D. Austin 52 1999 Director, President of the Company's
Atlas Technologies, Inc. subsidiary
and Senior Vice President of Strategic
Planning and Marketing of the Company
Class III Directors
Samuel N. Seidman 69 1993 Director, Chairman of the Board,
President and Chief Executive Officer
Alan H. Foster 78 1993 Director
The Company's Board of Directors is divided into three classes, each of which
serves for a term of three years, with only one class of directors being elected
in each year. The term of office of the Class II director will continue until
the next annual meeting of the Company, which is expected to be held in fiscal
2004. The term of office of the Class III directors will continue until the
annual meeting of the Company in fiscal 2005. The term of office of the Class I
directors will continue until the annual meeting of the Company in fiscal 2006.
A director will hold office until the next annual meeting of stockholders at
which his class of directors is to be elected.
Class I Director
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 placement financing, merger
and acquisition, and corporate advisory services. Previously, Mr. Levine served
as a commercial credit analyst for Society Bank, Michigan. Mr. Levine earned a
B.A. degree, with highest honors distinction, in economics from the University
of Michigan and obtained a chartered financial analyst certification in 1995.
Samuel N. Seidman, the President, Chief Executive Officer, and Chairman of the
Company, is Mr. Levine's uncle.
Class II Director
Michael D. Austin is currently the President of the Company's Atlas
Technologies, Inc. subsidiary and Senior Vice President of Strategic Planning
and Marketing of the Company. From 1998 to 2000, Mr. Austin held the position of
CEO and President of Atlas Technologies, Inc. From 1996 to 1998, Mr. Austin held
the position of President of Atlas Technologies, Inc., 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 Technologies,
Inc., 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
directors or board of advisors of the Flint-Genesee Economic Growth Alliance,
the Manufacturers Innovation Council, Kettering University, Baker College and
Mott Community College. Mr. Austin holds U.S. and foreign patents for certain
apparatus and methods for forming work pieces.
Class III Directors
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 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 Corporation, 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 International,
N.V., and a multi-national producer of automated equipment and systems for the
production of semiconductor 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
producer of television character generation equipment 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 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, Chief
Financial Officer, Secretary, Treasurer and a Director of the Company.
Alan H. Foster has been a Director of the Company since its inception. From 1986
until September 2001, he served as an Adjunct Professor of Finance and Corporate
Strategy at the University of Michigan. 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. For the last 12 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.
Executive Officers
The following table sets forth certain information concerning each individual
who currently serves as an executive officer of the Company. Executive officers
are appointed by the Board of Directors and serve at the discretion of the
Board. Except as specifically described, there are no family relationships among
any of the executive officers or any arrangements or understandings between any
executive officer and another person pursuant to which he was selected as an
executive officer.
Executive Officers Current Position
Samuel N. Seidman Chairman of the Board, President and
Chief Executive Officer
Jesse A. Levine Chief Financial Officer, Vice President,
Secretary and Treasurer
James A. Kolinski Vice President, Operations of the Company and
Chief Executive Officer of Atlas Technologies, Inc.
Michael D. Austin Senior Vice President of Strategic Planning and
Marketing of the Company and President of
Atlas Technologies, Inc.
Robert J. Cuccaro Vice President, Corporate Controller of the
Company and President of Westland Control
Systems, Inc.
See "Directors" in this Item 10 above for a description of the business
experience during at least the past five years of Messrs. Seidman, Levine and
Austin.
Robert J. Cuccaro, 48 years of age, joined the company on May 26, 2000 as Vice
President, Corporate Controller. In January 2001, Mr. Cuccaro was promoted to
President of Westland Control Systems, Inc. From 1998 to 2000, Mr. Cuccaro held
positions of General Manager and Controller for the Ring Group and Karmazin
Products Corporation and was responsible for directing sales, human resources,
production control, accounting and finance. From 1996 to 1998, Mr. Cuccaro held
the position of Chief Financial Officer/Division Controller for Stewart
Connectors Division, Inc. a subsidiary of Insilco Corporation. From 1994 to
1996, Mr. Cuccaro held various positions including Plant Controller and
Corporate Controller with Clark Material Handling Corporation, a subsidiary of
Terex Corporation. Previously, from 1982 to 1994, Mr. Cuccaro held various
financial positions at UNISYS Corporation including Controller and Sales
Director. Mr. Cuccaro has extensive international, manufacturing, financial
reporting and systems experience. Mr. Cuccaro earned his B.S. degree from
Rutgers University and attended graduate studies classes at Fairleigh Dickinson
University in New Jersey.
James A. Kolinski, 62 years of age, was hired by the Company on October 16,
2000, as Vice President - Operations. In November 2000, Mr. Kolinski was
promoted to CEO of Atlas Technologies, Inc. in addition to being the Vice
President - Operations for the Company. Mr. Kolinski had been Chief Executive
Officer and President of HPM Corporation, a $110 million manufacturer of
equipment for plastic injection molding, metal extrusion and metal die-casting
applications. Previously, for 6 years, Mr. Kolinski was President and Chief
Operating Officer at Grove Worldwide LLC, a leading manufacturer of aerial work
platforms with operations in the United States, United Kingdom, and France. Mr.
Kolinski assisted in the development of Grove's strategic plan, which resulted
in sales growth from $56 million to $205 million per annum. Mr. Kolinski had
full Profit and Loss Statement responsibility at HPM, Grove, and previously as
President and Director of Simon Aerials, a $55 million subsidiary of a $1
billion dollar per annum parent company, and before that with AAR Corporation, a
$25 million per annum producer of powered industrial sweepers and scrubbers, and
material handling equipment. Mr. Kolinski's employment arrangements provide
incentives for Mr. Kolinski if the Company reaches certain higher levels of
sales, sales growth, and earnings targets.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its officers and persons who own more than 10% of the
Company's common stock to file reports of ownership and changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on review
of the copies of such forms furnished to the Company, the Company believes that
all Section 16(a) filing requirements applicable to persons who are officers or
directors of the Company or holders of 10% of the Company's common stock were
complied with in fiscal 2003.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
During fiscal 2003, the Company's non-employee director, Alan H. Foster,
received $18,000 per annum, payable quarterly.
Executive Officer Compensation
The following table shows all compensation paid by the Company for the fiscal
years ended June 30, 2001, 2002 and 2003 to (1) the person who has served as the
chief executive officer of the Company at all times since the beginning of
fiscal 2003 (Samuel N. Seidman), and (2) each executive officer of the Company,
other than the chief executive officer, who served as an executive officer at
any time during fiscal 2003 and whose income exceeded $100,000 (James A.
Kolinski and Robert J. Cuccaro) (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Fiscal Year Stock Awards Underlying Options
Principal Position ended June 30, Salary ($) Bonus ($) (#) (#)
------------------------------------------------------------------------------------------------------
Samuel N. Seidman, 2003 120,000 --- --- --
Chairman of the 2002 120,000 --- --- ---
Board, President and 2001 120,000 --- --- ---
Chief Executive
Officer
James A. Kolinski, 2003 170,000 --- --- ---
Vice President, 2002 170,000 8,333 --- ---
Operations of the 2001 170,000 --- --- ---
Company and Chief
Executive Officer of
Atlas
Robert J. Cuccaro, 2003 103,000 --- --- ---
Vice President, 2002 103,000 --- --- ---
Corporate Controller 2001 95,000 --- --- ---
of the Company and
President of Westland
- ---------------
Option Awards and Values. No options or stock appreciation rights were awarded
to any of the Named Executive Officers in fiscal 2003. The following table sets
forth information concerning the aggregate number and values of options held by
the Named Executive Officers as of June 30, 2003. None of the Named Executive
Officers holds stock appreciation rights and none of such persons exercised any
options in fiscal 2003.
On July 16, 2003, the Company's board of directors authorized and directed the
Company to issue options to purchase 256,000 shares of the Company's common
stock in replacement of options, which had been granted in 1997 and expired in
2002 under the Company's Performance Equity Plan (PEP). The board approved for
256,000 options to be reissued under the continuing Performance Equity Plan by
the Company at an exercise price equal to the current market closing price for
the Company's common shares. The options granted to directors and executive
officers were allocated as follows: 97,000 options were reserved for Atlas and
Westland operating and management personnel; 49,000 options were allocated to
Mr. Seidman, 39,000 options each were allocated to Messrs. Kolinski and Levine;
29,000 options were allocated to Mr. Cuccaro; and 6,500 options each were
allocated to Messrs. Austin and Foster.
Aggregate Year-End Option Values at June 30, 2003
Number of unexercised options Value of unexercised in the money
at fiscal year end (#) options at fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Samuel N. Seidman 158,833 --- -$0- ---
James A. Kolinski --- --- --- ---
Robert J. Cuccaro --- --- --- ---
Compensation Committee Interlocks and Insider Participation
The full Board of Directors of the Company serves as both the Company's
Compensation Committee and, since January 1, 2002, the Audit Committee. There
have not been since the beginning of fiscal 2003 any interlocking relationships,
as defined in the regulations of the Securities and Exchange Commission,
involving any person who has served on the Company's Board of Directors since
that time. See Item 13 for a description of certain transactions and
relationships of the Company with directors of the Company since the beginning
of fiscal 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying footnotes set forth certain information as
of January 20, 2004 with respect to the stock ownership of (1) each stockholder
known by the Company to be a beneficial owner of more than 5% of the Company's
common stock, (2) each director and nominee of the Company, (3) the Company's
Chief Executive Officer, and (4) all directors and executive officers of the
Company as a group (based upon information furnished by such persons). Shares of
common stock issuable upon exercise of options which are currently exercisable
or exercisable within 60 days of the date of this report have been included in
the following table. See Item 11 for additional information regarding the stock
options granted to the indicated persons. The business address of the persons
listed below is Productivity Technologies Corp., 3100 Copper Avenue, Fenton,
Michigan 48430.
Name of Beneficial Owner Number of Shares Percentage of Shares
Beneficially Owned Beneficially Owned(3)
Michael D. Austin 319,100 (1) 12.9%
Samuel N. Seidman 245,250 (1) 9.5%
Jesse A. Levine 139,500 (1)(2) 5.4%
Alan H. Foster 43,250 (1) 1.7%
Ronald Prime 153,000 6.2%
Robert J. Cuccaro 29,000 (1) 1.2%
James A. Kolinski 45,000 (1) 1.8%
All directors and
executive officers as a
group (4) 974,100 (4) 35.1%
(1) Includes shares of common stock issuable upon immediately exercisable
warrants and options at prices ranging from $0.15 to $1.37 per share, as
follows: Mr. Austin - 6,500 shares, Mr. Seidman - 107,000 shares; Mr.
Levine - 97,000 shares; Mr. Kolinski - 39,000 shares, Mr. Cuccaro - 29,000
shares, and Mr. Foster - 18,500 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
(3) The percentage in this column is calculated by dividing the number of
shares beneficially held by the individual or group shown on each line by
the sum of (i) the number of outstanding shares of common stock and (ii)
any shares of common stock issuable upon the exercise of options held by
such individual or group members, but for no other person.
(4) Includes shares of common stock issuable upon immediately exercisable
warrants and options to all executive officers and directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the Company
office space, as well ascertain office, administrative and secretarial services
as may be required by the Company. The Company paid Seidman & Co., Inc.
approximately $20,000 in the fiscal year ended June 30, 2003 for such services.
Samuel N. Seidman, a director and the Chairman, President and Chief Executive
Officer 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
For fiscal 2002 and 2003, the Company's principal accountants, billed
approximately $48,000 and $45,500, respectively, for professional services
rendered by for the audit of the Company's annual financial statements and
review of financial statements included in the Company's quarterly reports on
Form 10-Q or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related Fees
For fiscal 2002 and 2003, the Company's principal accountants did not bill for
any assurance and related services related to the professional services rendered
by for the audit or review of the Company's annual financial statements.
Tax Fees
For fiscal 2002 and 2003, the Company's principal accountants, billed
approximately $14,000 and $14,000, respectively, for tax compliance, tax advice
and tax planning services. These services consisted of preparation of federal
and state tax returns.
All Other Fees
For fiscal 2002 and 2003, the Company's principal accountants, billed
approximately $25,000 and $0, respectively, for all other non-audit services and
products provided by these accountants. These services consisted of assisting
the Company in preparation of detailed consolidated and consolidating financial
schedules and projections in support of the Company's refinancing efforts. In
addition, the accountants assisted in helping both operating subsidiaries with
accounting systems, software, and other items, including optimizing charts of
accounts.
Approval of Non-Audit Services
In the absence of a separate Audit Committee, the full Board of Directors
intends to pre-approve all non-audit fees going forward. No such services were
provided since the date the Commission's regulations on pre-approval of fees
were adopted and, therefore, none were pre-approved.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on the Exhibit Index.
(b) Reports on Form 8-K.
None during the fourth quarter of fiscal 2003.
(c) Exhibits
The exhibits filed herewith are listed on the Exhibit Index.
(d) Other Financial Statement Schedules
None
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.
January 20, 2004
PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
--------------------------
Samuel N. Seidman
Chairman, Chief Executive Officer and 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/ Samuel N. Seidman Chairman, Chief Executive Officer, Jauary 20, 2004
Samuel N. Seidman President and Director (Principal
Executive Officer)
/s/ Michael D. Austin Director, Senior Vice President of January 20, 2004
Michael D. Austin Strategic Planning and Marketing,
President of Atlas
/s/ Jesse A. Levine Senior Vice President, Secretary, January 20, 2004
Jesse A. Levine Treasurer and Director and Chief Financial
Officer (Principal Financial Officer)
/s/ Robert J. Cuccaro Vice President, Corporate Controller January 20, 2004
Robert J. Cuccaro (Principal Accounting Officer)
/s/ James A. Kolinski Vice President, Operations of the January 20, 2004
James A. Kolinski Company and Chief Executive Officer
of Atlas
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONTENTS
Page
INDEPENDENT AUDITORS' REPORTS:
Report of Follmer Rudzewicz PLC F-2
Report of Doeren Mayhew F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2003 and 2002 F-4
Consolidated Statements of Operations for each of the years
in the three-year period ended June 20, 2003 F-6
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended June 30, 2003 F-7
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended June 30, 2003 F-8
Notes to Consolidated Financial Statements F-9 to F-22
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2003, and the
related consolidated statement of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Subsidiaries as of June 30, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Follmer Rudzewicz PLC
- ---------------------------
FOLLMER RUDZEWICZ PLC
Southfield, Michigan
August 29, 2003, except as to note 5,
which is as of December 22, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the two years ended June 30, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Productivity
Technologies Corp. and Subsidiaries as of June 30, 2002, and the results of
their operations and their cash flows for the two years ended June 30, 2002 and
2001 in conformity with accounting principles generally accepted in the United
States of America.
Our previous report on the June 30, 2002 financial statements, dated August 23,
2002 (except for Note 5, which the date is October 11, 2002) included an
explanatory paragraph that described the uncertainty of the Company continuing
as a going concern. Due to the Company operating currently in January 2004, the
going concern uncertainty as related to our report does not apply.
/s/ Doeren Mayhew
-------------------------
Doeren Mayhew
August 23, 2002 (Except for Note 5,
which the date is the October 11, 2002)
Troy, Michigan
F-3
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
June 30,
----------------------------------------
2003 2002
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,163,187 $ 4,971,837
Short-term investments, including accrued interest 540,582 149,720
Contract receivables, net of allowance for doubtful accounts
of $227,663 in 2003 and $250,198 in 2002 (note 2) 3,620,852 2,898,107
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 3) 3,423,457 1,773,141
Inventories 1,154,512 1,211,249
Prepaid expenses and other current assets 328,517 352,542
Deferred income taxes (note 8) 290,000 282,000
------------------ ------------------
Total current assets $ 10,521,107 $ 11,638,596
------------------ ------------------
PROPERTY AND EQUIPMENT:
Land $ 591,514 $ 591,514
Buildings and improvements 4,962,690 4,917,459
Machinery and equipment 4,215,036 4,223,506
Transportation equipment 21,000 21,000
------------------ ------------------
$ 9,790,240 $ 9,753,479
Less: Accumulated depreciation 3,631,717 3,042,568
------------------ ------------------
Net property and equipment $ 6,158,523 $ 6,710,911
------------------ ------------------
OTHER ASSETS:
Goodwill (note 4) $ 2,985,909 $ 4,926,448
Patents (note 4) 354,384 451,875
Deferred income taxes (note 8) 430,000 468,000
Other assets 252,955 297,959
------------------ ------------------
Total other assets $ 4,023,248 $ 6,144,282
------------------ ------------------
Total assets $ 20,702,878 $ 24,493,789
================== ==================
F-4
LIABILITIES
June 30,
----------------------------------------
2003 2002
------------------ ------------------
CURRENT LIABILITIES:
Current portion of long-term debt (note 5) $ 8,385,918 $12,190,338
Accounts payable 3,784,778 2,193,920
Accrued expenses:
Commissions payable 310,000 189,000
Warranty reserve 250,000 315,000
Payroll and related withholdings 62,464 370,178
Interest 610,957 1,122,552
Other 143,574 367,198
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 3) 1,864,980 750,970
Current maturitites of executive deferred compensation
agreements (note 11) 974,933 974,933
------------------ ------------------
Total current liabilities $16,387,604 $18,474,089
------------------ ------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) $ 1,735,000 $ 3,800,000
------------------ ------------------
SHAREHOLDERS' EQUITY
COMMON STOCK; $.001 par value; 20,000,000 shares
authorized; 2,475,000 shares issued and outstanding $ 2,475 $ 2,475
ADDITIONAL PAID-IN CAPITAL 9,966,408 9,966,408
DEFICIT (7,388,609) (7,749,183)
------------------ ------------------
Total shareholders' equity $ 2,580,274 $ 2,219,700
------------------ ------------------
Total liabilities and shareholders' equity $20,702,878 $24,493,789
================== ==================
F-5
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
Year ended June 30,
--------------------------------------------------------
2003 2002 2001
--------------------------------------------------------
REVENUES EARNED $ 29,050,542 $ 24,767,655 $ 27,992,387
COST OF REVENUES EARNED 22,197,218 18,260,764 22,154,991
------------ ------------ ------------
GROSS PROFIT $ 6,853,324 $ 6,506,891 $ 5,837,396
SELLING, GENERAL AND ADMINISTRA-
TIVE EXPENSES 6,003,959 6,452,908 8,004,219
IMPAIRMENT OF INTANGIBLE ASSETS
(NOTE 4) - 2,087,308 -
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS $ 849,365 $ (2,033,325) $ (2,166,823)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest expense $ (639,822) $ (1,668,519) $ (1,605,164)
Loss on disposal of equipment - (8,629) -
Interest income 10,019 56,912 53,705
Miscellaneous income 111,031 74,387 32,491
------------ ------------ ------------
Total other expenses $ (518,772) $ (1,545,849) $ (1,518,968)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) $ 330,593 $ (3,579,174) $ (3,685,791)
INCOME TAX EXPENSE (BENEFIT) (NOTE 8) (29,981) 548,328 (572,000)
------------ ------------ ------------
NET INCOME (LOSS) $ 360,574 $ (4,127,502) $ (3,113,791)
============ ============ ============
BASIC INCOME (LOSS) PER SHARE $ 0.15 $ (1.67) $ (1.26)
============ ============ ============
DILUTED INCOME (LOSS) PER SHARE $ 0.15 $ (1.67) $ (1.26)
============ ============ ============
F-6
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------------------------
Common Additional
Stock Common Paid-in
Shares Stock Capital Deficit Total
--------------- ------------- ---------------- ----------------- -----------------
BALANCE - July 1, 2000 2,475,000 2,475 $ 9,966,408 $ (507,890) $9,460,993
NET LOSS - - - (3,113,791) (3,113,791)
--------------- ------------- ---------------- ----------------- -----------------
BALANCE - June 30, 2001 2,475,000 2,475 $ 9,966,408 $(3,621,681) $6,347,202
NET LOSS - - - (4,127,502) (4,127,502)
--------------- ------------- ---------------- ----------------- -----------------
BALANCE - June 30, 2002 2,475,000 2,475 $ 9,966,408 $(7,749,183) $2,219,700
NET INCOME - - - 360,574 360,574
--------------- ------------- ---------------- ----------------- -----------------
BALANCE - June 30, 2003 2,475,000 2,475 $ 9,966,408 $(7,388,609) $2,580,274
=============== ============= ================ ================= =================
F-7
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended June 30,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 360,574 $(4,127,502) $(3,113,791)
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation 589,149 619,653 664,849
Amortization 142,444 103,119 387,011
Loss on disposal of property and equipment - 8,629 -
Provisions for losses on contract receivables (22,535) (89,802) 237,500
Impairment of intangible assets - 2,087,308 -
Inventory net realizable value reserve 50,000 (50,000) 50,000
Deferred income taxes 30,000 588,000 (572,000)
Changes in assets and liabilities:
Decrease (increase) in contract receivables (700,210) 2,725,468 4,159,640
Decrease in inventories, prepaid expenses and other current
assets, and other assets 30,762 407,420 317,369
Decrease (increase) in costs estimated earnings in excess of
billings on uncompleted contracts - net (536,306) 5,898,754 2,776,873
Decrease (increase) in accounts payable and accrued expenses 603,975 (2,083,739) (248,435)
------------ ------------ ------------
Total adjustments $ 187,279 $10,214,810 $ 7,772,807
------------ ------------ ------------
Net cash provided from operating activities $ 547,853 $ 6,087,308 $ 4,659,016
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (36,761) $ (108,378) $ (187,386)
Purchase of patent (315,000) -
Proceeds from sale of (purchases of) short-term investments - net (390,862) 93,416 66,949
------------ ------------ ------------
Net cash (used in) investing activities $ (427,623) $ (329,962) $ (120,437)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit agreement $(2,712,568) $ (677,662) $(3,880,148)
Payments on long-term debt (1,216,312) (873,899) (431,004)
------------ ------------ ------------
Net cash (used in) financing activities $(3,928,880) $(1,551,561) $(4,311,152)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH $(3,808,650) $ 4,205,785 $ 227,427
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,971,837 766,052 538,575
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,163,187 $ 4,971,837 $ 766,002
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,037,915 $ 960,502 $ 1,624,558
============ ============ ============
Noncash investing and financing activities:
Note payable reduced by purchase price adjustment $(1,940,539) $ - $ -
============ ============ ============
Write-down of goodwill based on purchase price adjustment $ 1,940,539 $ - $ -
============ ============ ============
F-8
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is a manufacturer of automated industrial systems,
machinery, equipment, custom electrical control panels and a
provider of engineering services. It operates with three
manufacturing plants, sales and engineering offices. Two of the
manufacturing plants are located in Fenton, Michigan and the
third plant is located in Westland, 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 years ended June 30, 2003, 2002 and
2001, amounted to approximately 17%, 23% and 24% of annual sales,
respectfully.
Company Operations
The Company operates in one segment. This is based on the fact
that the Company's chief operating decision maker, the Company's
Chief Executive Officer, regularly reviews operating results,
assesses performance and makes decisions about resources at the
parent company level.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principals generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Such management estimates include an allowance for
doubtful accounts receivable, recognition of profit under
long-term contracts, valuation allowances against deferred income
taxes, estimates related to recovery of long lived assets and
accruals of product warranty and other liabilities.
Principals of Consolidation
The accompanying consolidated financial statements include the
accounts of PTC and its wholly owned subsidiaries, Atlas
Technologies, Inc. ("Atlas") and Westland Control Systems, Inc.
("Westland") (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated upon
consolidation.
F-9
Cash Equivalents
Cash equivalents are money market investments. Short-term
investments, representing U.S. Treasury Bills with maturities of
twelve months or less, are carried at cost, which approximates
market value.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments and contract receivables.
While a significant portion of the Company's accounts receivable
is concentrated with a few customers as shown below, 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. In addition,
sales to customers in South America and China typically are
supported by Export-Import Bank (EXIM) guarantees and letters of
credit, respectively. 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. The Company's inability
to collect on its contract receivables could have a material
adverse effect on the Company's operations.
Two customers accounted for 39%, 38% and 47% of total revenue for
the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
The following individual customers accounted for 10% or more of
total accounts receivable for the fiscal years ended:
June 30,
-----------------
2003 2002
-----------------
Ford Motor Company 19% 35%
Dana Corporation 1% 17%
GKN Aerospace 15% 0%
Veltri Modular 18% 0%
Fair Values of Financial Instruments
The carrying amounts of the Company's cash, short-term
investments, contract receivables, accounts payable and accrued
expenses approximate fair value. The 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.
Advertising
The Company expenses advertisement costs as incurred.
Revenue and Cost Recognition
Atlas Technologies, Inc. - Revenues earned consist primarily of
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.
F-10
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.
The amount of earnings, which the Company will ultimately realize
would differ in the near term from the amounts estimated in the
accompanying consolidated financial statements if total actual
costs upon completion of a contract are either higher or lower
than the amount estimated.
Westland Control Systems, Inc. - Revenues are recognized upon
product shipment.
Shipping and Handling
The Company classifies amounts billed to customers in sales
transactions related to shipping and handling as revenue and
costs incurred by the Company for shipping and handling as cost
of revenues earned.
Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and primarily include raw materials and spare parts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed on the straight-line and accelerated methods, generally
using the following estimated useful lives:
Building and improvements 20-40 years
Machinery and equipment 3-10 years
Transportation equipment 2-5 years
Goodwill and Intangible Assets
The Company evaluates the recoverability of goodwill on an annual
basis or in certain circumstances as required under Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other
Intangible Assets".
Intangible assets are evaluated whenever events or changes in
circumstances indicate that the carrying value of the asset may
be impaired. An impairment loss is recognized when the fair value
or the estimated future cash flows expected to result from the
use of the asset, including disposition, is less than the
carrying value of the asset.
The patents are amortized over their estimated useful lives of
six to seventeen 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.
Health Insurance
Atlas was self-insured for certain losses relating to employee
medical benefits. Atlas discontinued its self-insured plan for
the majority of health benefits during the year ended June 30,
2002 and now uses a third party insurer. Atlas continues to be
self-insured for vision and dental insurance.
Income Taxes
The Company follows the assets and liability method of accounting
for income taxes specified by Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under
the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the
estimated future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
Income (Loss) Per Share
Income (Loss) per share reflected in the consolidated statement
of operations is presented in accordance with SFAS No. 128,
"Earnings per Share". The following presents the income (loss)
per share calculations:
June 30,
--------------------------------------------
2003 2002 2001
---------- ------------ -------------
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 360,574 $(4,127,502) $(3,113,791)
Denominator for basic and diluted
earnings per share:
Weighted aveage shares
outstanding, basic 2,475,000 2,475,000 2,475,000
Weighted average shares
outstanding, diluted 2,475,000 2,475,000 2,475,000
Options to purchase shares of common stock were outstanding at
June 30, 2003, 2002 and 2001 but were not included in the
computation of diluted earnings per share because the shares
would be antidilutive.
Long-Lived Assets
Long-lived assets, such as goodwill, patent 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.
F-12
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure ("SFAS
148"). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Additionally, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both the annual
and interim financial statements about the method of accounting
for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS 148 are
effective for all financial statements for fiscal years ending
after December 15, 2002. The Company adopted the disclosure
portion of this statement for the quarter ended December 31,
2002. The application of the disclosure portion of this standard
did not have any impact on the Company's consolidated financial
position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity ("SFAS 150").
This accounting standard establishes standards for classifying
and measuring certain financial instruments with characteristics
of both liabilities and equity. It requires that certain
financial instruments that were previously classified as equity,
now be classified as a liability. This accounting standard is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise at the beginning of the first
interim period beginning after June 15, 2003. The adoption of
this statement did not have a material impact on the consolidated
financial statements.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of SFAS No. 5, 57 and 107 and rescission
of FASB Interpretation No. 34" was issued in November 2002. FIN
45 clarifies the requirements of SFAS No. 5, " Accounting for
Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. The
adoption of FIN 45 related to initial recognition and measurement
of guarantees did not have an impact on the net income or equity
of the Company.
FIN No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB 51," was issued. The primary objectives of
FIN 46 are to provide guidance on the identification and
consolidation of variable interest entities, or VIE's, which are
entities for which control is achieved through means other than
through voting rights. The Company has completed an analysis of
FIN 46 and has determined that it does not have any VIE's.
NOTE 2 CONTRACT RECEIVABLES
The contract receivables consist of the following:
June 30,
----------------------------
2003 2002
---------- -----------
Billed
Completed contracts $1,514,981 $1,400,790
Uncompleted contracts 2,333,534 1,747,515
---------- -----------
Total contract receivables $3,848,515 $3,148,305
Less: Allowance for doubtful accounts (227,663) (250,198)
---------- -----------
Total $3,620,852 $2,898,107
=========== ===========
F-13
NOTE 3 COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
June 30,
-----------------------------------
2003 2002
----------- -----------
Costs incurred on uncomplted contracts $28,839,346 $24,633,492
Estimated earnings on uncompleted contracts 12,501,450 9,187,627
----------- -----------
Total coss and estimated earnings incurred
on uncompleted contracts $41,340,796 $33,821,119
Less: Billings to date 39,782,319 32,798,948
----------- -----------
Total $ 1,558,477 $ 1,022,171
============ ============
Included in the accompanying consolidated balance sheet under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,423,457 $ 1,773,141
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,864,980) (750,970)
----------- -----------
Total $ 1,558,477 $ 1,022,171
============ ============
NOTE 4 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, on July 1, 2001. As defined by SFAS No. 142, the Company
has identified two reporting units: 1) Atlas and 2) Westland,
which constitute components of the Company's business that
includes goodwill.
The write-down of goodwill for the fiscal year ended June 30,
2003 was due to a reduction of the purchase price of Westland,
thus the write-down was recognized as a reduction in the note
payable to the prior shareholder.
For the fiscal year ended June 30, 2002, the Company completed
the transitional and annual impairment test resulting in
Productivity Technologies Corp. and Subsidiaries recording a
charge to earnings of $1,595,440, or $0.65, per diluted share for
the write-down of goodwill related to its Westland reporting
unit. The impairment charge is included in the caption
"Impairment of Intangible Assets" in the statement of operations
for the year ended June 30, 2002.
This write-down resulted from management's consideration of
factors related to the performance of the Westland reporting
unit, including lower than projected sales, operating losses and
negative cash flows. Based on these considerations and others,
the Company updated its operating and cash flow projections for
the Westland business. An analysis of the projected discounted
future cash flows indicated that future recoverability of
goodwill related to the Westland operations was uncertain.
Accordingly, an impairment charge was recorded for fiscal year
ended June 30, 2002.
F-14
The changes in the carrying amount of goodwill for fiscal 2003
are as follows:
Westland Atlas Total
---------- ----------- -----------
Balance as of June 30, 2001 $ 4,273,690 $ 2,248,198 $ 6,521,888
Impairment adjustment (1,595,440 (1,595,440)
---------- ----------- -----------
Balance as of June 3, 2002 $ 2,678,250 $ 2,248,198 $ 4,926,448
Purchase price adjustment (1,940,539) -- (1,940,539)
---------- ----------- -----------
Balance as of June 30, 2003 $ 737,711 $ 2,248,198 $ 2,985,909
============ ============ ============
Patents and Other Intangible Assets
Intangible assets excluding goodwill consist of the following:
June 30, 2003 June 30, 2002
------------------------------------------ --------------------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
---------- ------------ ---------- ---------- ------------ ----------
Patent - Atlas $ 315,000 $ 65,625 $ 249,375 $ 315,000 $ 13,125 $ 301,875
Patent - Westland 258,132 153,123 105,009 258,132 108,132 150,000
---------- ---------- ---------- ---------- ---------- ----------
Total patents $ 573,132 $ 218,748 $ 354,384 $ 573,132 $ 121,257 $ 451,875
---------- ---------- ---------- ---------- ---------- ----------
Non-compete
agreements $ 348,750 $ 230,292 $ 118,458 $ 348,750 $ 194,542 $ 154,208
IRB closing fees 138,785 62,194 76,591 138,785 52,940 85,845
---------- ---------- ---------- ---------- ---------- ----------
Total other $ 487,535 $ 292,486 $ 195,049 $ 487,535 $ 247,482 $ 240,053
---------- ---------- ---------- ---------- ---------- ----------
Total $1,060,667 $ 511,234 $ 549,433 $1,060,667 $ 368,739 $ 691,928
========== ========== ========== ========== ========== ==========
At June 30, 2003 and 2002, the Company evaluated its patents and
other intangible assets for impairment. At June 30, 2002, the
Company determined that the Westland patent carrying amount is
not recoverable and its carrying amount exceeds its fair value.
The impairment loss is a result of a lack of sales opportunities
afforded by the patent and a lack of corresponding cash flows
generated by the patent. As a result, an impairment loss of
$491,868 has been recognized in the statement of operations in
the caption "Impairment of Intangible Assets" for the year ended
June 30, 2002. No impairment charge was recognized for the year
ended June 30, 2003.
All of the Company's patents and other intangible assets are
subject to amortization. Amortization expense totaled $142,444,
$103,119 and $387,011, respectively for the years ended June 30,
2003, 2002 and 2001.
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 2003, the Company had (1) $2,700,000 outstanding
under a commercial mortgage loan from Bank One, (2) $4,467,770
outstanding under a revolving credit facility with Bank One (the
"Old Atlas Revolver"), (3) $974,933 due to former executives
under a deferred compensation arrangement, (4) $2,178,148 million
outstanding under the Westland Loan, and (5) $775,000 due to Mr.
Thomas Lee, former owner of Westland. This total of $11,095,851
compares to a total combined indebtedness of $16,965,271 as of
June 30, 2002.
The amounts of long-term debt as of June 30, 2003 coming due
during the five years ending June 30, 2008 and thereafter, based
on the terms of the new debt arrangements, as described in this
Note 5, are as follows:
2004 $ 4,370,918
2005 $ 2,550,000
2006 $ 400,000
2007 $ 233,333
2008 $ 233,333
Thereafter $ 3,308,267
Total $ 11,095,851
F-15
Prior to the expiration of the Old Atlas Revolver in January
2002, the Company was not in compliance with certain financial
covenants and borrowing base limitations there under. The Company
also was not in compliance with certain financial covenants under
the Westland Loan. During fiscal year ended June 30, 2003, Bank
One did not demand that the Company repay either the Old Atlas
Revolver or the Westland Loan. In the period following the
January 2002 maturity of the Old Atlas Revolver, the Company and
Bank One engaged in discussions concerning possible terms of
forbearance, and Bank One consented to the settlement with Mr.
Lee; however, no formal forbearance arrangements were entered
into by the Company and Bank One. Since the expiration of the
revolving credit facility with Bank One on January 31, 2002, and
during fiscal year ended June 30, 2003, the Company was able to
meet its working capital needs from cash generated from
operations without borrowing additional funds under a line of
credit.
Effective as of December 12, 2003, Merrill Lynch Business
Financial Services Inc. ("MLB") entered into a new credit
facility with Atlas (the "MLB Credit Facility") providing for
borrowing availability of up to $8.0 million, of which $7.4
million was funded at closing. The MLB Credit Facility consists
of:
o a seven-year real estate term loan in the original principal
amount of $3.5 million, bearing interest at a variable per
annum rate equal to 3.15% in excess of one-month LIBOR,
payable in monthly installments of interest plus 1/180th of
principal (a 15-year amortization schedule) with the balance
of principal due at maturity in December 2010, and secured
by substantially all of the assets of Atlas;
o a three-year equipment term loan in the original principal
amount of $500,000, bearing interest at a variable per annum
rate equal to 3.15% in excess of one-month LIBOR, payable in
monthly installments of interest plus 1/36th of principal
(full amortization), maturing in December 2006, and secured
by substantially all of the assets of Atlas; and
o a one-year revolving working capital credit facility
providing for borrowing availability of up to $4.0 million
based upon eligible accounts receivable, bearing interest at
a variable per annum rate equal to 2.85% in excess of
one-month LIBOR, payable in monthly installments of interest
only, maturing on December 31, 2004 and secured by
substantially all of the assets of Atlas. For financial
reporting purposes beginning with reports for the quarter to
end December 31, 2004, the one year revolving working
capital credit facility will be considered by the Company as
a current liability.
The MLB Credit Facility is guaranteed by the Company and, in
addition, the Company has pledged all of the capital stock of
Atlas to secure the guaranty. The proceeds of the MLB Credit
Facility were used to retire the revolving credit facility and
commercial mortgage loan from Bank One, NA to Atlas in the
aggregate outstanding principal amount of $7.4 million. Atlas
continues to be responsible for legal and professional field
audit fees of Bank One in the amount of approximately $60,000. As
part of these financing transactions, Bank One also agreed to
release the liens on the assets of Atlas and the Company. In
addition, Bank One agreed to subordinate its rights with respect
to Westland's new lender, Spectrum Commercial Services, Inc.
("Spectrum"), in connection with Bank One's term loan in the
outstanding principal amount of approximately $2.2 million,
bearing interest at 1.25% over Bank One's prime rate, which the
Company incurred in February 2000 to purchase Westland (the
"Westland Loan").
In addition, also effective as of December 12, 2003, Spectrum
entered into a two-year credit facility with the Company (the
"Spectrum Credit Facility") providing for borrowing availability
of up to $1.25 million based upon eligible accounts receivable,
bearing interest at a variable per annum rate equal to 5.2% in
excess of the prime rate of Wells Fargo Bank, NA, (subject to
certain minimum payments of $5,575 per month, and subject to
reduction by 0.5% if specified profitability thresholds are met),
maturing in December 2005 and secured by substantially all of the
assets of Westland.
F-16
Bank One agreed to subordinate its rights under the Westland Loan
to Spectrum, subject to restating the obligations under a new
Guarantor Payment Agreement effective as of December 12, 2003
under which Bank One will look to Westland to repay the remaining
obligations owed to Bank One (which continues to be $2.2 million
in principal). Although the Company continues to be the primary
obligor under the Westland Loan as restated, the Company is
prohibited from making payments to Bank One so long as the MLB
Loan to Atlas (as to which the Company is a guarantor) remains
outstanding, and, accordingly, Westland entered into the new
Guarantor Payment Agreement. Under the terms of the restated
Westland Loan, Westland is required to pay to Bank One $10,000
per month plus interest as well as 25% of excess cash flow (as
defined in the restated loan agreement) from Westland's
operations. Under the restatement, without expressly waiving the
previously existing covenant defaults under Westland Loan, Bank
One has agreed to honor the scheduled maturity date of the
Westland Loan (February 23, 2005) absent any further defaults. As
restated, the Westland Loan bears interest at the per annum rate
of 3.0% in excess of Bank One's prime rate. Bank One continues to
hold a lien on substantially all of Westland's assets,
subordinated to the lien of Spectrum.
In connection with these financing transactions, the Company,
Atlas and Westland retired the remaining obligations to Thomas
Lee, in consideration of a payment of $525,000, resulting in a
gain on the extinguishment of debt of approximately $125,000.
Under agreements entered into with Bank One in January 1999,
Ronald Prime, formerly an owner and executive officer of Atlas,
and Michael Austin, formerly an owner and executive officer of
Atlas and currently a director of the Company, agreed to
subordinate their rights to receive payments for deferred
executive compensation obligations of approximately $974,000
(which were originally scheduled to be paid during the period
from July 2000 through July 2002). These executives agreed to
continue to subordinate their right to payment to MLB.
NOTE 6 SHAREHOLDERS' EQUITY
On July 5, 1994, PTC (under its prior name Production Systems
Acquisition Corp.) 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,
$0.001 par value, and two Redeemable Common Stock Purchase
Warrants ("Warrants"). Each Warrant entitled the holder to
purchase from PTC one share of common stock at an exercise price
of $5.00 during the period commencing May 25, 1996, and ending
June 24, 2002. The expired Warrants would have been 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 $8.50 per share for 20 consecutive trading days ending on
the third day prior to date on which notice of redemption is
given.
PTC also issued 300,000 warrants to certain investors, which are
identical to the Warrants discussed above. No Warrants have been
exercised or granted subsequent to May 23, 1996 and these
warrants expired June 22, 2002.
The Company is authorized to issue 1,000,000 shares of preferred
stock ($.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. As of June 30, 2003, no preferred stock
has been issued by the Company.
Effective as of the close of business on May 4, 2001, the
Company's Common Stock was delisted for trading on the NASDAQ
SmallCap Market. Trading in the Company's Common Stock, Warrants
and Units is now conducted in the over-the-counter markets on the
NASD Electronic Bulletin Board. 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
F-17
market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect
actual transactions. The delisting could have a material adverse
effect upon the Company in a number of ways, including its
ability to raise additional capital. In addition, the absence of
a trading system may adversely affect the ability of
broker-dealers to sell the Company's Common Stock, and
consequently may limit the public market for such Stock and have
a negative effect upon its trading price. There can be no
assurance that the Company's Common Stock will be relisted on the
NASDAQ National Market at any future date or that such stock will
be relisted or traded on any market or trading system.
NOTE 7 EMPLOYEE BENEFIT AND OPTION 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 made no contributions for
the years ended June 30, 2003, 2002 and 2001.
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 530,000
shares. The Company has adopted SFAS No. 148 and the
disclosure-only provisions of SFAS No, 123, "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the Plan in 2003, 2002 and 2001.
At June 30, 2003, 2002 and 2001, the Company has selected not to
perform a Black-Scholes valuation of the options granted and
outstanding to management and employees. The lowest strike price
of these options granted to management approximate $1.375 which
is considerably above the Company's share price trading range in
the past two years. Given the strike price is considerably higher
the last year's trading range, relatively short time to maturity,
relatively low volatility in comparison to strike price and
thinly traded quantity of the stock. The Black-Scholes model
would indicate only a nominal option value. Thus, the Company
elected to not perform the Black-Scholes analysis of the
outstanding options.
A summary of the status of the Company's stock options for the
years ended June 30, 2003, 2002 and 2001 are as follows:
Outstanding and exercisable at June 30, 2001 289,167 $ 3.00
Granted -- --
Expired -- --
Exercised -- --
------- -------
Outstanding and exercisable at June 30, 2002 289,167 $ 3.00
Granted -- --
Expired 98,167 4.25
Exercised -- --
------- -------
Outstanding and exercisable at June 30, 2003 191,000 $ 1.40
======= ========
F-18
The following summarizes information regarding stock options
outstanding and exercisable at June 30, 2003, 2002 and 2001:
Weighted Average
---------------------------
Options Remaining
Range of Outstanding and Contractual Exercise
Exercise Prices Exercisable Life Price
--------------- --------------- ----------- -----------
$1.375 - $1.50 191,000 1 year $ 1.40
NOTE 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,
--------------------------
2003 2002
---------- ----------
Current
Warranty accrual $ 85,000 $ 107,100
Inventory net realizable value reserve 51,000 34,000
Other 154,000 140,900
---------- ----------
Net current deferred tax asset $ 290,000 $ 282,000
========== ==========
Non-Current
Depreciation and basis of assets $ (796,000) $ (796,000)
Impairment of intangible assets 542,500 570,000
Research credit carryforward 1,165,000 1,165,000
Net operating loss carryforwards 2,024,400 2,145,000
Executive deferred compensation agreement 331,500 302,800
Other 38,700 38,700
Valuation allowance (2,876,100) (2,957,500)
---------- ----------
Net non-current deferred tax asset $ 430,000 $ 468,000
========== ==========
At June 30, 2003, the Company had aggregated net operating losses
of approximately $5,954,000 for income tax purposes, which begin
to expire in 2020. In addition, the Company had tax research
credit carry forwards of approximately $1,165,000 which will
begin to expire in 2012.
For financial reporting purposes, due to prior year operating
losses, and uncertainty in realization the Company has decreased
its valuation allowance from $2,957,500 to $2,876,100 against the
net operating loss carryforwards and other deferred tax assets.
The amount of the remaining deferred tax asset considered
realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
F-19
The significant components of income tax expense (benefit) is as
follows:
June 30,
--------------------------------------------
2003 2002 2001
---------- ----------- ------------
Federal
Current $ 8,000 $ (39,672) $ --
Deferred (37,981) 588,000 (572,000)
---------- ----------- ------------
Total income tax expense (benefit) $ (29,981) $ 548,328 (572,000)
=========== =========== ============
The reconciliation of income tax computed at the federal
statutory rate (34%) to income tax expense benefit is as follows:
June 30,
--------------------------------------------
2003 2002 2001
--------- ------------ ------------
Tax expense (benefit) at statutory rate $ 112,402 $(1,217,000) $(1,253,000)
Valuation allowance, tax research credit
valuation and other non-deductible items (146,206) 1,781,000 699,000
Other - net 3,823 (15,672) (18,000)
--------- ------------ ------------
Total income tax expense (benefit) $ (29,981) $ 548,328 $ (572,000)
========== ============ ============
NOTE 9 OPERATING LEASE COMMITMENTS
The Company entered into a new building leasing agreement in
April 2001 with the term beginning July 2001 and ending June 2006
for its Westland Subsidiary. Rent expense for the years ended
June 30, 2003, 2002 and 2001, totaled $214,867, $275,486 and
$244,862, respectively. Minimum rental payments under this
non-cancelable lease, which contains a five-year renewal option,
at June 30, 2003, are as follows:
2004 $ 214,867
2005 214,867
2006 215,867
2007 --
2008 --
F-20
NOTE 10 EXPORT SALES
A breakdown of export sales, based on shipment destination, is as
follows:
June 30,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
United States $24,202,585 $19,053,264 $21,313,623
France 535,831 1,217,595 --
Brazil 206,074 1,569,391 --
China 1,455,650 1,464,331 1,109,200
Mexico 45,977 769,624 1,371,605
England 46,989 443,691 2,746,052
Germany 25,051 136,726 1,073,016
Canada 2,529,235 109,586 290,023
Other foreign countries 450 3,447 88,868
----------- ----------- -----------
Total $29,050,542 $24,767,655 $27,992,387
=========== =========== ===========
NOTE 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 acquisition of Atlas. These amended
employment agreements are identical except that one agreement
expired on December 31, 1998, and other expired on December 31,
2001.
Each executive also received 150,000 shares of restricted common
stock of the Company issued during fiscal 1999. The restricted
common stock had been valued at market value less a 30% discount
for lack of marketability. Included in the accompanying
consolidated financial statements for the years ended June 30,
2003 and 2002 related to these amended agreements are the
following:
June 30,
-------------------------
2003 2002
--------- ---------
Current maturities of executive
deferred compensation agreements $ 974,933 $ 974,933
========= =========
NOTE 12 LEGAL PLEADINGS
The Company is a party to routine litigation matters in the
ordinary course of its business. No such pending matters,
individually or in the aggregate, if adversely determined, are
believed by management to be material to the business or
financial condition of the Company.
NOTE 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present Productivity Technologies Corp. and
Subsidiaries condensed operating results for each of the eight
fiscal quarters for the period ended June 30, 2003. The
F-21
information for each of these quarters is unaudited. In the
opinion of management, all necessary adjustments, which consists
only of normal and recurring accruals, have been included to
fairly present the unaudited quarterly results. This data should
be read together with Productivity Technologies Corp. and
Subsidiaries consolidated financial statements and the notes
thereto, the Independent Auditors Report and Management's
Discussions and Analysis of Financial Condition and Results of
Operations.
Three months ended (In thousands)
-----------------------------------------------------------------------------------------------
June 30 March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2002 2002 2002 2002 2001 2001
------- --------- -------- --------- -------- --------- -------- ---------
Revenues $8,034 $6,663 $7,617 $6,737 $5,414 $5,837 $6,057 $7,460
Cost of revenues 6,179 4,955 5,900 5,163 3,604 4,512 4,591 5,554
Net income (loss) 194 107 153 (93) (3,396) (325) (324) (83)
Net Income (loss)
per chare:
Basic 0.08 0.04 0.06 (0.04) (1.37) (0.13) (0.13) (0.03)
Diluted 0.08 0.04 0.06 (0.04) (1.37) (0.13) (0.13) (0.03)
Shares used in
computing per
share amounts:
Basic 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475
Diluted 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475
During the fourth quarter ended June 30, 2002 the Company
recorded material fourth quarter adjustments for the impairment
of intangibles ($2,087,308), the increase in the valuation
allowance for deferred taxes ($588,000) and the recording of
additional interest expense ($388,000) related to the unwinding
of a swap agreement.
NOTE 14 SUBSEQUENT EVENTS
On July 16, 2003, the Company's board of directors authorized and
directed the Company to issue options to purchase 256,000 shares
of the Company's common stock in replacement of options, which
had been granted in 1997 and expired in 2002 under the Company's
Performance Equity Plan (PEP). The board approved for 256,000
options to be reissued under the continuing Performance Equity
Plan by the Company at an exercise price equal to the current
market closing price for the Company's common shares. The options
granted to directors and executive officers were allocated as
follows: 63,000 options were reserved for Atlas and Westland
operating and management personnel; 49,000 options were allocated
to Mr. Seidman, 39,000 options each were allocated to Messrs.
Kolinski and Levine; 29,000 options were allocated to Mr.
Cuccaro; and 6,500 options each were allocated to Messrs. Austin
and Foster.
Effective December 12, 2003, the Company refinanced substantially
all of its bank debt. The details of the refinancing and certain
terms of the new agreements have been disclosed in Note 5 above.
F-22
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company. (1)
3.2 Amendment to Certificate of Incorporation of the Company filed May 28,
1996. (2)
3.3 By-laws of the Company. (1)
4.1 Form of common stock Certificate of the Company. (1)
10.1 1996 Performance Equity Plan of the Company. (3)
10.2 WCMA Loan and Security Agreement dated as of November 25, 2003 between
Atlas Technologies, Inc. and Merrill Lynch Business Financial Services Inc.
(4)
10.3 Term Loan and Security Agreement dated as of November 25, 2003 between
Atlas Technologies, Inc. and Merrill Lynch Business Financial Services Inc.
(4)
10.4 Term Loan and Security Agreement dated as of November 25, 2003 between
Atlas Technologies, Inc. and Merrill Lynch Business Financial Services Inc.
(4)
10.5 General Credit and Security Agreement dated as of December 3, 2003 between
WCS Acquisition Corp. and Spectrum Commercial Services Company. (4)
10.6 Guarantor Payment Agreement dated as of December 10, 2003 between WCS
Acquisition Corp. and Bank One, NA. (4)
16.1 Letter regarding change in BDO Seidman, LLP as certifying accountant. (5)
16.2 Letter regarding change in Doeren Mayhew as certifying accountant. (6)
21.1 List of Subsidiaries. (4)
31.1 Certification of chief executive officer under section 302 of the
Sarbanes-Oxley Act of 2002. (4)
31.2 Certification of chief financial officer under section 302 of the
Sarbanes-Oxley Act of 2002. (4)
32.1 Certification of chief executive officer under section 906 of the
Sarbanes-Oxley Act of 2002. (4)
32.2 Certification of chief financial officer under section 906 of the
Sarbanes-Oxley Act of 2002. (4)
-----------------------------
(1) Filed as an exhibit to Registration Statement on Form S-1, No.
33-78188, and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K filed June 7, 1996 and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for fiscal year ended March
31, 1996 and incorporated herein by reference.
(4) Filed herewith.
(5) Filed as an exhibit to Report on Form 8-K dated July 31, 2001 and
incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 8-K dated March 31, 2003 and
incorporated herein by reference.