Back to GetFilings.com
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, 2002
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)
201 South Main Street, 8/th/ Floor, Ann Arbor, Michigan 48104
-------------------------------------------------------------
(Address of Principal Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code (734) 996-1700
--------------
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. [_]
State the approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant at October 3, 2002: $247,500
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 2002
------------------------ ----------------------------------
Common stock, $.001 par value 2,475,000 shares
Documents Incorporated by Reference: Not applicable
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Productivity Technologies Corp. (the "Company") was incorporated in June 1993
under the name Production Systems Acquisition Corporation with the objective of
acquiring an operating business engaged in the production systems industry. The
Company completed an initial public offering ("IPO") of common stock in July
1994 and raised net proceeds of approximately $9.0 million. In May 1996, the
Company changed its name to Productivity Technologies Corp. and acquired,
through a merger, Atlas Technologies, Inc. ("Atlas") as a wholly owned
subsidiary. On February 23, 2000, the Company purchased, through a wholly owned
subsidiary formed for this purpose, substantially all of the assets of Westland
Control Systems, Inc. ("Westland"). The Company has no other subsidiaries or
operations. The Company, which produces industrial machinery, operates in a
single segment through its Atlas and Westland subsidiaries.
Sales of Atlas products have principally been 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 customers account for the majority of
sales. Westland's customers participate in the automotive, food processing,
adhesive and sealant, and other industries.
Atlas is a leading innovator and supplier of quick die change, flexible
transfer, and stacking/destacking equipment used to automate automotive and
other metal stamping operations. Atlas operates two manufacturing plants in
Fenton, Michigan and has sales and engineering offices in Michigan, Europe and
China.
Metal stamping presses are used to form a wide variety of sheet metal components
used in automobiles, appliances and other consumer and industrial products.
Atlas offers a complete range of products within three categories critical to
the operation of metal stamping presses: quick die changing equipment, press
automation equipment, and stacking and destacking equipment, which, together,
have historically accounted for approximately 85% to 90% of its sales revenues.
It also sells, on a turnkey basis, fully integrated metal stamping systems
comprised of components provided by Atlas and other manufacturers. During 1998,
Atlas began producing and selling finger tooling for use with its and third
party transfer press automation equipment. 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
other industrial applications. Westland operates one manufacturing plant in
Westland, Michigan, which is located less than 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, control panels are
considered a high 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. Westland also focuses on tight inventory
control. Often, the more expensive panel components are received into the
factory within one to two weeks of when the entire panel will be built, quality
tested, and shipped to the customer, thus reducing inventory carrying costs.
Inventory consignment arrangements also exist for some component and component
classes.
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 three to four weeks, rather
than the six to eight weeks which management believes is more typical of the
control panel production industry in general. Westland's streamlined production
processes allow the Company to satisfy the 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 2000, 2001 and 2002 fiscal years, automotive industry customers for the
Company accounted for approximately 91%, 68% and 84% of sales, respectively. For
such fiscal years, sales by the Company to General Motors Corporation
represented 18%, 8% and 5%, respectively, sales to DaimlerChrysler Corporation
(formerly Chrysler Corporation) represented 10%, 8% and 1%, respectively and
sales to The Ford Motor Company represented 16%, 24% and 22%, respectively, of
total sales. Sales are predominantly in the United States and Canada but, in
recent years and especially for the second half of fiscal year 2001, the Company
targeted sales efforts in Mexico, Brazil, Europe and Asia. International sales
for the 2000, 2001 and 2002 fiscal years represented approximately 15%, 23% and
24%, respectively, of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Porthcawl, South Wales, U.K., and Beijing,
China; commissioned sales representatives; and original equipment manufacturers
(OEMs) specializing in metal presses and related equipment. Westland's sales are
primarily direct and on occasion it has utilized outside manufacturers' sales
representatives.
The order backlogs were approximately $13.5 million, $17.0 million and $15.7
million at June 30, 2000, 2001 and 2002, respectively. The Company believes
substantially all of the June 30, 2002 backlog will be produced during fiscal
2003.
Products
Atlas offers critical, high technology products based on proven designs and
engineering, which it believes offer superior technology, engineering and
features to those offered by its competitors. Atlas products are modular and may
be used with existing systems as well as with completely new systems. As a
result of their modular design, a variety of pieces of equipment can be combined
to form an appropriate solution for a customer's metal stamping needs. Virtually
all of its products are manufactured on a made-to-order basis. Because of their
many desirable features, Atlas products are positioned at an above-average price
comparative to its competitors. The raw materials and components used by Atlas
in the manufacturing process are readily available and, generally, there are
numerous suppliers that are capable of providing these materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues to
implement a program to achieve greater modularity in the engineering and design
of its products. To date, the program has resulted in faster order fulfillment
and production, and improved fabrication. Atlas believes that significant
cost-reducing improvements can still be made in the manufacturing process,
particularly from further 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. The
Atlas-developed products allow die swapping to be accomplished in minutes as
compared to hours if conventional equipment is used. Atlas storage-retrieval
systems permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured for
use with either manually controlled or fully automated presses. Atlas believes
that its equipment is instrumental in increasing the "up-time" of presses while
also facilitating short run capability, gentle die handling, safer and improved
ergonomics and easier and more efficient die maintenance.
Transfer press automation equipment is sold by Atlas under the names Flex 2000
and Flex 5000(R). Transfer presses use as many as ten dies within a single press
to progressively form the component (typically including tasks such as drawing
or forming, trimming, piercing and flanging). Unlike tandem press lines, which
use multiple presses arranged in a line and require multiple devices to move a
component, transfer presses move the component being processed from one die
station to another using a single automation device. Compared to tandem presses,
transfer presses generally operate at higher production rates, require less
floor space, consume less energy and allow more component processes per press.
Because of this, and because they have fewer parts and require less expensive
quick die change equipment than tandem presses, transfer presses have become the
preferred type of press for new purchases although many tandem presses will
remain in use for many years and can be refitted with automation equipment.
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 & 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 occurs
later in the construction process, the wiring and control panels are essential
to effective machinery operation. It is the wiring and controls, which convert
the machinery from stationary metal to functional machines.
Westland's products range from small, single door electrical panels to larger
six door panels. Selling prices for Westland's products range from less than
$5,000 to more than $100,000 per unit. The electrical control panels are used by
customers to control the mechanical functions of machinery used in applying
adhesives and sealants in automobile production, material handling equipment for
metal forming for automobiles and appliances, the machining of cylinders for the
manufacture of vehicle engines, and the fabrication of containers for food and
juice packaging.
Competition
Atlas management believes Atlas' products are sold in specialized markets that
have limited customers and few competitors. In many instances, Atlas products
are procured through competitive bidding. Because of the capital cost and the
need for skilled personnel, such as engineers, designers, mechanics and sales
persons, entry into this industry is expensive and difficult to achieve and
Atlas does not expect competition to increase significantly over present levels.
Primary competitors of Atlas include ABB Flexible Automation (Sweden), Herwo Die
Changing (Sweden), Orchid International (Canada), Hirotec (Japan), HMS Products
Co. and Aisaku (Japan). Each of these companies offers components, which compete
with certain components manufactured or sold by Atlas. A number of the
competitors are well established with substantial financial resources,
recognized brand names, customer loyalty and established market positions,
capable engineering, strong distribution networks and comprehensive
manufacturing capabilities.
Westland management believes Westland's competitors sell their products
primarily regionally. 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 competitors in Southeast Michigan
include Stegnar Electric, Con-Syst-Int, JIC Electric, X-Bar Automation,
Electro-matic Products, Control Technique, Venus Controls, and Quantum. The two
latter companies are minority owned, and are believed to have an advantage as
suppliers to the auto industry given U.S. automaker commitments made in April
1998 to increase, and encourage their leading suppliers to increase, purchases
of auto parts from minority owned companies.
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. For the
fiscal years ended June 30, 2000 and 2001, the Company expensed approximately
$122,000 and $127,000, respectively, in license royalties under previous
licensing agreements. For fiscal 2002, the Company recorded a credit of $4,000
against royalties previously paid. Through April 2002, Mr. Maher's trust was
responsible for defending Atlas from patent infringement and for patent
maintenance fees. See also a description of certain legal proceedings involving
these patent rights in Item 3 of this Report.
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
four patents, one for an asynchronous conveyer construction, one for a transfer
arm for supporting work pieces, one for a magnetic
sheet separator construction, and one for apparatus and methods for forming work
pieces. Foreign patents for the latter are held in Australia, China, France,
Germany, Italy, Spain and Sweden with patent applications pending in Brazil,
Canada, Korea, Mexico and Poland. Atlas has applied for five United States
patents for an articulating work piece transfer apparatus, a magnetic sheet
fanner, a tooling gage, a finger tooling receiver for transfer press automation
equipment and a pin pallet cover. Foreign patent applications have been filed
for the articulating work piece transfer apparatus.
Atlas holds an exclusive license agreement that covers two more U.S. patents for
a system for transferring work pieces through a series of workstations and a
synchronized dual axis actuator. The system for transferring work pieces through
a series of workstations is protected by foreign patents in Canada, China,
France, Germany, Great Britain, Japan, Republic of Korea, Russian Federation,
Spain and Sweden. This license agreement also encompasses rights to transfer
system patents that are pending in the U.S. and several foreign countries
covered under the Patent Coordination Treaty.
Westland owns one patent related to a lay-in wire way for cords and wires for
use in connection with the field installation of machinery. The product is
trademarked as "Cheeta-Duct(R)".
Management and Employees
The Company employs approximately 169 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, 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, MI.
The principal executive offices of the Company are located at 201 South Main
Street, 8th Floor, Ann Arbor, Michigan 48104.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and John H. Maher (now deceased), then owner of the patents
licensed to Atlas for the FLEX 5000(R) transfer, initiated an action against
Orchid International Group, Inc. ("Orchid") in the Federal Court of Canada,
Trial Division, claiming infringement and wrongful sale, manufacture and use by
Orchid of the inventions protected by such patent and seeking, among other
relief, a declaration that the patents are valid and have been infringed by
Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). Subsequent
to the filing of the action, the John H. Maher Trust (the "Trust") was
substituted as a plaintiff
party. The defendant, Orchid, has filed an answer denying the material
allegations of the complaint and asserting a counterclaim requesting that the
patents be declared invalid. In April 2002, Atlas acquired all rights to these
patents from the Trust, and subsequently asked the court to remove the Trust
from the litigation proceedings. As a result of the assignment of the patents to
Atlas, Atlas no longer will pay royalties for use of the patents in making the
FLEX 5000(R) transfer, but will be responsible for the costs of the patent
maintenance and litigation, as applicable. A court trial is expected in 2003.
In March 2001, the Company filed suit as plaintiff in the State of Michigan
Sixth Judicial District Court in Oakland County, Michigan against Thomas G. Lee,
the former owner and operator of Westland relative to the Company's purchase of
Westland. Mr. Lee filed a response and counterclaim seeking payment for
contractual obligations structured at the time of the Westland purchase and for
related employment compensation. The trial was commenced in August 2002 but
settled effective as of September 3, 2002. As a condition of reaching settlement
terms, the Company and Westland acknowledge that Mr. Lee did not make any
misrepresentations or fraudulent statements during the initial purchase
negotiations or in connection with his performance related to the transaction
purchase agreement. Under the terms of settlement, (1) approximately $1.8
million of the $3.2 million outstanding under the Company's note (including
accrued interest) to Mr. Lee was extinguished, (2) the Company paid $450,000 of
the obligation on September 3, 2002 and (3) the Company agreed to pay the
remaining $950,000 on an installment basis over a 40 month period.
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 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective as of the close of business on May 4, 2001, the Company's Common Stock
was de-listed for trading on the NASDAQ Small Cap Market. Trading in the
Company's Common Stock and is now conducted in the over-the-counter markets on
the NASD Electronic Bulletin Board. The OTC Bulletin Board is an inter-dealer
automated quotation system sponsored and operated by the NASD for equity
securities not included in the NASDAQ Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. The de-listing
could have a material adverse effect upon the Company in a number of ways,
including its ability to raise additional capital. In addition, the absence of a
trading system may adversely affect the ability of broker-dealers to sell the
Company's Common Stock, and consequently may limit the public market for such
Stock and have a negative effect upon its trading price. There can be no
assurance that the Company's Common Stock will be re-listed on the NASDAQ
National Market at any future date or that such stock will be listed or traded
on any market or trading system.
The following table sets forth the range of high and low closing bid prices for
Common Stock as reported by the NASDAQ Small Cap Market for fiscal 2000 and the
first three quarters of fiscal 2001 and the OTC Bulletin Board for the fourth
quarter of fiscal 2001. Within the last two fiscal years there has been
extremely limited trading in the Company's Units and Warrants and, therefore, no
trading information is provided. The Warrants, which were last known to have
traded in the third quarter of fiscal 2001 for $0.06, expired effective on June
24, 2002.
High Low
Year ended June 30, 2001:
First Quarter 1.25 1.00
Second Quarter 0.63 0.25
Third Quarter 0.63 0.44
Fourth Quarter 0.38 0.25
Year ended June 30, 2002:
First Quarter 0.50 0.20
Second Quarter 0.40 0.13
Third Quarter 0.35 0.20
Fourth Quarter 0.45 0.25
As of September 30, 2002, the Company had 16 holders of record of its Common
Stock. The Company believes that there are in excess of 300 beneficial holders
of the Company's Common Stock. The Company has not declared or paid any
dividends on its Common Stock since its inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's and
its predecessor's consolidated financial statements which have been audited by
BDO Seidman, LLP, independent certified public accountants, as of and for June
30, 1998, 1999 and 2000. Effective with its appointment by the Company in July
2001, Doeren Mayhew has served as the Company's independent auditors as of and
for the years ended June 30, 2001 and 2002. 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,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------
Revenues earned $ 24,768 $ 27,992 $ 33,230 $ 34,001 $ 36,040
Cost of revenues earned 18,261 22,155 26,235 24,610 27,563
Gross profit 6,507 5,837 6,895 9,391 8,477
Selling, general and administrative 6,453 8,004 6,333 7,526 8,538
Impairment of intangible assets 2,087 -- -- -- --
Bonus restructuring expense -- -- -- -- 2,132
Income (loss) from operations (2,033) (2,167) 562 1,865 (2,193)
Net income (loss) (4,128) (3,114) (256) 974 (2,012)
Net income per share of common stock ($1.67) ($1.26) ($0.10) $0.40 ($0.95)
Weighted average common shares 2,475 2,475 2,475 2,432 2,125
Consolidated Balance Sheet Data
June 30,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------
Current assets $ 11,639 $ 15,822 $ 22,972 $ 19,148 $ 15,272
Current liabilities 18,474 17,355 8,155 5,330 5,470
Working capital (6,835) (1,533) 14,817 13,818 9,802
Property, plant and equipment, net 6,711 7,231 7,708 7,844 8,289
Total assets 24,494 31,757 39,238 30,108 26,809
Long-term debt, less current maturities 3,800 7,710 20,862 13,951 11,254
Total liabilities 22,274 25,410 29,777 20,391 18,160
Stockholders' equity 2,220 6,347 9,461 9,717 8,649
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Revenues at Atlas are recognized using the percentage-of-completion method,
which measures the percentage of contract costs incurred to date and compares
these costs to the total estimated costs for each contract. Atlas estimates the
status of individual contracts when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract costs
include all direct material and labor costs, and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
condition, estimated profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the period in which such
revisions are determined. Sales at Westland are recognized when products are
shipped.
Results of Operations
Fiscal Year 2002 Compared to Fiscal Year 2001
Revenues earned for the year ended June 30, 2002 were $24,767,655 as compared to
$27,992,387 for the year ended June 30, 2001, a decrease of 12%, principally as
a result of lower order volume during fiscal 2002. The decline in revenues
earned was primarily due to the softness in capital goods demand in the
automotive industry. In addition, management believes the terrorist events of
September 11, 2001 adversely affected demand for Atlas' and Westland' products.
The order backlog as of June 30, 2002 decreased 8% to $15,700,000 from the June
30, 2001 backlog of $17,100,000. The Company again attributes its backlog
decrease to the softness in capital goods demand in
the automotive industry, the adverse effects of the terrorist events of
September 11, 2001, and the general economic slowdown.
Gross profit for the year ended June 30, 2002 was $6,506,891, representing an
11% increase from the $5,837,396 gross profit for the year ended June 30, 2001.
Gross profit increased during fiscal 2002 principally due to the restructuring
efforts undertaken at Atlas during the 2001 and 2002 fiscal years and to
improved cost controls and inventory management.
Consolidated selling, general and administrative (SG&A) expenses, were
$6,452,908, down 19% as compared to SG&A expenses of $8,004,219 for the year
ended June 30, 2001. The decrease was principally due to restructuring efforts
undertaken at Atlas during the 2001 and 2002 fiscal years.
The impairment of intangible assets amounted to $2,087,308, all of which is
attributable to Westland.
Income from operations for the year ended June 30, 2002, before impairment of
intangible assets, amounted to $53,983 compared to the loss from operations of
$2,166,823 for the year ended June 30, 2001. The improvement in income from
operations resulted primarily from the restructuring initiatives discussed
above. The loss from operations including impairment of intangible assets
amounted to $2,033,325.
Interest expense for fiscal 2002 was $1,668,519 as compared to $1,605,164 for
fiscal 2001. This increase in interest expense for fiscal 2002 was due to a
one-time $388,000 expense charged to the Company by its existing bank lender for
unwinding an interest rate swap entered into in 2000. The remaining interest
expense for fiscal 2002 was $1,280,519, which was $324,645 less than the total
interest expense for fiscal 2001, principally as a result of lower interest
rates and management's focus on accelerating receivables collections and on
improving other cash and inventory management procedures.
At June 30, 2002, the Company had aggregated net operating losses of
approximately $6,309,000 for income tax purposes which begin to expire in 2020.
In addition, the Company had tax research credit carry forwards of approximately
$1,165,000 which will begin to expire in 2012. For financial reporting purposes,
due to prior year operating losses, and uncertainty in realization the Company
has increased its valuation allowance from $1,412,600 to $2,957,500 against the
net operating loss carryforwards and other deferred tax assets. The amount of
the remaining deferred tax asset considered realizable could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
For the year ended June 30, 2002, the Company incurred a net loss of $4,127,502
as compared to net loss for the year ended June 30, 2001 of $3,113,741. The net
loss during fiscal 2002 includes $2,087,308 for the impairment of intangible
assets, $588,000 for the write-down of the Company's deferred tax asset, and
$388,000 for the swap fee charged by the Company's existing lender. Excluding
these write-downs and non-recurring expenses, the Company's net loss for fiscal
year 2002 approximated $1,064,194, an improvement of $2,049,547 as compared to
the net loss reported in fiscal 2001 of $3,113,741. This improvement was due to
the numerous factors cited above, including lower interest rates; considerable
management focus on accelerating receivables collections and on improving
inventory and cash management procedures; and restructuring efforts undertaken
at Atlas during fiscal years 2001 and 2002 which provided operating and
financial benefits in fiscal 2002.
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues earned for the year ended June 30, 2001 were $27,992,387 as compared to
$33,230,195 for the year ended June 30, 2000, a decrease of 16%, principally as
a result of lower order volume at Atlas during fiscal 2001. The revenues earned
at Westland, which was acquired by the Company on February 23, 2000, represented
15% of the total revenues earned by the Company in fiscal 2001.
The order backlog as of June 30, 2001 increased 27% to $17,100,000 from the June
30, 2000 backlog of $13,500,000. The Company attributes its backlog increase to
more focused and efficient sales efforts by personnel at both of its locations,
which, in turn, were facilitated by management changes at both facilities during
the second and third quarters of fiscal 2001. Management believes the Company's
quotation activity is increasing worldwide relative to one year ago.
Gross profit for the year ended June 30, 2001 was $5,837,396, representing a 15%
decrease from the $6,895,369 gross profit for the year ended June 30, 2000.
Gross profit decreased during fiscal 2001 primarily due to volume reduction
associated with lower than anticipated orders for Atlas and cost overruns
incurred late in the production cycle for certain products. As was stated in the
third quarter 10-Q, the Company made management changes in the middle of the
second quarter of fiscal 2001 and now believes production problems which caused
cost overruns in prior periods have been corrected and that Atlas will
experience lower cost overruns relative to initial project quotations in the
future.
Consolidated selling, general and administrative (SG&A) expenses were
$8,004,219, up 26% as compared to SG&A expenses of $6,332,966 for the year ended
June 30, 2000. The increase is associated with the inclusion of the Westland
facility, which was acquired on February 23, 2000.
Loss from operations for the year ended June 30, 2001 was $2,166,823 compared to
income from operations of $562,403 for the year ended June 30, 2000. The decline
in income from operations was principally due to lower volume, production costs
overruns and the inclusion of a full year of Westland's SG&A expenses.
Interest expense for the year ended June 30, 2001 was $1,605,164, up 23% from
$1,307,732 for the year ended June 30, 2000. Higher interest costs during fiscal
2001 were due to the indebtedness incurred by the Company for the purchase of
Westland.
For the year ended June 30, 2001, the income tax benefit was $572,000. See note
8 in the consolidated financial statements for additional analysis. At June 30,
2001 the balance sheet includes a deferred tax asset whose realization is
dependent upon future earnings. Based on historical operating losses and
uncertainty of future earnings, a valuation allowance of $1,412,600 has been
recorded at June 30, 2001. This asset includes research and experimentation
(R&E) credit carryforwards valued at approximately $935,000 that will begin to
expire in 2012 and net operating loss carryforwards valued at approximately
$1,915,000 that will begin to expire in 2020.
For the year ended June 30, 2001, a net loss of $3,113,791 was incurred as
compared to net loss for the year ended June 30, 2000 of $256,280. The net loss
during fiscal 2001 was due to factors cited above, including cost overruns on
certain projects, lower volume, lower gross margins, and increased interest
expense.
Liquidity and Capital Resources
On July 31, 2000 and on October 31, 2001, the Company was scheduled to repay
approximately $417,000 and $217,000, respectively, of the subordinated deferred
indebtedness totaling $974,933 due to the former owners of Atlas. These
repayments were withheld by the Company pending the litigation of the parties'
disputes, which were ultimately settled as described below and in Item 3 of this
Report.
At June 30, 2002, the Company had (1) $3,000,000 of Industrial Revenue Bond
obligations, payable over the 12 years remaining in their term, (2) debt of
$7,180,338 outstanding under a revolving credit facility with Bank One, Michigan
("Bank One") plus obligation for letters of credits issued thereunder (including
in support of the $3,000,000 Industrial Revenue Bonds relating to Atlas' Copper
Road facility), (3) deferred executive compensation obligations of $974,933
originally scheduled to be paid over three equal annual installments during the
period from July 2000 through July 2002, (4) a five year term loan from Bank One
of $3,060,000, bearing interest at 125 basis points over the prime rate,
incurred in February
2000 to purchase Westland, and (5) subordinated term debt (including accrued
interest) of $3,200,000, payable to the former owner of Westland, Thomas G. Lee.
This total of $16,965,271 compares to a total combined long-term debt financing
and line of credit balance of $18,516,832 as of June 30, 2001. The decrease in
indebtedness at June 30, 2002 is principally due to paying down the line of
credit.
Since June 30, 2002, the Company entered into a settlement of the obligations
due to Mr. Lee under which (1) $1,800,000 of the $3,200,000 of the principal and
accrued interest outstanding under the Company's note to Mr. Lee was
extinguished, (2) the Company paid $450,000 of the obligation on September 3,
2002 and (3) the Company agreed to pay the remaining $950,000 on an installment
basis over a 40 month period. In addition, the Company made principal repayments
to Bank One of $800,000 under the five-year term loan for the Westland purchase
and approximately $1,975,000 under the revolving credit facility. As of the date
of this Report, there is outstanding under the revolving credit facility
$5,191,770 plus standby letters of credit of $3,210,353, and there is
outstanding under the term loan $2,260,000,
Working capital deficit at June 30, 2002 was ($6,835,443) and the current ratio
was (.63) to 1, as compared to working capital deficit of ($1,533,171) and a
current ratio of (.91) to 1 for the Company at June 30, 2001.
Prior to the expiration of the Company's revolving credit facility with Bank One
on January 31, 2002, the Company was not in compliance with certain financial
covenants and borrowing base limitations thereunder. The Company also is not in
compliance with certain financial covenants under its term loan with Bank One.
To date, Bank One has not demanded that the Company repay either the term loan
or the revolving credit facility. The Company and Bank One have, however,
engaged in discussions concerning terms of forbearance, the terms of retirement
of the revolving credit facility in the event of a refinancing with another bank
lender and/or other lenders, and possible modification of the term loan, and
Bank One has consented to the settlement with Mr. Lee. While Bank One is under
no legal obligation to continue to forbear in demanding payment of outstanding
obligations, management does not believe that it would be in Bank One's interest
to take any action in the immediate future that could jeopardize the Company's
efforts to refinance the obligations.
Since the expiration of the revolving credit facility with Bank One on January
31, 2002, the Company has been able to meet its working capital needs from cash
generated from operations without borrowing additional funds under a line of
credit In addition, since such time, the Company has sought to pay down its
borrowings from Bank One when and as cash has become available from operations.
If Bank One continues to forbear in demanding the immediate repayment of these
obligations (as to which no assurance can be given), the Company believes that
it can continue to operate in the immediate future as it has since January 31,
2002, when the revolving credit facility expired.
The Company does not, however, have funds available to it from its operations or
otherwise to repay the amounts due under the credit facilities. The Company has
engaged two investment banking firms to separately advise it in connection with
a possible revolving credit facility (senior secured bank facility) and
mezzanine financing (secured subordinated notes). In respect of a new revolving
credit facility, the Company has initiated discussions with one prospective bank
lender that has conducted due diligence review of the Company and its operations
and scheduled submission of a prospective loan proposal to its credit committee
to provide a revolving credit facility providing for borrowing availability
based upon eligible receivables and work-in-progress of up to $6,000,000
principal amount and a new $3.0 million letter of credit (to replace an existing
letter of credit under the Bank One credit facility). The Company also intends
to seek to obtain mezzanine debt of up to $7,000,000 on market terms, which may
include offering warrants to purchase common stock at a nominal exercise price
or convertibility features.
Management is hopeful as to the ability of the Company to consummate suitable
financing arrangements based upon factors including but not limited to (1) the
apparent value of the tangible assets owned by the Company, (2) management's
belief concerning the Company's current competitive position in its principal
markets, (3) recent improvements the Company has made in its cost structure as
is evident in cash flow and operating results prior to goodwill impairment costs
for the fiscal year ending June 30, 2002, and (4) the
ability of the Company to reduce indebtedness and to meet its expenses with cash
generated from operations during the fiscal year ending June 30, 2002. However,
if various important factors, such as those described under "Forward Looking
Statements" in this Item 6 cause the Company to be unable to meet its objectives
of obtaining a new revolving credit facility with another lender or,
alternatively, renewing the existing facility with Bank One, modifying its
existing term loan with Bank One to provide for a more favorable amortization
schedule and obtaining mezzanine debt, all on suitable terms and in a timely
manner, then the Company's operations could be materially adversely affected.
Contingencies
Atlas has accrued certain financial reserves for contingencies of bad debts;
product warranty and health insurance run off costs.
Recent Accounting Standards
In July 2001, the Financial Accounting Statements Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. (See note 5 for additional analysis on SFAS 142.) SFAS No. 141 requires
that all business combinations be accounted for under a single method, the
purchase method. Use of the pooling-of-interests method is no longer permitted,
although poolings initiated prior to June 30, 2001 are grandfathered. The
Company adopted the provisions of SFAS No. 141 during the first quarter of
fiscal 2002 without a material impact on the Company's financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset, and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company is required to adopt the
provisions of SFAS No. 143 in the first quarter of fiscal year 2004. To
accomplish this, the Company must identify all legal obligations for asset
retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. The determination of fair value is complex
and will require the Company to gather market information and develop cash flow
models. Additionally, the Company will be required to develop processes to track
and monitor these obligations. The adoption of this statement is not expected to
have a material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, addressing financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement is effective for the fiscal year beginning
July 1, 2002. The adoption of this statement will not have a significant impact
on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.'s
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other things, this statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, which required all gains and
losses from early extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
As a result, the criteria in APB Opinion No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will
now be used to classify those gains and losses. The statement became effective
in the first quarter of fiscal 2003 and is expected to have a favorable impact
on the Compny as a result of the extinquishment of a portion of the Company's
debt to Thomas Lee (see note 15 to the consolidated financial statemetns) or if
any other lenders agree to extinquish debt,
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which supercedes Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and requires that a liability
be recognized when it is incurred and should initially be measured and recorded
at fair value. This statement is effective for exit or disposal activities that
are initiated after December 31, 2002 and the adoption will not have an impact
on the Company's historical financial position or results of operations.
Forward-Looking Statements
Various statements in this Report concerning the manner in which the Company
intends to conduct its future operations and potential trends that may affect
future results of operations are forward-looking statements. The Company may be
unable to realize its plans and objectives due to various important factors.
These factors include but are not limited to general economic and business
conditions, particularly in light of economic deterioration which has been
exacerbated by the terrorist incidents of September 11, 2001, the threat of war
with Iraq, and high profile accounting scandals which have raised questions as
to the integrity of the stock markets , and in the automotive and other
industries principally served by the Company, including continued flat or
declining demand in the domestic and foreign markets for automobiles and
automotive parts resulting in reduced demand for the Atlas' automation
equipment; potential technological developments in the metal forming and
handling automation equipment markets which may render Atlas' automation
equipment noncompetitive or obsolete; the risk that Atlas or Westland customers
may be unwilling or unable to continue ordering products; the potential
inability of the Company to renew or replace its credit facilities, as described
under "Liquidity and Capital Resources" in this Item 7, due to the Company's
inability to achieve adequate operating results or the continued tightening of
the credit and capital markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $16,965,271 at June 30, 2002, obligations in
the amount of $3,200,000 were fixed rate or fixed rate based obligations and the
balance of approximately $14.2 million, were variable rate obligations. Assuming
an immediate 10% increase, as of June 30, 2002, in the interest rates on all of
the Company's variable rate obligations, the impact to the Company in annualized
interest payable would be approximately $90,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In July 2001, the Company dismissed BDO Seidman as its auditors. The Company was
unable at that time to reach an agreement with BDO Seidman as to appropriate
compensation for BDO Seidman to re-certify its audit report dated September 12,
2000, except for Note 5, which is as of October 13, 2000. Accordingly, BDO
Seidman has not been engaged to re-certify this report. Therefore, it has not
conducted a "keep current" review of the Company's operations or financial
condition, has not reviewed this annual report or Form 10-K or the financial
statements included herein and has not re-issued its audit report dated
September 12, 2000, except for Note 5 which is as of October 13, 2000.
The Company hereby incorporates by reference from its annual report on Form 10-K
for the year ended June 30, 2000, the following: consolidated balance sheets of
the Company at June 30, 1999 and 2000;
consolidated statements of operations for each of the years in the three year
period ended June 30, 2000; consolidated statements of cash flows for each of
the years in the three year period ended June 30, 2000; and the report of BDO
Seidman dated September 12, 2000, except for Note 5 which is as of October 13,
2000, issued in connection with the foregoing, which financial statements and
report are set forth in Exhibit 99.1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in the Company's Form 8-K filed on July 31, 2001, the
Company, in a cost-saving move, dismissed its former auditors, BDO Seidman, LLP.
As disclosed in the Form 8-K, there were no disagreements between the Company
and BDO Seidman on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to its satisfaction, would have caused it to make a reference to the
subject matter of the disagreement in connection with its reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Set forth below is information concerning each director of the Company,
including his business experience during at least the past five years, his
positions with the Company, and certain directorships held by him. Except as
hereinafter described, there are no family relationships among any of the
directors or any arrangements or understandings between any director and another
person pursuant to which he was selected as a director.
Director
Director Age Since Current Position
Class I Directors
Jesse A. Levine 35 1993 Director, Chief Financial Officer,
Vice President, Secretary and
Treasurer
Class II Director
Michael D. Austin 51 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 68 1993 Director, Chairman of the Board,
President and Chief Executive Officer
Alan H. Foster 77 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. The term of office of the Class III
directors will continue until the annual meeting of the Company held in fiscal
2003. The term of office of the Class I director will continue until the annual
meeting of the Company held in fiscal 2004. In each case, a director will hold
office until the next annual meeting of stockholders at which his class of
directors is to be elected.
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 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.
Executive Officers Current Position
Samuel N. Seidman Chairman of the Board, President and Chief Executive Officer
Jesse A. Levine Chief Financial Officer, Vice President, Secretary and
Treasurer
James A. Kolinski Vice President, Operations of the Company and Chief Executive
Officer of Atlas Technologies, Inc.
Michael D. Austin Vice President of Strategic Planning and Marketing of the
Company and President of Atlas Technologies, Inc.
Robert J. Cuccaro Vice President, Corporate Controller of the Company and
President of Westland Control Systems, Inc.
See "Directors" in this Item 10 above for a description of the business
experience during at least the past five years of Messrs. Seidman, Levine and
Austin.
Robert J. Cuccaro, 47 years of age, joined the company on May 26, 2000 as Vice
President, Corporate Controller. In January 2001, Mr. Cuccaro was promoted to
President of Westland Control Systems, Inc. From 1998 to 2000, Mr. Cuccaro held
positions of General Manager and Controller for the Ring Group and Karmazin
Products Corporation and was responsible for directing sales, human resources,
production control, accounting and finance. From 1996 to 1998, Mr. Cuccaro held
the position of Chief Financial Officer/Division Controller for Stewart
Connectors Division, Inc. a subsidiary of Insilco Corporation. From 1994 to
1996, Mr. Cuccaro held various positions including Plant Controller and
Corporate Controller with Clark Material Handling Corporation, a subsidiary of
Terex Corporation. Previously, from 1982 to 1994, Mr. Cuccaro held various
financial positions at UNISYS Corporation including Controller and Sales
Director. Mr. Cuccaro has extensive international, manufacturing, financial
reporting and systems experience. Mr. Cuccaro earned his B.S. degree from
Rutgers University and attended graduate studies classes at Fairleigh Dickinson
University in New Jersey.
James A. Kolinski, 61 years of age, was hired by the Company on October 16,
2000, as Vice President - Operations. In November 2000, Mr. Kolinski was
promoted to CEO of Atlas Technologies, Inc. in addition to being the Vice
President - Operations for the Company. Mr. Kolinski had been Chief Executive
Officer and President of HPM Corporation, a $110 million manufacturer of
equipment for plastic injection molding, metal extrusion and metal die-casting
applications. Previously, for 6 years, Mr. Kolinski was President and Chief
Operating Officer at Grove Worldwide LLC, a leading manufacturer of aerial work
platforms with operations in the United States, United Kingdom, and France. Mr.
Kolinski assisted in the development of Grove's strategic plan, which resulted
in sales growth from $56 million to $205 million per annum. Mr. Kolinski had
full Profit and Loss Statement responsibility at HPM, Grove, and previously as
President and Director of Simon Aerials, a $55 million subsidiary of a $1
billion dollar per annum parent company, and before that with AAR Corporation, a
$25 million per annum producer of powered industrial
sweepers and scrubbers, and material handling equipment. Mr. Kolinski's
employment arrangements provide incentives for Mr. Kolinski if the Company
reaches certain higher levels of sales, sales growth, and earnings targets.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its officers and persons who own more than 10% of the
Company's Common Stock to file reports of ownership and changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on 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, 2002, each of its officers, directors and 10% stockholders
complied with the Section 16(a) reporting requirements, except that a Form 3 was
not timely filed for James A. Kolinski, the Vice President, Operations of the
Company and Chief Executive Officer of Atlas Technologies, Inc.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
During fiscal 2002, 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, 2000, 2001 and 2002 to (1) the person who has served as the
chief executive officer of the Company at all times since the beginning of
fiscal 2002 (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 2002 and whose income exceeded $100,000 (James A.
Kolinski and Robert J. Cuccaro) (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Fiscal Year Stock Awards Underlying Options
Principal Position ended June 30, Salary ($) Bonus ($) (#) (#)
- ------------------------------------------------------------------------------------------------------
Samuel N. Seidman, 2002 120,000 --- --- --
Chairman of the Board, 2001 120,000 --- --- ---
President and Chief 2000 78,750 --- --- ---
Executive Officer
James A. Kolinski, 2002 170,000 8,333 --- ---
Vice President, 2001 170,000 --- --- ---
Operations of the 2000 --- --- --- ---
Company and Chief
Executive Officer of
Atlas
Robert J. Cuccaro, 2002 103,000 --- --- ---
Vice President, 2001 95,000 --- --- ---
Corporate Controller 2000 85,000 --- --- ---
of the Company and
President of Westland
- ---------------
Option Awards and Values. No options or stock appreciation rights were awarded
to any of the Named Executive Officers in fiscal 2002. The following table sets
forth information concerning the aggregate number and values of options held by
the Named Executive Officers as of June 30, 2002. None of the Named Executive
Officers holds stock appreciation rights and none of such persons exercised any
options in fiscal 2002.
Aggregate Year-End Option Values
Number of unexercised options Value of unexercised in the money
at fiscal year end (#) options at fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Samuel N. Seidman 158,833 --- -$0- ---
James A. Kolinski --- --- --- ---
Robert J. Cuccaro --- --- --- ---
Compensation Committee Interlocks and Insider Participation
The full Board of Directors of the Company serves as both the Company's
Compensation Committee and, since January 1, 2002, the Audit Committee. There
have not been since the beginning of fiscal 2002 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 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying footnotes set forth certain information as
of September 30, 2002 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., 201
South Main Street, 8th Floor, Ann Arbor, Michigan 48104.
Name of Beneficial Number of Shares Percentage of Shares
Owner Beneficially Owned Beneficially Owned(3)
Michael D. Austin 312,600 12.6%
Samuel N. Seidman 285,083 (1) 10.8%
Jesse A. Levine 149,583 (1)(2) 5.8%
Alan H. Foster 43,250 (1) 1.7%
Ronald Prime 153,000 6.2%
Robert J. Cuccaro 0 ---
James A. Kolinski 5,000 0.2%
All directors and 795,516(4) 28.8%
executive officers as a
group (4)
(1) Includes shares of Common Stock issuable upon immediately
exercisable warrants and options at prices ranging from $4.25 to
$5.25 per share, as follows: Mr. Seidman - 158,833 shares; Mr. Levine -
106,333 shares; and Mr. Foster - 22,000 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
(3) The percentage in this column is calculated by dividing the number
of shares beneficially held by the individual or group shown on each
line by the sum of (i) the number of outstanding shares of Common Stock
and (ii) any shares of Common Stock issuable upon the exercise of
options held by such individual or group members, but for no other
person.
(4) Includes shares of Common Stock issuable upon immediately
exercisable warrants and options to all executive officers and
directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the Company
office space, as well ascertain office, administrative and secretarial services
as may be required by the Company. The Company paid Seidman & Co., Inc.
approximately $20,000 in the fiscal year ended June 30, 2002 for such services.
Samuel N. Seidman, a director and the Chairman, President and Chief Executive
Officer of the Company, is President of Seidman & Co., Inc., and Jesse A.
Levine, a director, Chief Financial Officer, Vice President, Secretary and
Treasurer of the Company, is Senior Vice President of Seidman & Co., Inc.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on the Exhibit Index.
(b) Reports on Form 8-K.
None
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
C O N T E N T S
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of independent certified public accountants F-1
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of shareholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 to F-31
Report of Independent Certified Public Accountants
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, 2002 and
2001, 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 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 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, 2002 and 2001,
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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, has a working capital deficit and is in forbearance with its
financial institution. These factors raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DOEREN MAYHEW
August 23, 2002, except as to Note 5,
which is as of October 11, 2002
Troy, Michigan
-F-2-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2002 2001
------------ ------------
Current Assets
Cash $ 4,971,837 $ 766,052
Short-term investments, including accrued interest 149,720 243,136
Contract receivables, net of allowance for doubtful
accounts of $250,198 in 2002 and $340,000 in 2001 (note 3) 2,898,107 5,533,773
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 4) 1,773,141 7,172,626
Inventories 1,211,249 1,463,559
Prepaid expenses and other current assets 352,542 356,102
Deferred income taxes (note 9) 282,000 287,000
------------ ------------
Total current assets 11,638,596 15,822,248
Property and Equipment
Land 591,514 591,514
Buildings and improvements 4,917,459 4,911,665
Machinery and equipment 4,223,506 4,444,679
Transportation equipment 21,000 21,000
------------ ------------
9,753,479 9,968,858
Less accumulated depreciation 3,042,568 2,738,043
------------ ------------
Net property and equipment 6,710,911 7,230,815
Other Assets
Goodwill (note 5) 4,926,448 6,521,888
Patents (note 5) 451,875 686,859
Deferred income taxes (note 9) 468,000 1,051,000
Other assets 297,959 444,512
------------ ------------
Total other assets 6,144,282 8,704,259
------------ ------------
Total assets (note 6) $ 24,493,789 $ 31,757,322
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (note 6) $ 12,190,338 $ 9,831,899
Accounts payable 2,193,920 4,973,710
Accrued expenses
Commissions payable 189,000 248,000
Warranty reserve 315,000 315,000
Royalties payable - 265,398
Payroll and related withholdings 370,178 173,501
Interest 1,122,552 414,535
Other 367,148 251,393
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 4) 750,970 251,701
Current maturities of executive deferred compensation
agreements (note 12) 974,933 630,282
------------ ------------
Total current liabilities 18,474,039 17,355,419
Long-Term Debt, Less Current Maturities (note 6) 3,800,000 7,710,000
Executive Deferred Compensation Agreements, Less Current
Maturities (note 12) - 344,651
Shareholders' Equity (notes 7 and 8)
Common stock; $.001 par value; 20,000,000 shares authorized;
2,475,000 shares issued and outstanding 2,475 2,475
Additional paid-in capital 9,966,408 9,966,408
Deficit (7,749,183) (3,621,681)
------------ ------------
Total shareholders' equity 2,219,700 6,347,202
------------ ------------
Total liabilities and shareholders' equity $ 24,493,739 $ 31,757,272
============ ============
See accompanying notes to consolidated financial statements.
-F-3-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
June 30,
2002 2001
-------------- --------------
Revenues Earned $ 24,767,655 $ 27,992,387
Cost of Revenues Earned 18,260,764 22,154,991
-------------- --------------
Gross Profit 6,506,891 5,837,396
Selling, General and Administrative
Expenses 6,452,908 8,004,219
Impairment of Intangible Assets (note 5) 2,087,308 -
-------------- --------------
Loss From Operations (2,033,325) (2,166,823)
Other Income (Expenses)
Interest expense (1,668,519) (1,605,164)
Loss on disposal of equipment (8,629) -
Interest income 56,912 53,705
Miscellaneous income 74,387 32,491
-------------- --------------
Total other income (expenses) (1,545,849) (1,518,968)
-------------- --------------
Loss Before Income Taxes (Benefit) (3,579,174) (3,685,791)
Income Taxes (Benefit) (note 9) 548,328 (572,000)
-------------- --------------
Net Loss $ (4,127,502) $ (3,113,791)
============== ==============
Basic Loss Per Share (note 1) $ (1.67) $ (1.26)
============== ==============
Diluted Loss Per Share (note 1) $ (1.67) $ (1.26)
============== ==============
See accompanying notes to the consolidated financial statements.
-F-4-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002 AND 2001
Common Additional
Stock Common Paid-in
Shares Stock Capital Deficit Total
-------------- ------------ -------------- ------------ -----------
Balance - July 1, 2000 2,475,000 $ 2,475 $ 9,966,408 $ (507,890) $ 9,460,993
Net Loss - - - (3,113,791) (3,113,791)
-------------- ------------ -------------- ------------ -----------
Balance - June 30, 2001 2,475,000 2,475 9,966,408 (3,621,681) 6,347,202
Net Loss - - - (4,127,502) (4,127,502)
-------------- ------------ -------------- ------------ -----------
Balance - June 30, 2002 2,475,000 $ 2,475 $ 9,966,408 $ (7,749,183) $ 2,219,700
============== ============ ============== ============ ===========
See accompanying notes to consolidated financial statements
-F-5-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
June 30,
2002 2001
-------------- --------------
Cash Flows From Operating Activities:
Net loss $ (4,127,502) $ (3,113,791)
Adjustments to reconcile net loss to net cash provided
from operating activities:
Depreciation 619,653 664,849
Amortization 103,119 387,011
Loss on disposal of property and equipment 8,629 -
Provisions for losses on contract receivables (89,802) 237,500
Impairment of intangible assets 2,087,308 -
Inventory net realizable value reserve (50,000) 50,000
Deferred income taxes 588,000 (572,000)
Changes in assets and liabilities:
Decrease in contract receivables 2,725,468 4,159,640
Decrease in inventories, prepaid expenses,
other current assets, and other assets 407,420 317,369
Decrease in costs and estimated earnings in excess of
billings on uncompleted contracts - net 5,898,754 2,776,873
Decrease in accounts payable and accrued expenses (2,083,739) (248,435)
-------------- --------------
Total adjustments
10,214,810 7,772,807
-------------- --------------
Net cash provided from operating activities 6,087,308 4,659,016
Cash Flows From Investing Activities:
Purchase of property and equipment (108,378) (187,386)
Purchase of patent (315,000) -
Proceeds from sale of short-term investments - net 93,416 66,949
-------------- --------------
Net cash used in investing activities (329,962) (120,437)
Cash Flows From Financing Activities:
Net payments on revolving credit agreement (677,662) (3,880,148)
Payments on long-term debt (873,899) (431,004)
-------------- --------------
Net cash used in financing activities (1,551,561) (4,311,152)
-------------- --------------
Net Increase in Cash 4,205,785 227,427
Cash - Beginning 766,052 538,575
-------------- --------------
Cash - Ending $ 4,971,837 $ 766,002
============== ==============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash paid during the year for interest $ 960,502 $ 1,624,558
============== ==============
Cash paid during the year for income taxes $ - $ -
============== ==============
See accompanying notes to consolidated financial statements
-F-6-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business
The Company is a manufacturer of automated industrial systems,
machinery, equipment, custom electrical control panels and engineering
services. It operates with three manufacturing plants, sales and
engineering offices. Two of the manufacturing plants are located in
Fenton, Michigan and the third plant is located in Westland, Michigan.
Sales of products have principally been to automobile and automotive
parts manufacturers and appliance manufacturers. Other customers
include manufacturers of garden and lawn equipment, office furniture,
heating, ventilation and air conditioning equipment and aircraft. Sales
to automotive-related customers have accounted for the majority of
total annual sales. Sales are predominantly in the United States but,
in recent years, the Company has targeted sales efforts in Canada,
Mexico, Europe and Asia. Export sales during the year ended June 30,
2002 and 2001, amounted to approximately 23% and 24%, of annual sales.
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.
Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles 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.
-F-7-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of PTC and its wholly-owned subsidiaries, Atlas and Westland
(collectively, "the Company"). All significant intercompany balances
and transactions have been eliminated upon consolidation.
Cash Equivalents and Short-term Investments
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. 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.
The following individual customers accounted for 10% or more of total
revenue for the fiscal years ended:
June 30,
2002 2001
---------------- ---------------
Ford Motor Company 22% 24%
Dana Corporation 16% -
The Trane Company 4% 23%
-F-8-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Concentrations of Credit Risk - Continued
The following individual customers accounted for 10% or more of total
accounts receivable for the fiscal years ended:
June 30,
2002 2001
---------- ----------
Ford Motor Company 35% 36%
Dana Corporation 17% -
BMW Manufacturing Ltd. 5% 17%
The Trane Company - 23%
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 because of the short-term maturity of these items. The
carrying amounts of the revolving credit agreement and long-term debt
pursuant to the Company's bank credit agreements approximate fair value
because the interest rates on the majority of the loans outstanding
change with market rates.
Revenue and Cost Recognition
Atlas Technologies, Inc.
Revenues earned consist primarily of contract revenues from fixed price
contracts, and the related contract costs, are recognized using the
percentage-of-completion method, measured by the percentage of contract
costs incurred to date to total estimated costs for each contract. The
Company estimates the status of individual contracts when progress
reaches a point where experience is sufficient to estimate final
results with reasonable accuracy.
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.
-F-9-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Revenue and Cost Recognition - Continued
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.
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".
-F-10-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Goodwill and Intangible Assets - Continued
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.
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
The Company was self-insured for certain losses relating to employee
medical benefits. The Company discontinued its self-insured plan for
the majority of health benefits during the year ended June 30, 2001 and
now uses a third party insurer. The Company 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. Items giving rise to deferred taxes include depreciation
expense, goodwill impairment, and deferred executive compensation.
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.
-F-11-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Loss Per Share
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 loss per share calculations:
June 30,
2002 2001
----------------- -----------------
Numerator for basic and diluted earnings per share
Net loss $ (4,127,502) $ (3,113,791)
Denominator for basic and diluted earnings per share
Weighted average shares outstanding 2,475,000 2,475,000
Options to purchase shares of common stock were outstanding (see Notes
7 and 8), but were not included in the computation of diluted earnings
per share because there was a net loss in fiscal 2002 and 2001;
therefore any additional 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 July 2001, the Financial Accounting Statements Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. (See note 5 for additional analysis on SFAS
142.) SFAS No. 141 requires that all business combinations be accounted
for under a single method, the purchase method. Use of the
pooling-of-interests method is no longer permitted, although poolings
initiated prior to June 30, 2001 are grandfathered. The Company adopted
the provisions of SFAS No. 141 during the first quarter of fiscal 2002
without a material impact on the Company's financial position or
results of operations.
-F-12-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Recent Accounting Pronouncements - Continued
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The fair
value of the liability is added to the carrying amount of the
associated asset, and this additional carrying amount is depreciated
over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is
required to adopt the provisions of SFAS No. 143 in the first quarter
of fiscal year 2004. To accomplish this, the Company must identify all
legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption.
The determination of fair value is complex and will require the Company
to gather market information and develop cash flow models.
Additionally, the Company will be required to develop processes to
track and monitor these obligations. The adoption of this statement is
not expected to have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, addressing financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement is
effective for the fiscal year beginning July 1, 2002. The adoption of
this statement will not have a significant impact on the Company's
financial position or results of operations.
-F-13-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Recent Accounting Pronouncements - Continued
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No.'s 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other things, this statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, which required all gains and losses from early extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of the related income tax effect.
As a result, the criteria in APB Opinion No. 30, Reporting the Results
of Operations Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, will now be used to classify those gains and losses.
The statement became effective in the first quarter of fiscal 2003 and
will effect the transaction noted in Note 15.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and requires that a
liability be recognized when it is incurred and should initially be
measured and recorded at fair value. This statement is effective for
exit or disposal activities that are initiated after December 31, 2002
and the adoption will not have an impact on the Company's historical
financial position or results of operations.
-F-14-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 2 - Going Concern
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations and is in forbearance with
its financial institution.
Cash from operating activities was $6,087,308 for fiscal year 2002
compared to $4,659,016 in fiscal year 2001. The Company's future
success will depend heavily on its ability to generate cash from
operating activities and to meet its obligations as they become due.
The Company continues to focus on initiatives that specifically
address the need to increase and maintain cash provided from operating
activities. Some of these initiatives have included, job cost
initiatives, staff reductions and general and administrative cost
controls. If the Company is not sufficiently successful in maintaining
cash provided from operating activities and restructuring its credit
arrangements, it may need to sell additional common stock or sell
assets outside of the ordinary course of business in order to meet its
obligations. Currently, the Company has initiated discussions with a
financial institution to provide a replacement facility to repay
amounts to its existing lender and to provide working capital. There
is no assurance that the Company will be able to maintain cash flows
from operations, obtain new institutional lending, sell additional
common stock, or sell its assets for amounts at or in excess of book
value.
The Company's ability to restructure its credit agreements and obtain
additional cash if and when needed could have a material adverse effect
on its financial position, results of operations and its ability to
continue in existence. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
-F-15-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 3 - Contract Receivables
The contract receivables consist of the following:
June 30,
2002 2001
----------------- -----------------
Billed
Completed contracts $ 1,400,790 $ 2,502,770
Uncompleted contracts 1,747,515 3,371,003
---------------- -----------------
Total contract receivables 3,148,305 5,873,773
Less allowance for doubtful accounts (250,198) (340,000)
---------------- -----------------
Total $ 2,898,107 $ 5,533,773
================ =================
Note 4 - Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred on uncompleted contracts $ 24,633,492 $ 28,888,443
Estimated earnings on uncompleted contracts 9,187,627 10,168,707
---------------- -----------------
Total costs and estimated earnings incurred
on uncompleted contracts 33,821,119 39,057,150
Less billings to date 32,798,948 32,136,225
---------------- -----------------
Total $ 1,022,171 $ 6,920,925
================ =================
Included in the accompanying consolidated balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,773,141 $ 7,172,626
Billings in excess of costs and estimated
earnings on uncompleted contracts (750,970) (251,701)
---------------- -----------------
Total $ 1,022,171 $ 6,920,925
================ =================
-F-16-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 5 - 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 Technologies, Inc. (Atlas) and 2)
Westland Control Systems, Inc. (Westland), which constitute components
of the Company's business that include goodwill.
For the fiscal year ended June 30, 2002, the Company completed the
transitional and annual impairment tests and for the fourth quarter of
fiscal 2002, Productivity Technologies Corp. and Subsidiaries recorded
a charge to earnings of $1,595,440, or $.65 per diluted share, for the
write-down of goodwill related 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 writedown 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.
The changes in the carrying amount of goodwill for fiscal 2002, are as
follows
Westland Atlas Total
---------------- --------------- ----------------
Balance as of June 30, 2001 $ 4,273,690 $ 2,248,198 $ 6,521,888
Impairment adjustment (1,595,440) - (1,595,440)
---------------- --------------- ----------------
Balance as of June 30, 2002 $ 2,678,250 $ 2,248,198 $ 4,926,448
================ =============== ================
-F-17-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 5 - Goodwill and Other Intangible Assets
Goodwill - Continued
Had the provisions of SFAS 142 been applied for the year ended June 30,
2001, the Company's net loss and net loss per share would have been as
adjusted follows:
Net loss, as reported $ (3,113,791)
Add back goodwill amortization 342,020
------------
Adjusted net loss $ (2,771,771)
============
Net loss per share:
Basic and diluted net loss per share, as reported $ (1.26)
Add back amortization of goodwill .14
------------
Basic and diluted net loss per share, as adjusted $ (1.12)
============
Patents and Other Intangible Assets
Intangible assets excluding goodwill consist of the following:
June 30, 2002 June 30, 2001
-------------------------------------------- --------------------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
------------- ------------- -------------- ------------- ------------- -------------
Patent - Atlas $ 315,000 $ 13,125 $ 301,875 $ - $ - $ -
Patent - Westland 258,132 108,132 150,000 750,000 63,141 686,859
Non-compete
agreements 348,750 194,542 154,208 348,750 158,792 189,958
IRB closing fees 138,785 52,940 85,845 138,785 43,687 95,098
------------- ------------- -------------- ------------- ------------- -------------
Total $ 1,060,667 $ 368,739 $ 691,928 $ 1,237,535 $ 265,620 $ 971,915
============= ============= ============== ============= ============= =============
-F-18-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 5 - Goodwill and Other Intangible Assets
Patents and Other Intangible Assets - Continued
At June 30 2002, the Company evaluated its patents and other intangible
assets for impairment. The Company has 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.
All of the Company's patents and other intangible assets are subject to
amortization. Amortization expense totaled $103,119 and $387,011,
respectively for the years ended June 30, 2002 and 2001.
Estimated future amortization expense is as follows:
2003 $ 105,360
2004 105,360
2005 105,360
2006 105,360
2007 105,360
-F-19-
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 6 - Notes Payable and Long-Term Debt
June 30,
2002 2001
------------- --------------
Revolving credit agreements with a bank. The agreements are in
forbearance at June 30, 2002. The amount that may be borrowed
under this agreement was limited to specified percentages of
contract receivables, work-in process and property and equipment
of Atlas. The revolving credit agreements provide for outstanding
borrowings to bear interest at a rate equal the bank's prime rate
less 1/4% to plus 1%, (the bank's prime rate was 4.75% at June 30,
2002). Borrowings under this agreement are secured by
substantially all assets of Atlas $ 7,180,338 $ 7,858,000
First mortgage note payable - see item (1) on page F-22 3,000,000 3,300,000
------------- --------------
Total - this page 10,180,338 11,158,000
F-20
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 6 - Notes Payable and Long-Term Debt - Continued
June 30,
2002 2001
------------- --------------
Total - from previous page $ 10,180,338 $ 11,158,000
$3,600,000 term loan with a bank used for the purchase of Westland.
This agreement is in forbearance at June 30, 2002. The agreement
provides for outstanding borrowings to bear interest at a rate
equal to the bank's prime rate (which was 4.75% at June 30, 2002)
plus 1 1/4% payable monthly. Minimum principal payments on the
outstanding borrowings are due as follows: February 2003 -
$900,000; February 2004 - $900,000; and February 2005 -
$1,260,000. Borrowings under this agreement are secured by
substantially all assets of the Company 3,060,000 3,600,000
Subordinated term loans with the former owner of Westland. The
agreements provide for outstanding borrowings to bear interest at
a rate of 9.25%. Principal payments were to commence in five
equal installments beginning in February 2001, the term notes are
unsecured (see note 15) 2,750,000 2,750,000
Other - 33,899
------------- --------------
Total 15,990,338 17,541,899
Less current portion of long-term debt 12,190,338 9,831,899
------------- --------------
Total debt reflected as long-term $ 3,800,000 $ 7,710,000
============= ==============
F-21
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 6 - Notes Payable and Long-Term Debt - Continued
(1) In January 1997, the Company borrowed $4,500,000 in
connection with variable rate industrial revenue bonds issued
by The Economic Development Corporation of the County of
Genesee. The note is payable in amounts of $400,000 per year
for fiscal years 2000-2001 and then $300,000 per year through
fiscal 2012. Interest is payable quarterly and is set weekly by
the remarketing agent at a level which allows the bonds to be
sold at par. The interest rate at June 30, 2002 was
approximately 4%. To enhance the marketability of the bonds and
guarantee payment of the bonds on the Company's behalf, a bank
has issued its Letter of Credit through December 2001, whereby
a fee of 1% is charged annually. Also, the bonds are secured by
a first mortgage note secured by substantially all assets of
the Company.
The amounts of long-term debt coming due during the five years ending
June 30, 2007 and thereafter are as follows:
2003 $ 12,190,338
2004 850,000
2005 850,000
2006 300,000
2007 300,000
Thereafter 1,500,000
Interest expense for the years ended June 30, 2002 and 2001, amounted
to $1,668,519 and $1,605,164, respectively.
In May 2002, the Company received notice of cancellation by the bank
of their interest rate swap due agreement due to the forbearance
described below which resulted in a loss of $388,000 for the year
ended June 30, 2002.
The Company's revolving credit agreement and term loan with a bank
impose financial levels of tangible capital funds, specified leverage
ratios (debt to equity), and fixed expense coverage. At June 30,
2002, the Company was in forbearance with the bank for the majority
of its financing resulting in all debt associated with the bank to be
classified as current liabilities in the amount of $10,240,338.
Should the Company not be able to find a suitable replacement credit
agreement with another lender the potential exercise of the current
banks rights under default could have a material adverse effect on
the Company's operations including the discontinuance of Company
operations.
F-22
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 7 - Shareholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units
("Units"). (425,000 shares had been previously issued for $25,000).
Each Unit consisted of one share of PTC's common stock, $.001 par
value, and two Redeemable Common Stock Purchase Warrants
("Warrants"). Each Warrant entitled the holder to purchase from PTC
one share of common stock at an exercise price of $5.00 during the
period commencing May 24, 1996, and ending June 24, 2002. The expired
Warrants would have been redeemable at a price of $.01 per Warrant
upon 30 days notice at any time, only in the event that the last sale
price of the common stock is at least $8.50 per share for 20
consecutive trading days ending on the third day prior to date on
which notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are
identical to the Warrants discussed above. No Warrants have been
exercised or granted subsequent to May 23, 1996.
At June 30, 2001, 3,700,000 shares of common stock were reserved for
the issuance upon exercise of the warrants described above.
The Company is authorized to issue 1,000,000 shares of preferred
stock ($.001 par value) with such designations, voting and other
rights and preferences as may be determined from time-to-time by the
Board of Directors. No preferred stock has been issued by the
Company.
Effective as of the close of business on May 4, 2001, the Company's
Common Stock was delisted for trading on the NASDAQ SmallCap Market.
Trading in the Company's Common Stock, Warrants and Units is now
conducted in the over-the-counter markets on the NASD Electronic
Bulletin Board. The OTC Bulletin Board is an inter-dealer automated
quotation system sponsored and operated by the NASD for equity
securities not included in the NASDAQ Stock Market. Such
over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily reflect actual transactions. The delisting could have a
material adverse effect upon the Company in a number of ways,
including its ability to raise additional capital. In addition, the
absence of a trading system may adversely affect the ability of
broker-dealers to sell the Company's Common Stock, and consequently
may limit the public market for such Stock and have a negative effect
upon its trading price. There can be no assurance that the Company's
Common Stock will be relisted on the NASDAQ National Market at any
future date or that such stock will be listed or traded on any market
or trading system.
F-23
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 8 - Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees.
The plan allows for eligible employees to defer a portion of their
salary. In addition, discretionary contributions may be made by the
Company. The Company made no contributions for the year ended June
30, 2001.
PTC adopted a Performance Equity Plan in 1996 to enable the Company
to offer to selected personnel an opportunity to acquire an equity
interest in the Company through the award of incentives such as stock
options, stock appreciation rights and/or other stock-based awards.
The total number of shares of common stock reserved and available for
distribution under the Plan is 530,000 shares. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the Plan.
At June 30, 2002 the Company has selected not to perform a
Black-Scholes valuation of the options granted and outstanding to
management and employees. The lowest strike price of these options
granted to management approximate $1.50 which is considerably above
the Company's share price trading range in the past two years. Given
the strike price is considerably higher the last year's trading
range, relatively short time to maturity, relatively low volatility
in comparison to strike price and thinly traded quantity of the
stock. The Black-Scholes model would indicate only a nominal option
value. Thus, the Company elected to not perform the Black Scholes
analysis of the outstanding options.
A summary of the status of the Company's stock options for the years
ended June 30, 2002 and 2001 are as follows:
Weighted
Average Exercise
Shares Price
------------- -------------
Outstanding and exercisable - beginning 289,167 $ 3.00
Granted - -
Expired - -
Exercised - -
------------- -------------
Outstanding and exercisable - ending 289,167 $ 3.00
============= =============
F-24
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 8 - Employee Benefit Plans - Continued
The following summarizes information regarding stock options outstanding
and exercisable at June 30, 2002 and 2001:
Weighted Average
------------------------------
Options
Outstanding Remaining
Range of and Contractual Exercisable
Exercise Prices Exercisable Life Price
---------------- ----------- ----------- -----------
$ 1.375 - $ 5.00 289,167 2 years $ 3.00
Note 9 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
(liabilities) are as follows:
June 30,
2002 2001
-------------- ---------------
Current
Warranty accrual $ 107,100 $ 107,100
Inventory net realizable value reserve 34,000 51,000
Other 140,900 128,900
-------------- ---------------
Net current deferred tax asset $ 282,000 $ 287,000
============== ===============
F-25
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 9 - Income Taxes - Continued
June 30,
2002 2001
------------- -------------
Non-Current
Depreciation and basis of assets $ (796,000) $ (700,000)
Impairment of intangible assets 570,000 -
Research credit carry forward 1,165,000 935,000
Net operating loss carry forwards 2,145,000 1,915,000
Executive deferred compensation agreement 302,800 302,800
Other 38,700 10,800
Valuation allowance (2,957,500) (1,412,600)
------------- -------------
Net non-current deferred tax asset $ 468,000 $ 1,051,000
============= =============
At June 30, 2002, the Company had aggregated net operating losses
of approximately $6,309,000 for income tax purposes which begin to
expire in 2020. In addition, the Company had tax research credit
carry forwards of approximately $1,165,000, which will begin to
expire in 2012.
For financial reporting purposes, due to prior year operating
losses, and uncertainty in realization the Company has increased
its valuation allowance from $1,412,600 to $2,957,500 against the
net operating loss carry forwards and other deferred tax assets.
The amount of the remaining deferred tax asset considered
realizable could be reduced in the near term if estimates of
future taxable income during the carry forward period are reduced.
The significant components of income tax expense (benefit) is as
follows:
June 30,
2002 2001
------------ -----------
Federal
Current $ (39,672) $ -
Deferred 588,000 (572,000)
------------ -----------
Total income taxes (benefit) $ 548,328 $ (572,000)
============ ===========
F-26
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 9 - Income Taxes - Continued
The reconciliation of income tax computed at the federal statutory rate
(34%) to income tax expense benefit is as follows:
June 30,
2002 2001
------------ -------------
Tax expense benefit at statutory rate $ (1,217,000) $ (1,253,000)
Valuation allowance, tax research credit
valuation and other non-deductible items 1,781,000 699,000
Other - net (15,672) (18,000)
------------- --------------
Total income tax benefit $ 548,328 $ (572,000)
============= ==============
Note 10 - Operating Lease Commitments
The Company entered into a new building leasing agreement in April
2001 with the term beginning July 2001 and ending June 2007 for its
Westland subsidiary. Rent expense for the years ended June 30, 2002
and 2001, totaled $275,486 and $244,862, respectively. Minimum rental
payments under this noncancelable lease, which contains a five-year
renewal option, at June 30, 2002, are as follows:
2003 $ 214,867
2004 214,867
2005 214,867
2006 214,867
F-27
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 11 - Export Sales
A breakdown of export sales, based on shipment destination, is as
follows:
June 30,
2002 2001
-------------- ---------------
United States $ 19,053,264 $ 21,313,623
France 1,217,595 -
Brazil 1,569,391 -
China 1,464,331 1,109,200
Mexico 769,624 1,371,605
England 443,691 2,746,052
Germany 136,726 1,073,016
Canada 109,586 290,023
Other foreign countries 3,447 88,868
-------------- ---------------
Total $ 24,767,655 $ 27,992,387
============== ===============
Note 12 - Bonus Restructuring
During fiscal 1998, the Company amended the employment agreements of
two executive officers of Atlas that were previously entered into in
connection with the acquisition of Atlas. These amended employment
agreements are identical except that one agreement expired on December
31, 1998, and the other expires on December 31, 2001. Each agreement
requires the executive to devote substantially all of his business
time and attention to the affairs of the Company. Annual compensation
under the remaining agreement is $198,588, subject to cost of living
increases for one of the officers. The amended agreements also provide
that each executive, regardless of future employment, will receive
four annual payments of $207,571 commencing July 30, 1999.
F-28
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 12 - Bonus Restructuring - Continued
Each executive also received 150,000 shares of restricted common stock
of the Company issued during fiscal 1999. The restricted common stock
has been valued at market value less a 30% discount for lack of
marketability. Included in the accompanying consolidated financial
statements as of and for the years ended June 30, 2002 and 2001
related to these amended agreements are the following:
June 30,
2002 2001
------------ -------------
Consolidated Balance Sheet
Current maturities of executive
deferred compensation agreements $ 974,933 $ 630,282
============ =============
Executive deferred compensation
agreements, less current maturities $ - $ 344,651
============ =============
Note 13 - 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.
(see Note 15 for additional legal proceedings)
Note 14 - 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, 2002. The information for each
of these quarters is unaudited. In the opinion of management, all
necessary adjustments, which consist 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 there to, the Independent Auditors Report and
Managements Discussions and Analysis of Financial Condition and
Results of Operations.
F-29
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 14 - Quarterly Results of Operations (Unaudited) - Continued
The Independent Auditors Report contains an explanatory paragraph that
states that our recurring losses from operations, working capital
deficit, and forbearance with our financial lender raise substantial
doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments that
might result from any the outcome of that uncertainty.
Three months ended (In thousands)
=================================================================================================
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2002 2002 2001 2001 2001 2002 2000 2000
========= ========= ======== ========= ======== ======== ======== =========
Revenues $ 5,414 $ 5,837 $ 6,057 $ 7,460 $ 8,531 $ 4,205 $ 6,980 $ 8,276
Cost of revenues 3,604 4,512 4,591 5,554 6,138 3,858 5,687 6,472
Net income (loss) (3,396) (325) (324) (83) (862) (1,231) (728) (293)
Net income (loss) per share:
Basic (1.37) (0.13) (0.13) (0.03) (0.35) (0.50) (0.29) (0.12)
Diluted (1.37) (0.13) (0.13) (0.03) (0.35) (0.50) (0.29) (0.12)
Shares used in computing per
share amounts:
Basic 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475
Diluted 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475
During the fourth quarter ended June 30, 2002 the Company recorded
material forth quarter adjustments for the impairment of intangibles
($2,087,308), the increase in the valuation allowance for deferred
taxes ($588,000) and the recording of additional interest expense
($377,000) related to the unwinding of a swap agreement.
F-30
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 15 - Subsequent Events
Legal Proceedings
In March 2001, the Company filed suit as plaintiff in the State of
Michigan Sixth Judicial District Court in Oakland County, Michigan
against Thomas G. Lee, the former owner and operator of Westland. On
September 3, 2002, PTC settled the lawsuit with Mr. Lee. Under the
settlement terms, PTC and Westland agreed to pay Mr. Lee approximately
$1.4 million in full consideration for approximately $3.2 million
outstanding in principal and accrued interest due to Mr. Lee which was
in dispute. The subordinated security interest of Mr. Lee in assets of
Atlas and Westland as initially negotiated at the time of PTC's
purchase of Westland in February 2000 shall continue. $458,000 of the
$1.4 million was paid to Mr. Lee at settlement closing. The balance of
$950,000 is scheduled to be paid over approximately 40 months from
closing, at $25,000 per month including principal and interest
starting in the third month after settlement closing through the 39th
month after settlement closing. A balance of approximately $5,700 is
scheduled to be paid in the 40th month after settlement closing. In
addition, Westland is scheduled to pay Mr. Lee $50,000 in the 12th and
24th months after settlement closing. All of the settlement amounts
scheduled to be paid as outlined above, approximating $950,000, remain
subordinated to the existing or a successor senior lender under
existing loan agreements and any extensions or modifications. In
addition, Mr. Lee shall be obligated to subordinate his continuing
security interest in the assets of Atlas to a new senior lender.
F-31
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 14, 2002 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 14, 2002
Samuel N. Seidman President and Director (Principal
Executive Officer)
------------------------------------------------------------------------------------------------------
/s/ Michael D. Austin Director October 14, 2002
Michael D. Austin
------------------------------------------------------------------------------------------------------
/s/ Jesse A. Levine Vice President, Secretary, Treasurer October 14, 2002
Jesse A. Levine and Director and Chief Financial
Officer (Principal Financial Officer)
------------------------------------------------------------------------------------------------------
/s/ Robert J. Cuccaro Vice President, Corporate Controller October 14, 2002
Robert J. Cuccaro (Principal Accounting Officer)
------------------------------------------------------------------------------------------------------
/s/ Alan H. Foster Director October 14, 2002
Alan H. Foster
------------------------------------------------------------------------------------------------------
CERTIFICATIONS
I, Samuel N. Seidman, the Chairman, Chief Executive Officer and President of
Productivity Technologies Corp., certify that:
1. I have reviewed this annual report on Form 10-K of Productivity Technologies
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 14, 2002
/s/ Samuel N. Seidman
- ---------------------
Samuel N. Seidman
Chairman, Chief Executive Officer and President
I, Jesse A. Levine, the Vice President, Secretary, Treasurer and Chief Financial
Officer of Productivity Technologies Corp., certify that:
1. I have reviewed this annual report on Form 10-K of Productivity Technologies
Corp.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 14, 2002
/s/ Jesse A. Levine
- -------------------
Jesse A. Levine
Vice President, Secretary, Treasurer and Chief Financial Officer
EXHIBIT INDEX
3.1 Certificate of Incorporation (1)
3.2 Amendment to Certificate of Incorporation filed May 28, 1996 (2)
3.3 By-laws (1)
4.1 Form of Common Stock Certificate of the Company (1)
10.3 1996 Performance Equity Plan of the Company (3)
10.4 Asset Purchase Agreement dated as of February 23, 2000 among WCS
Acquisition Corp., Productivity Technologies Corp., Westland
Control Systems, Inc. and Thomas G. Lee (4)
16.1 Letter regarding change in certifying accountant (5)
21.1 List of Subsidiaries. (6)
99.1 Consolidated balance sheets of the Company at June 30, 1999 and 2000;
consolidated statements of operations for each of the years in the
three year period ended June 30, 2000; consolidated statements of
cash flows for each of the years in the three year period ended
June 30, 2000; and the report of BDO Seidman dated September 12,
2000, except for Note 5 which is as of October 13, 2000, issued in
connection with the foregoing, all as filed in the Company's
annual report on Form 10-K for the year ended June 30, 2000, and
incorporated herein by reference. (6)
99.2 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 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 8-K/A dated May 3, 2000 and
incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 8-K dated July 31, 2001 and
incorporated herein by reference.
(6) Filed herewith.