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, 2004
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 of (I.R.S. Employer Identification No.)
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 X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: $1,100,000
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At October 8, 2004, there were
2,747,500 shares of common stock outstanding.
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.
Sales to automotive related customer's 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. In March 2004, Atlas formed a German subsidiary, Atlas Technologies,
GmbH, in order to facilitate its operations in Europe.
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. During fiscal 2000, Atlas also began
to offer standard transfer press cells where Atlas acts as the systems
integrator for its customers.
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). Certain Atlas products also handle stamped parts
after they have passed through the stamping presses, functions known as
"End-of-Line" applications.
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
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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 2002, 2003 and 2004 fiscal years, automotive industry customers for the
Company accounted for approximately 84%, 89% and 83% of sales, respectively. For
such fiscal years, sales by the Company to General Motors Corporation
represented 5%, 8% and 21% respectively and sales to The Ford Motor Company
represented 22%, 31% and 23%, respectively, of total sales. Sales are
predominantly in the United States and Canada but, in recent years the Company
targeted sales efforts in Mexico, Brazil, Europe and Asia. International sales
for the 2002, 2003 and 2004 fiscal years represented approximately 23%, 17% 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. Atlas also
established offices in Brazil and Germany in the fiscal year 2004. Westland's
sales are primarily direct and on occasion it has utilized outside
manufacturers' sales representatives.
The order backlogs were approximately $9.2 million and $8.5 million at September
30, 2003 and September 30, 2004, respectively. The Company believes
substantially all of the September 30, 2004 backlog will be produced during
fiscal 2005.
Products
Atlas offers production critical, higher technology products based on proven
designs and engineering, which it believes 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
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products are manufactured on a made-to-order basis. Because of their many
desirable features, Atlas products are positioned at an above-average price
comparative to its competitors. The raw materials and components used by Atlas
in the manufacturing process are readily available and, generally, there are
numerous suppliers that are capable of providing these materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues 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 recently began offering 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
wash/scrub or roll-coat the metal blanks 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. While the wiring of machinery may occur
later in the construction process, 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
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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 Bentech, K-R Automation, Con-Syst-Int, JIC Electric, X-Bar Automation
and Control Technique, Incorporated.
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 patents owner, 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 work piece transfer support apparatus, one for a
magnetic sheet fanner, one for an apparatus for supporting a work piece 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
5
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.
Management and Employees
The Company employs approximately 160 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 2004.
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 Over the Counter Bulletin Board (OTCBB). In October
2003, due to a delay in the Company's filing its annual report on Form 10-K for
the fiscal year ended June 30, 2003, the Company's quotation on the OTCBB was
suspended. The Company's common stock then was traded through the Pink Sheets
LLC. In August 2004, the Company's common stock was relisted for quotation on
the OTCBB.
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The following table sets forth the range of high and low closing bid prices for
common stock as reported through both the Pink Sheets LLC and on the OTCBB.
High Low
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
Year ended June 30, 2004:
First Quarter 0.40 0.15
Second Quarter 1.25 0.54
Third Quarter 1.15 0.70
Fourth Quarter 1.01 0.27
As of June 30, 2004, the Company had approximately 20 holders of record of its
common stock. The Company believes that there are in excess of 140 beneficial
holders of the Company's common stock.
The Company has not declared or paid any dividends on its common stock since its
inception.
Recent Sales of Unregistered Securities
In June 2004, Cornell Capital Partners ("Cornell Capital") entered into a
securities purchase agreement with the Company under which Cornell Capital
agreed to purchase $300,000 face amount of the Company's convertible debentures.
Cornell Capital purchased $200,000 face amount of convertible debentures in June
2004. Cornell Capital subsequently purchased $50,000 face amount of convertible
debentures in July 2004 and $50,000 of face amount of convertible debentures in
September 2004. In each case, the purchase price of the debentures was 90% of
their face amount, so that Cornell Capital paid $270,000 in the aggregate for
$300,000 face amount of the Company's convertible debentures.
The debentures are convertible at the holder's option any time up to maturity at
a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the average
of the three lowest closing bid prices of the common stock for the thirty
trading days immediately preceding the conversion date. The debentures are
secured by a second mortgage on real property owned by the Company's Atlas
subsidiary. The debentures have a three-year term and accrue interest at 5% per
year. Interest accrues and must be paid at or prior to maturity. At maturity,
the Company has the option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures into shares of common
stock at a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the
average of the three lowest closing bid prices of the common stock for the
thirty trading days immediately preceding the conversion date. No principal
payments are due prior to maturity.
The Company can redeem the debentures by paying Cornell Capital Partners 120% of
the face amount of the debentures to be redeemed and by issuing warrants to
Cornell Capital Partners to purchase 50,000 shares of the Company's common stock
for every $100,000 of debentures redeemed. Cornell Capital purchased the
convertible debentures from the Company in a private placement in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act of 1933.
In connection with Cornell Capital's investment in the convertible debentures,
in July 2004, the Company issued to Cornell 247,500 shares of the Company's
common stock as a commitment fee, valued at $0.40 per share. The Company issued
to Newbridge Security Corporation ("Newbridge") an additional 25,000 shares of
its common stock as a placement agent fee. These shares were valued at $0.40 per
share, or $109,000 in the aggregate. Cornell Capital and Newbridge received the
shares of common stock from the Company in a private placement in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act of 1933. The Company has agreed to file a registration statement with the
Securities and Exchange Commission to register for resale the shares of its
common stock issued or issuable (upon conversion of the convertible debentures)
to Cornell Capital or Newbridge.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's
consolidated financial statements which have been audited by BDO Seidman, LLP,
independent certified public accountants, as of and for June 30, 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 and 2004. 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,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------
Revenues earned $ 28,155 $ 29,051 $ 24,768 $ 27,992 $ 33,230
Cost of revenues earned 21,537 22,197 18,261 22,155 26,235
Gross profit 6,618 6,853 6,507 5,837 6,895
Selling, general and 5,497 6,004 6,453 8,004 6,333
administrative
Impairment of intangible assets -- -- 2,087 -- --
Extraordinary gain on 125 -- -- -- --
extinguishment of debt
Income (loss) from operations 1,121 849 (2,033) (2,167) 562
Net income (loss) 721 361 (4,128) (3,114) (256)
Net income per share of common
stock:
Basic $ 0.29 $ 0.15 ($1.67) ($1.26) ($0.10)
Diluted $ 0.26 $ 0.15 ($1.67) ($1.26) ($0.10)
Weighted average common shares:
Basic 2,475 2,475 2,475 2,475 2,475
Diluted 2,731 2,475 2,475 2,475 2,475
Consolidated Balance Sheet Data
June 30,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------
Current assets $10,516 $ 10,521 $ 11,639 $ 15,822 $ 22,972
Current liabilities 12,460 16,388 18,474 17,355 8,155
Working capital (1,944) (5,867) (6,835) (1,533) 14,817
Property, plant and equipment, net 5,569 6,159 6,711 7,231 7,708
Total assets 20,350 20,703 24,494 31,757 39,238
Long-term debt, less current
maturities 3,613 1,735 3,800 7,710 20,862
Total liabilities 17,049 18,123 22,274 25,410 29,777
Stockholders' equity 3,301 2,580 2,220 6,347 9,461
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
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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
In June 2004, Cornell Capital entered into a securities purchase agreement with
the Company under which Cornell Capital agreed to purchase $300,000 face amount
of the Company's convertible debentures. Cornell Capital purchased $200,000 face
amount of convertible debentures in June 2004. Cornell Capital subsequently
purchased $50,000 face amount of convertible debentures in July 2004 and $50,000
face amount of convertible debentures in September 2004. In each case, the
purchase price of the debentures was 90% of their face amount, so that Cornell
Capital paid $270,000 in the aggregate for $300,000 face amount of the Company's
convertible debentures.
The debentures are convertible at the holder's option any time up to maturity at
a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the average
of the three lowest closing bid prices of the common stock for the thirty
trading days immediately preceding the conversion date. The debentures are
secured by a second mortgage on real property owned by the Company's Atlas
subsidiary. The debentures have a three-year term and accrue interest at 5% per
year. Interest accrues and must be paid at or prior to maturity. At maturity,
the Company has the option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures into shares of common
stock at a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the
average of the three lowest closing bid prices of the common stock for the
thirty trading days immediately preceding the conversion date. No principal
payments are due prior to maturity.
The Company can redeem the debentures by paying Cornell Capital Partners 120% of
the face amount of the debentures to be redeemed and by issuing warrants to
Cornell Capital Partners to purchase 50,000 shares of the Company's common stock
for every $100,000 of debentures redeemed.
Critical Accounting Policies and Estimates
Management's discussion in this Item 7 addresses the Company's consolidated
financial statements which have been prepared in conformity with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses reported in
those financial statements. These judgments can be subjective and complex, and
consequently actual results could differ from those estimates. A discussion of
the more significant estimates follows. Management has discussed the
development, selection and disclosure of these estimates and assumptions with
the full Board of Directors.
Results of Operations
Fiscal Year 2004 Compared to Fiscal Year 2003
Revenues earned for the year ended June 30, 2004 were $28,155,198 as compared to
$29,050,542 for the year ended June 30, 2003, a decrease of 3%. Atlas's revenues
were down 6% principally as a result of slower order activity. Westland's
revenues increased 7% due to the addition of new customers which began ordering
from Westland, or ordered in greater volume, compared to previous years.
Gross profit for the year ended June 30, 2004 was $6,617,834, representing a 3%
decrease from the $6,853,324 gross profit for the year ended June 30, 2003. The
decrease in gross profit was due to the Company's overall volume decrease. Gross
profit as a percentage of revenues earned for the year ended June 30, 2004 as
compared to prior fiscal year remained constant at 23%.
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Consolidated selling, general and administrative (SG&A) expenses for fiscal 2004
were $5,497,191, down 9.0% as compared to SG&A expenses of $6,003,959 for fiscal
2003. The decrease was principally due to continued efforts by management to
contain expenses.
Income from operations for the year ended June 30, 2004 amounted to $1,120,643
compared to the income from operations of $849,365 for the year ended June 30,
2003. The improvement in income from operations resulted primarily from lower
SG&A expenses noted above which was offset in part by the decreased gross profit
due to lower volume.
Interest expense for fiscal 2004 was $695,702, which was $55,880 greater than
fiscal year 2004. The increase was due in part to Westland's higher costs for
borrowing funds from its new senior lender effective as of December 2003 and a
slightly higher Company debt level compared to one year ago.
The Company recognized in fiscal 2004 an increase in its long term deferred
income tax asset of $175,000 as a result of profitability in fiscal 2003 and
2004. Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance at June 30, 2004. As a result, the deferred income tax asset
was increased at the end of fiscal 2004 by $175,000 to $895,000, as compared to
the Company's total net operating loss carryforwards which approximated $2.39
million at June 30, 2004. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The net income for fiscal 2004 was $720,536 as compared to net income for the
year ended June 30, 2003 of $360,574. Net income for the fiscal year 2004
included a $125,000 gain on extinguishment of debt.
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 order and
business activity. Westland's revenues increased 39% due to the addition of new
customers who 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 year 2003 resulted
primarily from higher sales volume and lower SG&A expenses noted above and the
absence of a write-off for 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
10
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 higher sales volume, lower SG&A expense and lower
interest expenses.
Liquidity and Capital Resources
General
At June 30, 2004, the Company had (1) $3.4 million outstanding under a
commercial mortgage loan for Atlas as part of the MLB Credit Facility, (2) $0.4
million outstanding under an equipment term loan for Atlas as part of the MLB
Credit Facility, (3) debt of $4.0 million outstanding under a revolving credit
facility for Atlas as part of the MLB Credit Facility, (4) deferred executive
compensation obligations of approximately $0.95 million originally scheduled to
be paid over three equal annual installments during the period from July 2000
through July 2002, (5) $0.7 million outstanding under the Spectrum Credit
Facility, (6) $2.2 million outstanding under the Westland Loan, and (7) $200,000
outstanding in convertible subordinated debentures which mature in June 2007.
This total of approximately $11.9 million as of June 30, 2004 compares to a
total combined indebtedness of $11.1 million as of June 30, 2003.
The Company's working capital deficit at June 30, 2004 was $(1,913,000) and the
current ratio was 0.85 to 1, as compared to a working capital deficit of
($5,866,497) and a current ratio of 0.64 to 1 for the Company at June 30, 2003.
Effective as of December 12, 2003, Merrill Lynch Business Financial Services
Inc. ("Merrill Lynch") entered into new credit facilities with Atlas (the "MLB
Credit Facility") which provides for borrowing availability of up to $8.0
million (based in part upon eligible accounts receivable), of which $7.4 million
was funded at closing. Effective on March 4, 2004, Merrill Lynch agreed to a
modification of the terms of the MLB Credit Facility under which in which it
increased the borrowing availability by $750,000 under the revolving credit
facility for a 60-day period (the "overline period") and increased the interest
rate by 0.5% per annum during this period. As of April 10, 2004, the Company
paid back all amounts over the original $4.0 million revolver, and the overline
period expired in early May 2004. At June 30, 2004, the weighted average
interest payable under the MLB Credit Facility approximated 4.75%.
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
11
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.
In addition, also effective as of December 12, 2003, Spectrum Commercial
Services, Inc. ("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 5.25% 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, N.A. agreed to subordinate its rights to 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"). As a
condition to agreeing to subordinate to Spectrum, Bank One required the Company
to restate the obligations under a new Guarantor Payment Agreement effective as
of December 12, 2003. Under these terms, Bank One will look to Westland to repay
the remaining obligations owed to Bank One (which continues to be the $2.2
million principal amount that was outstanding prior to the restatement).
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 Credit Facility remains outstanding. 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. The Westland Loan bears interest at the
per annum rate of 3.0% in excess of Bank One's prime rate. Westland has
suspended payments to Bank One under the Guarantor Payment Agreement (as part of
the Westland Loan) and Bank One has made no demand for payment thereunder. 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 (now deceased), 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.
With the availability of funds under the MLB Credit Facility and the Spectrum
Credit Facility, and the proceeds from the sale of its convertible debentures to
Cornell Capital (described in "Recent Developments" in this Item 7) and assuming
no adverse business or economic developments, management believes that the
Company will have sufficient funds available to it to meet its working capital
needs for the next 12 months.
Off Balance Sheet Arrangements
During fiscal 2004, the Company had no off-balance sheet arrangements other than
operating leases entered into in the normal course of business, as indicated in
the table below.
Summary of Contractual Commitments
The following table represents contractual commitments associated with operating
agreements (excluding interest on debt obligations) for the periods ending June
30th in the years indicated. With respect to the lines of credit borrowed by
Atlas and Westland, at June 30, 2004, these amounted to $4.0 million in maximum
revolving commitments for Atlas which will be up for renewal in December 2004
and $1.25 million in maximum revolving commitments for Westland which will be up
for renewal in December 2005.
12
2005 2006 2007 2008 2009 Thereafter Total
-------------- ----------- ---------- ----------- ----------- -------------- -----------
Real estate term loan 233,342 233,333 233,333 233,333 233,333 2,236,105 3,402,780
Equipment term loan 166,667 166,667 97,222 -- -- -- 430,555
Revolver - Atlas 3,998,177 -- -- -- -- -- 3,998,177
Revolver - Westland 695,167 695,167
Subordinated term loan 2,212,583 -- -- -- -- -- 2,212,583
Debentures -- -- -- 180,000 -- -- 180,000
-------------- ----------- ---------- ----------- ----------- -------------- -----------
Total debt 7,305,936 400,000 330,555 413,333 233,333 2,236,105 10,739,262
Building lease 214,867 214,867 429,734
-------------- ----------- ---------- ----------- ----------- -------------- -----------
Total 7,520,803 614,867 330,555 413,333 233,333 2,236,105 11,168,996
============== =========== ========== =========== =========== ============== ===========
Recently Issued Accounting Standards
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 revises and
rescinds certain sections of SAB No. 101 in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. Accordingly there is no impact to the Company's
results of operations, financial position or cash flows as a result of the
issuance of SAB No. 104.
On December 23, 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132"
("FAS 132 (revised 2003)"). This statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits",
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The new rules require additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and postretirement benefit plans. The new disclosures are
generally effective for 2003 calendar year-end financial statements of public
companies, with a delayed effective date for certain disclosures and for foreign
plans. The adoption of SFAS No. 132 did not have an effect on the Company's
consolidated financial statements.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of this standard had no effect on the Corporation's
financial condition or results of operations
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to FIN 46, "Consolidation of Variable Interest Entities." FIN 46R clarifies some
of the provisions of FIN 46 and exempts certain entities from its requirements.
FIN 46R is effective at the end of the first interim period ending after March
15, 2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provisions of FIN 46 until the effective date of FIN 46R.
The adoption of FIN 46R did not have an effect on the Company's consolidated
financial statements.
Forward-Looking Statements
Various statements in this Report concerning the manner in which the Company
intends to conduct its future operations and potential trends that may affect
future results of operations are forward-looking statements. The Company may be
unable to realize its plans and objectives due to various important factors.
These factors include but are not limited to economic and business conditions,
particularly in the automotive, machine tool and other industries principally
served by the Company, including the ongoing and permanent (non-cyclical) loss
of manufacturing capabilities in the United States to foreign competition, and
continued volatile demand in the domestic and foreign markets for automobiles
and automotive parts, in each case resulting in reduced or uncertain demand for
the Atlas' automation equipment; potential
13
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 obtain needed access to the credit and capital
markets to finance future operations or plans for capital improvement or growth.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $11.7 million at June 30, 2004, almost all of
the indebtedness comprises variable rate obligations. Assuming an immediate 10%
increase, as of June 30, 2004, 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 $120,000.
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 was qualified as to uncertainty
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 other 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 Doeren's 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.
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. The chief executive officer and chief financial officer have
concluded that, to their knowledge on the basis of that evaluation, the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this report except as to deficiencies described below. 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; however, management intends to implement the
changes described below.
In connection with its audit of the Company's consolidated financial statements
as of and for the year ended June 30, 2004, the Company's auditor advised the
Company's management and its Audit Committee that it had identified deficiencies
which were designated as "reportable conditions" but which did not constitute
"material weaknesses." Areas requiring improvement include (1) reconciling
intercompany accounts and balances between consolidated entities, (2)
recordkeeping over property, plant and equipment, (3) recordkeeping and
evaluation of deferred tax assets and liabilities and analysis of valuation
allowance against net deferred tax assets, and (4) reviewing accounting activity
performed on amounts appearing in the Company's consolidated financial
statements. In addition, in the past the Company has not filed on a timely basis
certain of its quarterly Forms 10-Q and annual Form 10-K with the Securities
Exchange Commission (SEC) within the required due dates. An extension of time to
file has been requested for the 10-K as of June 30, 2004, which, under Section
404 of the Sarbanes Oxley Act, constitutes a deficiency in internal controls
over financial reporting. The Company has assigned a high priority to the short
and long term correction of these internal control deficiencies and believes it
can make significant progress toward correction of these matters in fiscal 2005.
ITEM 9B. OTHER INFORMATION
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
14
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 Directors
Jesse A. Levine 37 1993 Director, Chief Financial Officer,
Vice President, Secretary and
Treasurer
Class II Director
Michael D. Austin 53 1999 Director, President of the Company's
Atlas Technologies, Inc. subsidiary
and Vice President of Strategic
Planning and Marketing of the Company
Class III Directors
Samuel N. Seidman 70 1993 Director, Chairman of the Board,
President and Chief Executive Officer
Alan H. Foster 79 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 expected in fiscal 2005. In turn, the
term of office of the Class III and Class I directors will continue until the
annual meetings of the Company expected to be held in fiscal 2006 and 2007,
respectively. 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 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
15
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 Society of Manufacturing Engineers, the Flint-Genesee
Economic Growth Alliance, the Genesee Area Focus Council, 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.
16
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
Michael D. Austin 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 and Chief Executive Officer of Westland Control
Systems, Inc.
William G. Rogner Chief Executive Officer of Atlas Technologies, 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, 49 years of age, joined the company on May 26, 2000 as Vice
President, Corporate Controller. In January 2001, Mr. Cuccaro was promoted to
President and Chief Executive Officer 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.
William G. Rogner, 53 years of age, is Chief Executive Officer of Atlas. Mr.
Rogner has approximately 18 years experience with Atlas, including having
previously served as its Executive Vice President, Vice President of
Engineering, Director of Contract Management and Project Manager. In these and
other capacities, Mr. Rogner has at various times had direct responsibilities
for sales, manufacturing, engineering, and mechanical engineering, fluid
engineering, and electrical controls. As Executive Vice President, Mr. Rogner
assisted in development and implementation of the Company's strategic plan,
including the reduction of Atlas' financial break-even point by approximately 35
percent. He initiated a value analysis and value engineering (VA/VE) program to
reduce costs at least 5 percent while maintaining or improving product
functionality.
Mr. Rogner also had direct responsibility for establishing Atlas' Brazilian
subsidiary, which was profitable in its first year, and he assisted in
developing sales and service in Europe and Asia and sales representation in
India. As part of a continuous focus on costs, Mr. Rogner reduced headcount by
over 40% in approximately three years and sought to level load (smooth out)
manufacturing schedules and direct labor manpower by utilizing production
outsourcing. He also supervised the implementation of the Company's enterprise
resource planning (ERP) system. From 1984 to 1997, as Director of Contract
Management at Atlas, Mr. Rogner had direct responsibility for major projects,
customer service, and warranty. He also was a Project Manager with direct
responsibility for the mechanical design and building of machines and projects.
During this time, he managed some of the largest projects in the history of
Atlas, including an $18 million system which included an engineering study and
implementation of a Greenfield project for an entire press room for a major
appliance manufacturer, including sheet metal dies for a new product. This
project employed 18 presses, three coil lines, more than 130 tools, as well as
equipment automation, and quick die change capabilities.
Mr. Rogner spent two years away from Atlas in the past 20 years, when he
co-founded an engineering design and consulting firm. As a company principal,
Mr. Rogner arranged the firm's line of credit, more than doubled firm revenues
in its first two years of operations, broadened the firm's initial customer
base, enabling the firm to report net earnings of 10 percent of its sales. Mr.
Rogner received his B.S. from Michigan State University and he also recently
completed an immersion course at the Wharton School of Business in finance for
non-financial executives.
17
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 its
review of the copies of such forms furnished to it, and written representations
that no other reports were required, the Company believes that during the fiscal
year ended June 30, 2004, each of its officers, directors and 10% stockholders
complied with the Section 16(a) reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
During fiscal 2004, 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, 2002, 2003 and 2004 to (1) the person who has served as the
chief executive officer of the Company at all times since the beginning of
fiscal 2004 (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 2004 and whose income exceeded $100,000 (William G.
Rogner and Robert J. Cuccaro) (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Fiscal Year Stock Awards Underlying Options
Principal Position Ended June 30, Salary ($) Bonus ($) (#) (#)
-------------------------------------------------------------------------------------------------------
Samuel N. Seidman, 2004 120,000 --- --- ---
Chairman of the Board, 2003 120,000 --- --- ---
President and Chief 2002 120,000 --- --- ---
Executive Officer
William G. Rogner 2004 150,000 --- --- ---
Chief Executive Officer 2003 150,000 --- --- ---
of Atlas 2002 150,000 --- --- ---
Robert J. Cuccaro, Vice 2004 103,000 --- --- ---
President, Corporate 2003 103,000 --- --- ---
Controller of the 2002 103,000 --- --- ---
Company and President
and Chief Officer of
Westland
_______________
18
Option Awards and Values. No options or stock appreciation rights were awarded
to any of the Named Executive Officers in fiscal 2004. The following table sets
forth information concerning the aggregate number and values of options held by
the Named Executive Officers as of June 30, 2004. None of the Named Executive
Officers holds stock appreciation rights and none of such persons exercised any
options in fiscal 2004.
Aggregated Year-End Option Values at June 30, 2004
Number of unexercised options Value of unexercised in the money
at fiscal year end (#) options at fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Samuel N. Seidman 107,000 --- --- ---
Bill Rogner 34,000 --- --- ---
Robert J. Cuccaro 19,000 --- --- ---
Compensation Committee Interlocks and Insider Participation
The full Board of Directors of the Company serves as the Company's Compensation
Committee. Mr. Foster as the outside director serves as the Chairman of the
Audit Committee which in turn reports to the full Board of Directors of the
Company. There have not been since the beginning of fiscal 2004 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 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying footnotes set forth certain information as
of October 8, 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 312,600 (1) 11.4%
Cornell Capital Partners 247,500 (4) 9.0%
Samuel N. Seidman 258,250 (1) 9.0%
Jesse A. Levine 143,500 (1)(2) 5.0%
Alan H. Foster 39,750 (1) 1.4%
Estate of Ronald Prime 163,000 5.9%
William Rogner 59,000 (1) 2.1%
Robert J. Cuccaro 29,000 (1) 1.0%
All directors and executive
officers as a group (4)
842,100 (5) 27.9%
19
(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. Rogner - 34,000 shares, Mr. Cuccaro - 19,000
shares, 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) In July 2004, Cornell Capital was paid a $99,000 fee, which was paid in
restricted shares of the Company, in consideration for Cornell Capital
entering into a Structured Equity Distribution Agreement (SEDA) with the
Company. At the time of this payment, the closing price of the Company's
common stock shares was $0.40. The $99,000 fee equaled 247,500 restricted
shares.
(5) 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 as certain office services as may be required by the
Company. The Company paid Seidman & Co., Inc. approximately $10,000 for such
services plus reimbursements for third party administrative and secretarial
services in the fiscal year ended June 30, 2004. 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 each of fiscal 2003 and 2004, the Company's principal accountants billed
$45,500 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.
Audit-Related Fees
For each of fiscal 2003 and 2004, the Company's principal accountants had no
billings for assurance and related services that are reasonably related to the
professional services rendered by for the audit or review of the Company's
annual financial statements.
Tax Fees
For each of fiscal 2003 and 2004, the Company's principal accountants billed
$14,000 for tax compliance, tax advice and tax planning services. These services
consisted of preparation of federal and state tax returns.
20
All Other Fees
For each of fiscal 2003 and 2004, the Company's principal accountants had no
billings for all other non-audit services and products provided by these
accountants.
Approval of Non-Audit Services
In accordance with the requirements of the Securities and Exchange Commission
and the Company's policies, the Company's Audit Committee must pre-approve all
non-audit services proposed to be provided by the Company's auditor, except for
non-audit services within the permitted exceptions. All such services performed
in fiscal 2004 were pre-approved by the Audit Committee.
PART IV
ITEM 15. 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 2004.
(c) Exhibits
The exhibits filed herewith are listed on the Exhibit Index.
(d) Other Financial Statement Schedules
None
21
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.
October 8, 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, October 8, 2004
Samuel N. Seidman President and Director (Principal
Executive Officer)
/s/ Michael D. Austin Director October 8, 2004
Michael D. Austin
/s/ Jesse A. Levine Vice President, Secretary, Treasurer October 8, 2004
Jesse A. Levine and Director and Chief Financial
Officer (Principal Financial Officer)
/s/ Robert J. Cuccaro Vice President, Corporate Controller October 8, 2004
Robert J. Cuccaro (Principal Accounting Officer)
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 Doeren Mayhew as certifying accountant. (5)
21.1 List of Subsidiaries. (6)
31.1 Certification of chief executive officer under section 302 of the
Sarbanes-Oxley Act of 2002. (6)
31.2 Certification of chief financial officer under section 302 of the
Sarbanes-Oxley Act of 2002. (6)
32.1 Certification of chief executive officer under section 906 of the
Sarbanes-Oxley Act of 2002. (6)
32.2 Certification of chief financial officer under section 906 of the
Sarbanes-Oxley Act of 2002. (6)
_____________________________
(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 as an exhibit to Report on Form 10-K for fiscal year ended June 30,
2003 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 8-K dated March 31, 2003 and
incorporated herein by reference.
(6) Filed herewith.
23
Productivity Technologies Corp. and Subsidiaries
June 30, 2004
Consolidated Financial Statements
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
REPORT OF INDEPENDENT ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2004 and 2003 F-4
Consolidated Statements of Operations for each of the
years in the three-year period ended June 20, 2004 F-6
Consolidated Statements of Shareholders' Equity for
each of the years in the three-year period
ended June 30, 2004 F-7
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended June 30, 2004 F-8
Notes to Consolidated Financial Statements F-9 to F-24
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Productivity Technologies Corp. and Subsidiaries as of June 30, 2004 and 2003,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ FOLLMER RUDZEWICZ PLC
FOLLMER RUDZEWICZ PLC
Southfield, Michigan
September 13, 2004
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2002, and the
related consolidated statements 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 consolidated
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 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 consolidated financial position of
Productivity Technologies Corp. and Subsidiaries as of June 30, 2002, 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/ DOEREN MAYHEW
August 23, 2002 (Except for Note 5,
which the date is October 11, 2002)
Troy, Michigan
F-3
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
June 30,
--------------------------------------
2004 2003
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 233,882 $ 1,163,187
Short-term investments, including accrued interest 450,080 540,582
Contract receivables, net of allowance for doubtful accounts
of $377,663 in 2004 and $227,663 in 2003 (note 2) 4,479,656 3,620,852
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 3) 3,759,498 3,423,457
Inventories, net of reserve of $50,000 in 2004 and $150,000 in 2003 1,151,703 1,154,512
Prepaid expenses and other current assets 268,005 328,517
Deferred income taxes (note 8) 173,000 290,000
----------------- -----------------
Total current assets $ 10,515,824 $ 10,521,107
----------------- -----------------
PROPERTY AND EQUIPMENT:
Land 591,514 $ 591,514
Buildings and improvements 4,962,690 4,962,690
Machinery and equipment 4,235,503 4,215,036
Transportation equipment 21,000 21,000
----------------- -----------------
$ 9,810,707 $ 9,790,240
Less: Accumulated depreciation 4,241,399 3,631,717
----------------- -----------------
Net property and equipment $ 5,569,308 $ 6,158,523
----------------- -----------------
OTHER ASSETS:
Goodwill (note 4) 2,985,909 $ 2,985,909
Patents (note 4) 256,893 354,384
Deferred income taxes (note 8) 722,000 430,000
Other assets 299,570 252,955
----------------- -----------------
Total other assets $ 4,264,372 $ 4,023,248
----------------- -----------------
Total assets $ 20,349,504 $ 20,702,878
================= =================
F-4
LIABILITIES
June 30,
--------------------------------------
2004 2003
----------------- -----------------
CURRENT LIABILITIES:
Current portion of long-term debt (note 5) $ 7,305,936 $ 8,385,918
Accounts payable 3,427,383 3,784,778
Accrued expenses:
Commissions payable 251,648 310,000
Warranty reserve 225,000 250,000
Payroll and related withholdings 85,665 62,464
Interest 240,755 610,957
Other 271,199 143,574
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 3) 652,849 1,864,980
----------------- -----------------
Total current liabilities $ 12,460,435 $ 15,412,671
----------------- -----------------
Executive deferred compensation agreements (note 11) $ 974,933 $ 974,933
Long-term debt, less current maturities (note 5) 3,613,326 1,735,000
----------------- -----------------
Total liabilities $ 17,048,694 $ 18,122,604
----------------- -----------------
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 (6,668,073) (7,388,609)
----------------- -----------------
Total shareholders' equity $ 3,300,810 $ 2,580,274
----------------- -----------------
Total liabilities and shareholders' equity $ 20,349,504 $ 20,702,878
================= =================
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-5
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
---------------------------------------------------
2004 2003 2002
----------------------------------------------------
REVENUES EARNED $ 28,155,198 $ 29,050,542 $ 24,767,655
COST OF REVENUES EARNED 21,537,364 22,197,218 18,260,764
------------ ----------- -------------
GROSS PROFIT $ 6,617,834 $ 6,853,324 $ 6,506,891
SELLING, GENERAL AND ADMINISTRA-
TIVE EXPENSES 5,497,191 6,003,959 6,452,908
IMPAIRMENT OF INTANGIBLE ASSETS
(NOTE 4) - - 2,087,308
------------ ----------- -------------
INCOME (LOSS) FROM OPERATIONS $ 1,120,643 $ 849,365 $ (2,033,325)
------------ ----------- -------------
OTHER INCOME (EXPENSES):
Interest expense (695,702) $ (639,822) $ (1,668,519)
Loss on disposal of equipment - (8,629)
Interest income 2,699 10,019 56,912
Miscellaneous (expense) income, net (7,104) 111,031 74,387
------------ ----------- -------------
Total other expenses $ (700,107) $ (518,772) $(1,545,849)
------------ ----------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM $ 420,536 $ 330,593 $ (3,579,174)
INCOME TAX (BENEFIT) EXPENSE (NOTE 8) (175,000) (29,981) 548,328
------------ ----------- -------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM $ 595,536 $ 360,574 $ (4,127,502)
EXTRAORDINARY ITEM, GAIN ON
EXTINGUISHMENT OF DEBT 125,000 - -
------------ ----------- -------------
NET INCOME (LOSS) $ 720,536 $ 360,574 $ (4,127,502)
============ =========== ============
BASIC INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY GAIN $ 0.24 $ 0.15 $ (1.67)
EXTRAORDINARY GAIN 0.05 - -
------------ ----------- -------------
TOTAL BASIC EARNINGS (LOSS) PER SHARE $ 0.29 $ 0.15 $ (1.67)
============ =========== ============
DILUTED INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY GAIN $ 0.21 $ 0.15 $ (1.67)
EXTRAORDINARY GAIN 0.05 - -
------------ ----------- -------------
TOTAL DILUTED INCOME (LOSS) PER SHARE $ 0.26 $ 0.15 $ (1.67)
============ =========== ============
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-6
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2004, 2003 and 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Common Additional
Stock Common Paid-in Accumulated
Shares Stock Capital Deficit Total
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - July 1, 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
NET INCOME - - - 720,536 720,536
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - June 30, 2004 2,475,000 2,475 $ 9,966,408 $(6,668,073) $3,300,810
=============== ============= ================ =================== =================
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-7
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
--------------------------------------------
2004 2003 2002
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 720,536 $ 360,574 $(4,127,502)
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation 620,856 589,149 619,653
Amortization 237,841 142,444 103,119
Loss on disposal of property and equipment - - 8,629
Gain on foreign currency exchange (11,127) - -
Gain on extinguishment of debt (125,000) - -
Provisions for losses on contract receivables 150,000 (22,535) (89,802)
Impairment of intangible assets - - 2,087,308
Inventories net realizable value reserve (100,000) 50,000 (50,000)
Deferred income taxes (175,000) 30,000 588,000
Changes in assets and liabilities:
Decrease (increase) in contract receivables (1,008,804) (700,210) 2,725,468
Decrease in inventories, prepaid expenses and other current
assets, and other assets 128,411 30,762 407,420
Decrease (increase) in costs estimated earnings in excess of
billings on uncompleted contracts - net (1,548,172) (536,306) 5,898,754
Decrease (increase) in accounts payable and accrued expenses 660,123 603,975 (2,083,739)
----------- ----------- -----------
Total adjustments $(2,491,118) $ 187,279 $10,214,810
----------- ----------- -----------
Net cash (used in) provided from operating activities $(1,770,582) $ 547,853 $ 6,087,308
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (17,969) $ (36,761) $ (108,378)
Purchase of patent - - (315,000)
Proceeds from sale of (purchases of) short-term investments - net 90,502 (390,862) 93,416
----------- ----------- -----------
Net cash provided from (used in) investing activities $ 72,533 $ (427,623) $ (329,962)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit agreement $ 225,574 $(2,712,568) $ (677,662)
Borrowings on long-term debt 4,047,770 - -
Payments on long-term debt (3,350,000) (1,216,312) (873,899)
Debt issuance costs (154,600) - -
----------- ----------- -----------
Net cash provided from (used in) financing activities $ 768,744 $(3,928,880) $(1,551,561)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH $ (929,305) $(3,808,650) $ 4,205,785
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,163,187 4,971,837 766,052
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 233,882 $ 1,163,187 $ 4,971,837
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,065,904 $ 1,037,915 $ 960,502
=========== =========== ===========
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 $ -
=========== =========== ===========
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-8
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
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 four manufacturing plants,
sales and engineering offices. Two of the manufacturing plants are
located in Fenton, Michigan, the third plant is located in Westland,
Michigan and a fourth office located in Germany.
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, 2004, 2003 and 2002, amounted to approximately 21%, 17% and
23% of annual sales, respectfully.
In March 2004, the Company began operations in Germany. The Company
formed Atlas Technologies, GmbH, which is owned 100% by Atlas
Technologies (wholly owned subsidiary) and is included in these
consolidated financial statements.
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.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of PTC and its wholly owned subsidiaries, Atlas Technologies,
Inc. ("Atlas") and its wholly owned subsidiary Atlas Technologies,
Gmbh (ATG) 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 44%, 39% and 38% of total revenue for the
fiscal years ended June 30, 2004, 2003 and 2002, respectively.
The following individual customers accounted for 10% or more of total
accounts receivable for the fiscal years ended:
June 30,
----------------------------------------
2004 2003
------------------ ------------------
Ford Motor Company 23% 19%
GKN Aerospace 9% 15%
General Motors 21% 4%
Veltri Modular 1% 18%
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. and Atlas Technologies GmbH - 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 asset 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.
Stock Based Compensation
The Company has adopted SFAS No. 148 and the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company records compensation expense for stock options only if the
market price of the Company's stock, on the date of grant, exceeds the
amount an individual must pay to acquire the stock, if dilutive.
Accordingly, if the Company had elected to recognize compensation cost
based on the fair value of the options at grant date, the Company's
earnings and earnings per share from continuing operations, assuming
dilution, for fiscal 2004, 2003 and 2002 would have been the pro forma
amounts indicated below (in thousands, except per share amounts):
June 30,
---------------------------------------------
2004 2003 2002
------------ ------------- --------------
Net income (loss) as reported $ 721 $ 361 $ (4,128)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 23 - -
------------ ------------- --------------
Pro forma net earnings $ 698 $ 361 $ (4,128)
------------ ------------- --------------
Earnings (loss) per share:
As reported - Basic $ 0.29 $ 0.15 $ (1.67)
------------ ------------- --------------
As reported - Diluted $ 0.26 $ 0.15 $ (1.67)
------------ ------------- --------------
Pro forma - Basic $ 0.28 $ 0.15 $ (1.67)
------------ ------------- --------------
Pro forma - Diluted $ 0.26 $ 0.15 $ (1.67)
------------ ------------- --------------
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2004: dividend yield of 0%;
expected volatility of 217.85%; risk free interest rate of 1.75%; and
expected life of 5
F-12
years. The effects of applying SFAS No. 123 in the above pro forma
disclosures are not necessarily indicative of future amounts, because
additional stock option awards could be made in future years.
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,
------------------------------------------------
2004 2003 2002
--------- --------- -----------
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 720,536 $ 360,574 $(4,127,502)
Denominator for basic and diluted
earnings per share:
Weighted average shares 2,475,000 2,475,000 2,475,000
outstanding, basic
Weighted average shares
outstanding, diluted 2,731,000 2,475,000 2,475,000
Options to purchase shares of common stock were outstanding at June
30, 2003 and 2002 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.
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition". SAB No. 104 revises and rescinds certain sections of SAB
No. 101 in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules
and regulations. Accordingly there is no impact to our results of
operations, financial position or cash flows as a result of the
issuance of SAB No. 104.
On December 23, 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a
revision of FASB Statement No. 132 ("FAS 132 (revised 2003)")". This
statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans required by SFAS No. 87, "Employers'
Accounting for Pensions", SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The new rules require
additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined
F-13
benefit pension plans and postretirement benefit plans. The new
disclosures are generally effective for 2003 calendar year-end
financial statements of public companies, with a delayed effective
date for certain disclosures and for foreign plans. The adoption of
SFAS No. 132 did not have an effect on our consolidated financial
statements.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments
and Hedging Activities" amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. The Statement is effective
for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of
this standard had no effect on the Corporation's financial condition
or results of operations
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"),
a revision to FIN 46, "Consolidation of Variable Interest Entities".
FIN 46R clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements. FIN 46R is effective at the end of the
first interim period ending after March 15, 2004. Entities that have
adopted FIN 46 prior to this effective date can continue to apply the
provisions of FIN 46 until the effective date of FIN 46R. The adoption
of FIN 46R did not have an effect on our consolidated financial
statements.
NOTE 2 CONTRACT RECEIVABLES
The contract receivables consist of the following:
June 30,
---------------------------
2004 2004
----------- -----------
Billed
Completed contracts $ 1,784,168 $ 1,514,981
Uncompleted contracts 3,073,151 2,333,534
----------- -----------
Total contract receivables $ 4,857,319 $ 3,848,515
Less: Allowance for doubtful accounts 377,663 227,663
----------- -----------
Total $ 4,479,656 $ 3,620,852
=========== ===========
NOTE 3 COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
June 30,
-----------------------------------------
2004 2003
------------------- -------------------
Costs incurred on uncompleted contracts $ 25,558,246 $ 28,839,346
Estimated earnings on uncompleted contracts 11,273,444 12,501,450
------------------- -------------------
Total costs and estimated earnings incurred
on uncompleted contracts $ 36,831,690 $ 41,340,796
Less: Billings to date 33,725,041 39,782,319
------------------- -------------------
Total $ 3,106,649 $ 1,558,477
=================== ===================
Included in the accompanying consolidated balance sheet under the following
captions:
F-14
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,759,498 $ 3,423,457
Billings in excess of costs and estimated
earnings on uncompleted contracts (652,849) (1,864,980)
------------------- -------------------
Total $ 3,106,649 $ 1,558,477
=================== ===================
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.
Management has assessed the remaining carrying amount of previously
recorded goodwill of $2,985,909 and determined that such amount is not
impaired in accordance with SFAS No. 142. Accordingly, goodwill impairment
was not recorded for the year ended June 30, 2004.
The changes in the carrying amount of goodwill for fiscal 2004 and fiscal
2003 are as follows:
Westland Atlas Total
------------------- ------------------- -------------------
Balance as of June 30, 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
=================== =================== ===================
Balance as of June 30, 2004 $ 737,711 $2,248,198 $2,985,909
=================== =================== ===================
F-15
Patents and Other Intangible Assets
Intangible assets excluding goodwill consist of the following:
June 30, 2004 June 30, 2003
--------------------------------------------- ---------------------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
----------------- --------------------------- ----------------- --------------------------
Patent - Atlas $ 315,000 $ 118,125 $ 196,875 $ 315,000 $ 65,625 $ 249,375
Patent - Westland 258,132 198,114 60,018 258,132 153,123 105,009
----------------- ------------- ------------- ----------------- ------------ ------------
Total patents $ 573,132 $ 316,239 $ 256,893 $ 573,132 $ 218,748 $ 354,384
----------------- ------------- ------------- ----------------- ------------ ------------
Non-compete
agreements $ 348,750 $ 266,052 $ 82,698 $ 348,750 $ 230,292 $ 118,458
IRB closing fees 138,785 138,785 - 138,785 62,194 76,591
ML Closing fees 154,603 24,550 130,053 - - -
----------------- ------------- ------------- ----------------- ------------ ------------
Total other $ 642,138 $ 429,387 $ 212,751 $ 487,535 $ 292,486 $ 195,049
----------------- ------------- ------------- ----------------- ------------ ------------
Total $ 1,215,270 $ 745,626 $ 469,644 $ 1,060,667 $ 511,234 $ 549,433
================= ============= ============= ================= ============ ============
On an annual basis the Company evaluates 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, 2004 and 2003.
All of the Company's patents and other intangible assets are subject to
amortization. Amortization expense totaled $237,841, $142,444 and $103,119,
respectively for the years ended June 30, 2004, 2003 and 2002. Estimated
aggregate amortization expense for each of the next five years is
approximated as follows:
Fiscal year Amount
- ----------------------------------------- ---------------------
2005 $ 198,000
2006 178,000
2007 53,000
2008 41,000
2009 -
Thereafter -
---------------------
$ 470,000
=====================
F-16
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
2004 2003
------------- ------------
Revolving line of credit with financial institution, Merrill
Lynch Business Financial Services, Inc. ("MLB"), with
interest payable monthly at the 2.85% above 30-day LIBOR
(1.32% at June 30, 2004), due December 2004. This debt has
maximum borrowings up to $4,000,000 and is secured by
substantially all assets of Atlas $ 3,998,177 $ -
Note payable, MLB, due in monthly installments of $19,444
through December 2010, plus interest at 3.15% above the
30-day LIBOR. The note is secured by substantially all
assets of Atlas. 3,402,780 -
Note payable, MLB, due in monthly installments of $13,889
through December 2006, plus interest at 3.15% above the
30-day LIBOR. The note is secured by substantially all
assets of Atlas. 430,555 -
Credit facility with financial institution (Spectrum), with
interest due monthly at the bank's prime rate (4.0% at June
30, 2004) plus 5.2%, due December 2005. The facility allows
maximum borrowings up to $1,250,000, based on eligible
accounts receivable and is collateralized by substantially
all assets of Westland. 695,167 -
Note payable to a financial institution, due in monthly
installments of principal plus interest at the banks prime
rate plus 3.0%, due February 2005. This debt is secured by
substantially all assets of Westland. The entire amount of
this debt has been classified as a current liability. 2,212,583 2,178,148
Convertible debentures, net of a discount of $20,000,
payable to a financial institution (Cornell Capital
Partners), with interest accruing at 5% and payable upon
maturity. The debt mature June 2007 and is secured by all
real property of the Company. 180,000 -
Commercial mortgage loan payable to a financial institution
(Bank One), with monthly installments of $25,000 plus
interest at the banks prime rate plus 1.25%, originally due
December 2012, repaid during fiscal 2004. - 2,700,000
Bank one revolving line of credit repaid during fiscal 2004 - 4,467,770
Note payable to former owner of Westland with a original
maturity of January 2006. This note was repaid in fiscal
2004, net of $125,000 gain on extinguishment. - 775,000
------------- ------------
$ 10,919,262 $ 10,120,918
Less - current maturities 7,305,936 8,385,918
------------- ------------
$ 3,613,326 $ 1,735,000
============== ============
F-17
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.
In June 2004, Cornell Capital ("Cornell Capital") entered into a securities
purchase agreement with the Company under which Cornell Capital agreed to
purchase $300,000 face amount of the Company's convertible debentures.
Cornell Capital purchased $200,000 face amount of convertible debentures in
June 2004. Cornell Capital subsequently purchased $50,000 face amount of
convertible debentures in July 2004 and $50,000 of face amount of
convertible debentures in September 2004. In each case, the purchase price
of the debentures was 90% of their face amount, so that Cornell Capital
paid $270,000 in the aggregate for $300,000 face amount of the Company's
convertible debentures.
The debentures are convertible at the holder's option any time up to
maturity at a conversion price equal to the lower of (i) $0.48 or (ii) 100%
of the average of the three lowest closing bid prices of the common stock
for the thirty trading days immediately preceding the conversion date. The
debentures are secured by a second mortgage on real property owned by the
Company's Atlas subsidiary. The debentures have a three-year term and
accrue interest at 5% per year. Interest accrues and must be paid at or
prior to maturity. At maturity, the Company has the option to either pay
the holder the outstanding principal balance and accrued interest or to
convert the debentures into shares of common stock at a conversion price
equal to the lower of (i) $0.48 or (ii) 100% of the average of the three
lowest closing bid prices of the common stock for the thirty trading days
immediately preceding the conversion date. No principal payments are due
prior to maturity.
The Company can redeem the debentures by paying Cornell Capital Partners
120% of the face amount of the debentures to be redeemed and by issuing
warrants to Cornell Capital Partners to purchase 50,000 shares of the
Company's common stock for every $100,000 of debentures redeemed.
The Company accounted for the conversion features of the convertible
debentures in accordance with Emerging Issues Task Force (EITF) No. 00-27,
"Application of Issue 98-5 to Certain Convertible Instruments". As of June
30, 2004 there is no beneficial conversion option as the conversion price
is equal to or less than the fair value of the common stock. Therefore, no
intrinsic value has been assigned to the conversion option.
The aggregate maturities of long-term debt are as follows:
Fiscal year Amount
- ----------------------------------------- ---------------------
2005 $ 7,305,936
2006 400,000
2007 330,555
2008 413,333
2009 233,333
Thereafter 2,236,105
---------------------
$ 10,919,262
=====================
F-18
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 (425,000 shares had been
previously issued for $25,000). Each unit consisted of one share of the
Company's common stock, $0.001 par value, and two warrants. (These warrants
and other identical warrants issued to investors expired unexercised in
fiscal 2002.)
The Company is authorized to issue 1,000,000 shares of preferred stock
($.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, 2004, no preferred stock has been issued by the
Company.
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 Over the Counter Bulletin Board (OTCBB). In
October 2003, due to a delay in the Company's filing its annual report on
Form 10-K for the fiscal year ended June 30, 2003, the Company's quotation
on the OTCBB was suspended. The Company's common stock then was traded
through the Pink Sheets LLC. In August 2004, the Company's common stock was
relisted for quotation on the OTCBB.
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, 2004, 2003 and
2002.
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 2004, 2003 and 2002.
A summary of the status of the Company's stock options for the years ended
June 30, 2004, 2003 and 2002 are as follows:
F-19
Weighted
Weighted Average
Average Exercise
Shares Price
--------------- ----------------
Outstanding and exercisable at June 30, 2002 289,167 $ 3.00
Granted - -
Expired - -
Exercised - -
--------------- ----------------
Outstanding and exercisable at June 30, 2003 289,167 $ 3.00
Granted 256,000 0.15
Expired 86,167 5.00
Exercised - -
--------------- ----------------
Outstanding and exercisable at June 30, 2004 459,000 $ 0.76
=============== ================
The following summarizes information regarding stock options outstanding
and exercisable at June 30, 2004, 2003 and 2002:
Weighted Average
------------------------------------
Options Remaining
Range of Outstanding and Contractual Exercisable
Exercise Prices Exercisable Life Price
- ----------------------- ----------------------- ---------------- ----------------
$0.15 - $1.88 459,000 2.56 $ 0.76
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:
F-20
June 30,
-------------------------------------------
2004 2003
-------------------- -------------------
Current
Warranty accrual $ 77,000 $ 85,000
Inventory net realizable value reserve 17,000 51,000
Other 79,000 154,000
-------------------- -------------------
Net current deferred tax asset $ 173,000 $ 290,000
==================== ===================
Non-Current
Depreciation and basis of assets $ (967,000) $ (796,000)
Impairment of intangible assets 542,500 542,500
Research credit carryforward 1,165,000 1,165,000
Net operating loss carryforwards 1,999,000 2,024,400
Executive deferred compensation agreement 331,500 331,500
Other 38,500 38,700
Valuation allowance (2,387,500) (2,876,100)
-------------------- -------------------
Net non-current deferred tax asset $ 722,000 $ 430,000
==================== ===================
At June 30, 2004, the Company had aggregated net operating losses of
approximately $5,879,700 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.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible. Management
considers the scheduled reversals of deferred taxes, projected future
taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowance at June 30, 2004. The amount of the deferred
tax assets considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period
are reduced.
The significant components of income tax expense (benefit) is as follows:
June 30,
------------------------------------------------
2004 2003 2002
---------- --------- ---------
Federal
Current $ 117,000 $ 8,000 $ (39,672)
Deferred (292,000) (37,981) 588,000
---------- --------- ---------
Total income taxes (benefit) $(175,000) $(29,981) $ 548,328
========== ========= ==========
The reconciliation of income tax computed at the federal statutory rate
(34%) to income tax expense benefit is as follows:
F-21
June 30,
--------------------------------------------------
2004 2003 2002
----------- ---------- ------------
Tax expense (benefit) at statutory rate $ 185,482 $ 112,402 $(1,217,000)
Valuation allowance, tax research credit
valuation and other non-deductible items (385,085) (146,206) 1,781,000
Other - net 24,603 3,823 (15,672)
----------- ---------- ------------
Total income tax (benefit) expense $ (175,000) $ (29,981) $ 548,328
=========== ========== ============
NOTE 9 OPERATING LEASE COMMITMENT
The Company is obligated for a building lease expiring June 2006 for its
Westland Subsidiary. Rent expense for the years ended June 30, 2004, 2003
and 2002, totaled $223,768, $214,867 and $275,486, respectively. Minimum
rental payments under this non-cancelable lease at June 30, 2004, are as
follows:
Fiscal year Amount
- ------------------------------ -------------------
2005 $ 214,867
2006 214,867
NOTE 10 EXPORT SALES
A breakdown of export sales, based on shipment destination, is as follows:
June 30,
--------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
United States $ 22,192,991 $ 24,202,585 $ 19,053,264
France 227,958 535,831 1,217,595
Brazil 424,666 206,074 1,569,391
China 3,951,055 1,455,650 1,464,331
Mexico 57,185 45,977 769,624
England 238,827 49,689 443,691
Germany 119,452 25,051 136,726
Canada 943,064 2,529,235 109,586
Other foreign countries - 450 3,447
------------ ------------ ------------
Total $ 28,155,198 $ 29,050,542 $ 24,767,655
============ ============ =============
F-22
NOTE 11 DEFERRED COMPENSATION
As part of the purchase of Atlas, the Company entered into deferred
compensation agreements with Ronald Prime and Mike Austin, former owners
and executives of Atlas. This deferred compensation was originally
scheduled to be paid over a period from July 2000 through July 2002. The
former owners agreed to defer receipt of their respective compensation
under a subordinate agreement as part of debt financing arrangements
entered into by the Company and MLB. Included in the accompanying
consolidated financial statements for the years ended June 30, 2004 and
2003 related to these amended agreements are the following:
June 30,
----------------------------------------
2004 2003
------------------ ------------------
Payable under 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, 2004. The 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,
2004 2004 2003 2003 2003 2003 2003 2003
-------------------------------------------------------------------------------------------
Revenues $ 7,113 $ 5,639 $7,839 $7,564 $8,034 $ 6,663 $ 7,617 $6,737
Cost of revenues 4,815 4,281 6,491 5,950 6,179 4,955 5,900 5,163
Net income (loss) 500 (16) 23 214 194 107 153 (93)
Net income (loss)
per share:
Basic 0.20 (0.01) 0.01 0.09 0.09 0.04 0.06 (0.04)
Diluted 0.17 (0.01) 0.01 0.09 0.09 0.04 0.06 (0.04)
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 2,731 2,475 2,475 2,475 2,475 2,475 2,475 2,475
F-23
NOTE 14 SUBSEQUENT EVENT
In June 2004, Cornell Capital entered into a securities purchase agreement
with the Company under which Cornell Capital agreed to purchase $300,000
face amount of the Company's convertible debentures. Cornell Capital
purchased $200,000 face amount of convertible debentures in June 2004.
Cornell Capital subsequently purchased $50,000 face amount of convertible
debentures in July 2004 and $50,000 of face amount of convertible
debentures in September 2004. In each case, the purchase price of the
debentures was 90% of their face amount, so that Cornell Capital paid
$270,000 in the aggregate for $300,000 face amount of the Company's
convertible debentures.
The debentures are convertible at the holder's option any time up to
maturity at a conversion price equal to the lower of (i) $0.48 or (ii) 100%
of the average of the three lowest closing bid prices of the common stock
for the thirty trading days immediately preceding the conversion date. The
debentures are secured by a second mortgage on real property owned by the
Company's Atlas subsidiary. The debentures have a three-year term and
accrue interest at 5% per year. Interest accrues and must be paid at or
prior to maturity. At maturity, the Company has the option to either pay
the holder the outstanding principal balance and accrued interest or to
convert the debentures into shares of common stock at a conversion price
equal to the lower of (i) $0.48 or (ii) 100% of the average of the three
lowest closing bid prices of the common stock for the thirty trading days
immediately preceding the conversion date. No principal payments are due
prior to maturity.
The Company can redeem the debentures by paying Cornell Capital Partners
120% of the face amount of the debentures to be redeemed and by issuing
warrants to Cornell Capital Partners to purchase 50,000 shares of the
Company's common stock for every $100,000 of debentures redeemed.
In connection with Cornell Capital's investment in the convertible
debentures, in July 2004, the Company issued to Cornell 247,500 shares of
the Company's common stock as a commitment fee, valued at $0.40 per share.
The Company issued to Newbridge Security Corporation an additional 25,000
shares of its common stock as a placement agent fee. These shares were
valued at $0.40 per share, or $109,000 in the aggregate.
F-24