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Washington, D. C. 20549
FORM 10-K
(Mark One)
| X | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-24212
PRODUCTIVITY TECHNOLOGIES CORP.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3764753
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
509 Madison Avenue, New York, New York 10022
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 843-1480
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of class)
Redeemable Common Stock Purchase Warrants Units, each consisting of one share
- ----------------------------------------- of Common Stock and two Redeemable
(Title of class) Common Stock Purchase Warrants
-----------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 16, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $5,100,000.
As of September 16, 1998, there were 2,425,000 shares of the Registrant's
Common Stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Productivity Technologies Corp. (formerly named Production Systems
Acquisition Corporation), a Delaware corporation ("Company"), was organized in
June 1993 as a Specified Purpose Acquisition Company(R) ("SPAC(R)"), with the
objective of acquiring an operating business ("Target Business") in the
production systems industry ("Production Systems Industry"). The Production
Systems Industry consists of companies which produce the machinery, components
and systems for manufacturing.
On May 23, 1996, the Company acquired Atlas Technologies, Inc. ("Atlas"), a
Michigan-based corporation incorporated in 1974 and engaged in the manufacture
and sale of equipment to automate metal stamping press operations. The
acquisition was accomplished through the merger of a wholly-owned subsidiary of
the Company into Atlas, with Atlas being the surviving company and becoming a
wholly-owned subsidiary of the Company. The Company has no other subsidiaries or
operations.
Business of Atlas
Metal stamping presses are used to form a wide variety of sheet metal
components used in automobiles, appliances and other consumer and industrial
products. Atlas offers a complete range of products within three categories
critical to the operation of metal stamping presses: quick die changing
equipment, press automation equipment, and stacking and destacking equipment,
which, together, have historically accounted for approximately 85% to 90% of its
sales revenues. It also sells material handling product lines and, on a turnkey
basis, fully integrated metal stamping systems comprised of components provided
by Atlas and other manufacturers. During fiscal 1998, Atlas also began producing
and selling finger tooling for use with its and third party transfer press
automation equipment.
Metal stamping involves setting pieces of flat sheet metal over a shaped
die which is set in a press and then lowering a matching die onto the sheet
metal to form it into the desired shape. The sheet metal pieces typically pass
through several stamping press operations, each performing a different shaping
function. Atlas's automation provides the material handling needs of the cut
sheets of steel converted from rolled coils of steel into what the industry
calls blanks. The blanks require stacking so they can be palletized and moved
into the next operation. These blanks are then stationed into a destacker to be
cycled one at a time through cleaning and washing stations and then loaded into
the first forming press onto a die. The part moves from one die station to
another within a multi-station transfer press or between presses within a tandem
line of presses until it reaches its desired shape. To change the production of
a different desired part the dies within the press must be changed over. These
dies can weigh 5 to 50 tons. To assist in storage and retrieval of these dies or
other heavy loads, Atlas automated storage and retrieval equipment facilitates
the staging of the die for the moving and change-over of the press line by use
of the Atlas automatic die change carts.
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 the manufacturers of such products to increase the
flexibility and efficiency of the machinery used in their manufacture. The
presses must accommodate rapid changes in production schedules and produce
profitable batch runs of varying sizes. Equipment such as that made by Atlas is
important to meet the needs of the manufacturers.
Sales of Atlas products have principally been to two customer segments -
automobile and automotive parts manufacturers, and appliance manufacturers.
Other customers include steel service centers and manufacturers of garden and
lawn equipment, construction earth moving equipment, office furniture, heating,
air conditioning and ventilation (HVAC) equipment and aircraft. In Atlas's 1996,
1997 and 1998 fiscal years, the automotive segment accounted for approximately
86%, 90% and 90% of sales, respectively, and appliance manufacturers accounted
2
for approximately 8%, 3%, and 0.5% respectively. In fiscal 1998, sales to the
construction equipment industry accounted for approximately 8% of total sales.
For such fiscal years, sales by Atlas to General Motors Corporation represented
10%, 12%, and 27% respectively, sales to Chrysler Corporation represented 13%,
3%, and 10%, respectively, and sales to The Ford Motor Company represented 11%,
9%, and 14% respectively, of total sales. Sales are predominantly in the United
States and Canada but, in recent years, Atlas has targeted sales efforts in
Mexico, Europe and Asia. International sales for the 1996, 1997 and 1998 fiscal
years represented approximately 13%, 20%, and 30% of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices in Atlanta,
Illinois and at its headquarters in Fenton, Michigan; commissioned sales
representatives; and original equipment manufacturers (OEMs) specializing in
metal presses and related equipment. Order backlogs were approximately
$18,200,000, $19,000,000, and $17,000,000 at June 30, 1996, 1997 and 1998,
respectively.
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 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. Generally, there is a large number of suppliers
that are capable of providing the materials and components used by Atlas.
Atlas personnel perform applications engineering, product design or
customization, research and development, procurement, fabrication, machining,
assembly, testing, shipping and installation of the products and systems it
sells. In 1993, Atlas began implementing a continuing program to achieve greater
standardization in the engineering and design of its products. To date, the
program has resulted in faster order fulfillment and production, and improved
fabrication. Atlas believes that significant cost-reducing improvements can
still be made in the manufacturing process, particularly from further
standardization and reduction of custom engineering.
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's 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.
Atlas's transfer press automation equipment is sold by it 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 significantly 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
retrofitted with automation and die change equipment. Transfer presses require
devices to hold the part during transfer. This is accomplished by lifting the
sheet metal part with suction or vacuum cups or by lifting from its supporting
corners. Transfer tooling, known as "fingers," are the extension arms and
support devices used to reach into the die and lift the part so it can be
transferred into the next die and nested with precision and speed. Atlas has
provided its own patented tooling, along with customer specified tooling in many
of its transfer applications, since the inception of the FLEX 5000(R). Atlas has
also designed special automated methods to accomplish complete line tooling
change-over when used in conjunction with the Atlas FLEX 5000(R). This method of
change-over increases part transfer accuracy and change-over uptime. Atlas has
also made improvements to its transfer tooling fingers and accessories,
increasing its overall market and sales capabilities.
3
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 or steel
service centers. Destacking equipment feeds the flat blanks into the press and
includes functions to scrub or roll-coat the metal blanks and to queue them to
assure a steady flow.
Competition
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, Herwo Die Changing, Orchid, Hirotec
(Japan), Verson All Steel Press, a division of Allied Products Corp., HMS
Products Co., Automatic Feed 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, strong engineering and distribution networks and comprehensive
manufacturing capabilities.
Trademarks and Patents
Atlas has an agreement to use components in the FLEX 5000(R) transfer press
automation that it manufactures and sells that are based on patents owned by the
estate of Mr. John Maher. The agreement grants Atlas an exclusive worldwide
license to use the patents for a term equal to the life of the patents,
including any extensions as a result of modifications to the patents. Currently,
the patents registered with the United States Patent and Trademark Office expire
on various dates between June 23, 2005 and June 21, 2007. Atlas is obligated to
pay the estate of Mr. Maher a royalty based on a portion of the sales price of
the FLEX 5000(R) transfer press automation as it relates to the value of the
patented components. For Atlas's fiscal years ended June 30, 1996, 1997, and
1998 Atlas expensed approximately $320,000, $270,000, $202,000, respectively, in
license fees under this agreement. The agreement also provides that the estate
of Mr. Maher is responsible for defending Atlas for any patent infringements.
Atlas believes that the terms of the agreement with the estate of Mr. Maher are
industry competitive. A patent infringement suit has been brought by Atlas and
the estate of Mr. Maher against Orchid International Group, Inc. See Item 3 --
Legal Proceedings, below.
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)."
Atlas owns and has registered with the United States Patent and Trademark
Office four patents, of which one is for a power and free roller conveyer, one
is for certain apparatus and methods for forming workpieces, one is for magnetic
sheet separator constructions and one is for the transfer arm for supporting
workpieces. Atlas also has registered patents for the first of these in Canada
and Great Britain. Atlas has applied for three United States patents for
over-under conveyor, finger tooling for transfer press automation equipment and
laser blank pallet carriers.
Management and Employees
Ronald M. Prime is currently the Chief Executive Officer emeritus of Atlas.
Mr. Prime will retire from Atlas on December 31, 1998. Mr. Prime has been
responsible for the overall operations of Atlas, managing the project
management, engineering, manufacturing, controls, service, purchasing, and
finance departments. Mr. Prime has also been active in product development, as
well as the establishment and improvement of Atlas's project management,
engineering, manufacturing, and financial processes. From 1972 to 1984, Mr.
Prime was President of Fluid & Electric Control Co., founding that business and
growing it from one person to 150, one of the largest industrial controls
contractors in Michigan. That company was merged with a predecessor of Atlas in
1984. From 1970 to 1972, Mr. Prime held various technical and controls
engineering positions.
4
Michael D. Austin is currently the President and Chief Executive Officer of
Atlas and has been the principal officer of Atlas, chiefly responsible for
directing the sales of the company, for determining the overall product
directions, managing product research and development, and managing the
application engineering departments. From 1977 to 1996, Mr. Austin held various
other management positions at Atlas, including Vice President of Operations,
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.
Neither Mr. Prime nor Mr. Austin currently performs any policy-making
functions for the Company.
Atlas employs approximately 200 persons. None of these persons is a member
of a union. Atlas believes that its employee relations are good. Atlas believes
that its location in Michigan is beneficial in its access and ability to hire
qualified personnel because of the highly industrialized nature of the area.
ITEM 2. PROPERTIES
Atlas operates from manufacturing facilities in Fenton and Linden,
Michigan. It has approximately 94,200 square feet of space in two facilities
which it owns in Fenton. One of the Fenton facilities, newly 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. Both Fenton facilities are used for assembly
operations and light and medium machining operations and electrical panel
construction. Project management, engineering and sales offices are also located
in Fenton.
In Linden, Michigan, at a leased location, Atlas has a welding and
fabrication and warehouse facility located in approximately 16,300 square feet.
During the fiscal year, Atlas reduced staffing and office space leased in
Atlanta, Georgia.
The principal executive office of Atlas is located at 201 South Alloy
Drive, Fenton, Michigan 48430, and its telephone number is (810) 629-6663.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and the estate of John Maher, the owner of the patent for
the FLEX 5000(R) licensed to Atlas, initiated an action against Orchid
International Group Inc. and Orchid Automation ("Orchid") in the Federal Court
of Canada, Trial Division, claiming infringement and wrongful sale, manufacture
and use by Orchid of the inventions protected by such patent and seeking, among
other relief, a declaration that the patents are valid and have been infringed
by Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). The
defendant has filed an answer denying the material allegations of the complaint
and asserting a counterclaim requesting that the patents be declared invalid.
Discovery activities are presently being undertaken by the parties.
During the third quarter of fiscal 1998, Atlas and the SWVA, Inc.
("SWVA") reached a settlement in connection with an outstanding legal dispute.
SWVA's initial claim under the dispute was for $15,300,000. The settlement
provided for a payment of $700,000 to SWVA, of which $210,000 was paid from
insurance proceeds.
Except for the action against Orchid, neither the Company nor Atlas is
currently involved in any material legal proceedings.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (Symbol: PRAC) and Warrants (Symbol: PRACW) are listed for
trading on the Nasdaq SmallCap Market. The Company's Units (Symbol: PRACU), each
consisting of one share of Common Stock and two Warrants, are quoted on the OTC
Bulletin Board.
The following table sets forth the range of high and low closing bid prices
for the Common Stock and Warrants, as reported by the Nasdaq SmallCap Market,
and for the Units, as reported by the OTC Bulletin Board. There was no material
trading in the Units during the periods reported. 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 System. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions.
Units Common Stock Warrants
High Low High Low High Low
-------- --------- ---------- ----------- --------- ---------
Year ended June 30, 1997:
First Quarter 9 9 6 3/8 4 5/8 1 7/8 1 3/16
Second Quarter 8 3/4 7 1/4 5 3 1/4 1 1/2 1/2
Third Quarter 6 7/8 6 5/8 4 3/8 2 1/2 1 1/4 1/2
Fourth Quarter -- -- 3 1/4 1 3/4 1 3/8
Year ended June 30, 1998:
First Quarter -- -- 4 5/8 1 3/4 1 3/8
Second Quarter 6 5/8 6 3/8 5 3 7/16 1 1/2 5/8
Third Quarter -- -- 5 7/8 3 3/4 1 9/16 1 3/16
Fourth Quarter -- -- 6 7/16 3 1/2 1 3/4 5/8
As of September 30, 1998, the Company had 12 holders of record of its
Common Stock. The Company believes that there are in excess of 500 beneficial
holders of the Company's Common Stock.
The Company has not declared or paid any dividends on its Common Stock
since its inception.
Recent Sales of Unregistered Securities
No securities were issued by the Company during the fiscal year ended June
30, 1998. In September 1998, 150,000 shares of Common Stock were issued to each
of Messrs. Prime and Austin pursuant to agreement reached during the year ended
June 30, 1998. Such shares were not registered under the Securities Act of 1933,
as amended (the "Act"), pursuant to the exemption provided by Section 4(2) of
the Act as transactions by an issuer not involving a public offering.
7
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's
and its predecessor's consolidated financial statements which have been audited
by BDO Seidman, LLP, independent certified public accountants, at June 30, 1998,
1997 and 1996, for the periods July 1, 1995 to May 23, 1996, May 24, 1996 to
June 30, 1996, and for the years ended June 30, 1997 and 1998, and by Dupuis &
Ryden, independent certified public accountants, at June 30, 1995 and 1994 and
for the years then ended. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Report.
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data
The Company Predecessor
------------------------------------- ------------------------------------
July 1
Year Year May 24, 1995 Year Year
Ended Ended to to Ended Ended
June 30, June 30, June 30, May 23, June 30, June 30,
1998 1997 1996 1996 1995 1994
-------- ------- -------- ------- ---------- -----------
Net sales $36,040 $34,438 $ 4,404 $ 31,598 $ 29,077 $ 21,186
Cost of sales 27,562 24,825 3,029 21,773 21,034 16,320
Gross profit 8,478 9,613 1,375 9,825 8,043 4,866
Selling, general and 8,538 7,081 729 6,007 5,119 4,872
administrative expenses
Officers' bonuses 0 711 197 2,117 --- ---
Bonus Restructuring Expense 2,132 --- --- --- --- ---
Income (loss) from operations (2,192) 1,821 448 1,701 2,924 (6)
Net income (loss) (2,012) 593 204 762 2,219 (297)
Basic earnings per share
of common stock ($0.95) $.28 $ .10
Weighted average common
shares 2,125 2,125 2,125
Consolidated Balance Sheet Data
The Company Predecessor
------------------------------------ --------------------
June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995 1994
-------- -------- ----------- -------- ----------
Current assets $15,272 $22,627 $ 18,690 $ 11,423 $ 8,850
Current liabilities 5,470 7,284 13,642 8,321 7,246
Working capital 9,802 15,343 5,048 3,102 1,604
Property, plant and equipment, net 8,289 7,667 4,240 2,517 2,595
Total assets 26,809 33,410 26,023 14,550 11,774
Long-term debt, less current maturities 11,254 15,327 2,228 2,717 1,666
Total liabilities 18,160 23,444 16,650 11,037 8,912
Stockholders' equity 8,649 9,966 9,373 3,513 2,862
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The fiscal year ended June 30, 1998 is the second full year of consolidated
activities for Productivity Technologies Corp. and its wholly-owned subsidiary,
Atlas Technologies, Inc.
Currently, automotive and auto-related suppliers and steel service centers
account for approximately 90% of new orders and receive most of Atlas's recent
marketing efforts. At the same time, Atlas remains familiar and maintains
quoting activity with non-automotive customers, including producers of home
appliances, heating and air conditioning systems, off-road vehicles and
equipment, and other manufacturers which use significant amounts of sheet metal
in their products.
Results of Operations
The Company, on a consolidated basis, incurred a loss of $2,012,350 or
$0.95 per share for the fiscal year ending June 30, 1998 due, in part, to legal
settlements, a bonus restructuring with senior executives of Atlas, and other
charges due to changes in estimates. Significant expenses included the bonus
restructuring plan charge of $2,131,903 in one lump sum rather than over a
period from the present through December 31, 2001, legal settlement and defense
costs approximating $750,000 during the fiscal year, and changes in estimates
resulting in the write down of work-in-process and an increase in allowance for
bad debts approximating $446,800. These charges represented a combined pre-tax
charge of $3,328,741. After imputing a 34% federal tax benefit, the net
after-tax effect of these charges approximated $2,196,969.
Atlas's operating performance before unusual charges was lower in revenues
and earnings margins than expected at the beginning of the year by Atlas
management. Orders which were received, and the delivery dates of the orders,
tended to be concentrated over a shorter period of time, hindering the ability
of Atlas management to schedule production and use labor optimally. This
increased Atlas's costs and reduced profit margins on shipments. Atlas also
experienced a reduction in new orders during the General Motors workers strike
in the summer of 1998. Atlas began to produce orders for GM in the third and
fourth quarters of fiscal 1998, but had to suspend production when GM canceled
orders due to a delay in certain plant expansion plans.
Results of operations for the year ending June 30, 1997 are not fully
comparable to results for fiscal 1996. PTC acquired Atlas on May 23, 1996.
Fiscal 1996 figures include approximately eleven months of unconsolidated Atlas
operations. Consequently, fiscal 1996 data includes only 38 days of consolidated
PTC and Atlas activities.
Sales (Revenue and Cost Recognition)
Sales are recognized using the percentage-of-completion method, which
measures the percentage of contract costs incurred to date and compares these
costs to the total estimated costs for each contract. The Company estimates the
status of individual contracts when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
condition, estimated profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the period the revisions
are determined.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for the fiscal year ending June 30, 1998 were $36,040,278, an
increase of 5% over net sales of $34,437,625 for the fiscal year ending June 30,
1997. Atlas management believes the worldwide customer demand is still strong
for automation to enhance stamping press line production speeds, quality, safety
and unit cost savings. Despite this, Atlas's backlog as of June 30, 1998
approximated $17,000,000, a 10% decline versus the $19,000,000 backlog at June
30, 1997. Atlas management believes the decline in backlog as of June 30, 1998
was temporary, and caused in part by postponements in order placement due to the
GM strike and the delay in capital spending leading up to the completion of the
merger of DaimlerBenz and Chrysler Corp.
9
Cost of products sold for the fiscal year ending June 30, 1998 were
$27,562,608, a level approximating 76% of net sales, compared to $24,824,582, or
72% of net sales, for the 1997 fiscal year. Cost of sales relative to revenues
increased due to a less favorable product mix during fiscal 1998, foreign sales
at lower margins, and to a less efficient use of production and labor resources
necessitated by the higher concentration in required product delivery dates
relative to fiscal 1997. Included in cost of sales during fiscal 1998 were
expenses related to ISO 9000 certification efforts, employee computer and other
training, a change in estimate that resulted in a write down of work-in-process
and finished inventories approximating $447,000, and research and development
costs in connection with the final design phase of new automation and material
handling products.
Gross profits for the year ending June 30, 1998 were $8,477,670 compared to
$9,613,043 in fiscal 1997, a decrease of 12% due to the reasons cited in the
immediately preceding paragraph on cost of sales. Approximately 30% of Atlas's
sales in fiscal 1998 were foreign. In general, Atlas foreign sales during fiscal
1998 were at lower gross margins due to higher costs associated with foreign
marketing efforts, foreign redesign requirements, travel and shipping expenses.
Selling, general and administrative (SG&A) expenses were $8,538,166 in
fiscal 1998 compared to $7,081,273 for fiscal 1997, an increase of 21%. The
increase was primarily due to expenses of approximately $750,000 in connection
with the legal defense and settlement of the SWVA lawsuit, higher commission
expenses related to Atlas's increased volume, and travel and sales related costs
associated with the first full year of Atlas's sales and marketing efforts in
the United Kingdom and China.
The bonus restructuring plan agreed to between Atlas and Messrs. Prime and
Austin, senior executives and former owners of Atlas, during fiscal 1998
resulted in a charge of $2,131,903. Under the bonus restructuring plan, Atlas
agreed to pay to the senior executives the following: (1) 300,000 shares of
common stock restricted from transfer or resale for a period of three years, and
(2) deferred compensation of $1,660,564 which is to be paid in four equal annual
installments in arrears. In addition, $810,000 accrued in previous years under
their employment agreements was agreed to be paid in cash, of which $560,000 is
to be placed in an escrow account. It is expected that part or all of the
balance in the escrow account will be distributed at a later date to the senior
executives, depending upon the future resolution of a dispute between Atlas and
the Internal Revenue Service related to research and experimentation credits
claimed by Atlas for the fiscal years ended June 30, 1991 through 1995. See
"Contingencies" below.
Interest expense during fiscal 1998 was $1,057,725, an increase of 13%
compared to $933,632 for 1997. The increase in interest expense for the period
was due to the first full year of interest payments on the $4,500,000 Industrial
Revenue Bond issued by Atlas in December 1996 for building construction and the
purchase of equipment and other assets.
The net loss during fiscal year 1998 was $2,012,350 compared to 1997 net
income of $592,730. The reasons for the net loss are provided in the above
paragraphs of this section.
The Company's consolidated statement of cash flows indicates net cash
generated in operating activities of $5,503,400 for the fiscal year ending June
30, 1998 which resulted primarily from a reduction in work-in-process and
accounts receivable. Net cash used in investing activities included proceeds
from the sale of a facility in Linden, Michigan which was offset by new
purchases of computers, furniture and equipment in connection with the newer
plant in Fenton, Michigan. The net proceeds generated by operating activities
were used to pay down the bank line of credit and the net effect of cash
financing and usage activity resulted in an increase of cash and equivalents of
$1,328,748 as of June 30, 1998 compared to June 30, 1997.
10
Fiscal Year 1997 (Consolidated) Compared to Fiscal Year 1996
Net sales for the fiscal year ending June 30, 1997 were $34,437,625, a
decrease of 4% over net sales of $36,002,861 for fiscal year 1996. The decrease
resulted primarily from two factors. The first relates to shipments which were
delayed by a customer of Atlas's newly designed destacker. Atlas also
experienced reduced production flow caused by the move to and start-up of the
new facility. Customer demand for automation solutions that enhance production
speeds, quality, safety and provide piece part cost savings remains strong.
Atlas's backlog at June 30, 1997 approximated $19.0 million, a 4% increase over
June 30, 1996 backlog of $18.2 million.
Cost of products sold for the fiscal year ending June 30, 1997 were
$24,824,582, representing 72% of revenues, compared to $24,802,193 or 69% of
revenues, for fiscal year 1996. The increase in cost of sales relative to
revenues was primarily due to Atlas's expensing, during the first two quarters
of fiscal 1997, costs associated with the development of its new destacking
equipment, and additional expenses from increases in foreign sales, including
redesign requirements for foreign orders, project management, foreign travel,
and overseas shipping expenses.
Gross profits for fiscal year ending June 30, 1997 were $9,613,043,
compared to 1996 gross profits of $11,200,668, a decrease of 14%. The decrease
was primarily due to development expenses related to the introduction of large
destacker equipment, costs associated with increasing foreign market sales, and
lower overall sales levels.
For fiscal 1997, selling, general and administrative (SG&A) expenses were
$7,081,273, as compared to $6,736,106 for 1996, an increase of 5%. Changes in
Atlas's SG&A included a reduction in legal expenses of $148,000, a decrease in
bad debt costs of $160,000 and an increase in goodwill amortization of $92,000
associated with the acquisition of Atlas by the Company. SG&A increases included
the Company's corporate administrative and compensation expenses. The Company's
SG&A expenses for the full 12 months of fiscal 1997 were $679,446 compared to
$54,381 for approximately one month during fiscal 1996. The Company's expenses
increased in fiscal 1997 compared to 1996 due to the Company's acquisition of
Atlas in May, 1996. Corporate salaries for employees of the Company were $18,332
in fiscal year 1996 and $223,221 in fiscal year 1997. Corporate salaries in 1996
commenced subsequent to the Company's purchase of Atlas and covered only 38
days, from May 23, 1996 to June 30, 1996. In contrast, the Company's salaries
were paid for the entirety of fiscal year 1997. Accounting fees increased from
approximately $8,000 in fiscal year 1996 to $68,024 in 1997, legal fees
increased from $19,000 in 1996 to $29,960 in 1997, and travel related costs grew
from $13,237 to $60,057. Professional consulting and stock market related fees
increased from $0 and $3,324, respectively, in 1996 to $60,976 and $64,005,
respectively, in fiscal 1997.
Officer bonuses to Ronald Prime and Michael Austin, executives and former
owners of Atlas, amounted to a total of $711,000 during fiscal 1997. The
bonuses, which are superseded in fiscal 1998, were contingent on the Company
achieving certain levels of financial profitability each year and were not
accrued if the Company did not meet the earnings targets. Bonuses during fiscal
1996 were $2,314,000, of which $753,000 was expensed subsequent to January 1,
1996 when the employment agreement between the Company and Messrs. Prime and
Austin commenced.
Interest expense for fiscal year ending June 30, 1997 was $933,632, an
increase of $363,450 relative to interest costs of $570,182 in fiscal 1996. The
significant increase in interest expense for the period was caused by higher
utilization of the line of credit to finance work-in-process, increased accounts
receivable, distribution of officer bonuses and increases in borrowings related
to the issuance of the $4,500,000 Industrial Revenue Bond (IRB) in December
1996. The IRB was issued to pay for Atlas's new plant construction and asset
acquisitions.
Net Income during fiscal year 1997 was $592,730 compared to 1996 net income
of $967,428. The decrease in net income of 39% was primarily due to lower
volume, higher cost of sales, higher interest charges, and increased corporate
overhead absorption for the full 1997 fiscal year.
11
The Company used net cash of $1,389,788 in operating activities in fiscal
1997 to support an increase in customer receivables of $1,123,172 and work in
process of $417,420. Cash used in investing activities of $4,438,338 was
employed to purchase the land, building and equipment for the Company's new
plant. Company financing activities during fiscal 1997 provided $6,159,656 of
cash, and included a $4,500,000 Industrial Revenue Bond offering issued by Atlas
in December 1996 to finance new plant construction, furnishings and
manufacturing equipment. The balance derived from increased borrowings on the
revolving line of credit and a term note to finance a boring mill. The net
result of financing and usage activity resulted in an increase of cash and
equivalents of $331,530 compared to the balance at the end of fiscal 1996.
Liquidity and Capital Resources
The Company believes Atlas's future short term capital expenditure
requirements can be met from the $14,000,000 asset-based revolving line of
credit. Atlas borrowed from $7,200,000 to $12,700,000 under the revolver during
fiscal 1998. Use of the revolver depends on project invoicing. Delays in
converting work in process into customer invoices typically require increases in
revolver borrowings. From time to time, Atlas's bank allows for temporary
increases in the collateral requirements as stated in the current agreement. The
debt to officers under the bonus restructuring plan is subordinated to bank
borrowings and is included in calculating certain debt ratios as required by
covenants in the banking agreements.
The Company's working capital at June 30, 1998 was $9,801,888, compared to
$15,343,022 as of June 30, 1997. The decrease was due primarily to the
$4,100,450 repayment on the revolving credit line and an increase of $1,193,616
in expenditures for property and equipment.
At June 30, 1998, Atlas had borrowings outstanding of $13,306,187 on
various loans and the deferred compensation agreement, of which the current
portion was $615,677. Atlas's loans and deferred compensation agreement were
comprised of the following:
(i) A revolving credit agreement expiring in September 1999, with
increased maximum debt usage of $14,000,000 based on collateral
including Atlas receivables, work-in-process, and other assets.
Interest rates were at the bank prime rate less 1/4% or the 30, 60 or
90 day LIBOR rate plus 230 basis points, at the option of the Company.
Atlas amortized certain asset based debt with quarterly payments of
$37,360. Atlas's outstanding revolving line of credit at June 30, 1998
was $7,199,165.
(ii) A note with First Chicago NBD, N.A. The note balance at fiscal year
end 1998 was $140,077. The note bears interest at the bank's prime
rate. The final note payment is due in January, 2002.
(iii)Atlas had borrowings outstanding of $30,562 from Concord Commercial,
a leasing company, secured by certain Atlas equipment. The borrowings
bear interest of 8.7% per annum. Final payment on the borrowings is
due in October, 1999.
(iv) Atlas had outstanding borrowings of $4,500,000 relating to the
issuance of the Industrial Revenue Bonds. The bonds are state and
federal tax exempt. Consequently, the floating rate of interest is
significantly reduced compared to conventional construction or
real-estate financing. IRB terms are as follows for each fiscal year:
1999-2001 -- $400,000 annual payments plus quarterly interest payments
2002- 2012 -- $300,000 annual payments plus quarterly interest payments
IRB closing costs of $184,409 were incurred and booked as a long term
asset. These are being amortized over the 15 year life of the Industrial Revenue
Bonds.
12
(v) Deferred compensation due to officers of $1,660,564 which is payable
over four equal annual installments in arrears, with the final payment
due in July 2002.
The Company believes that, as a result of the revolving credit agreement,
its short-term credit availability is adequate to support its business
operations at current and near-term anticipated sales levels.
Contingencies
Atlas is undergoing an Internal Revenue Service audit for the fiscal year
ended June 30, 1995. The main area of review is a research and experimentation
tax credit the Company has calculated and filed for over the past six years. The
Company had applied approximately $459,000 of credit towards Federal taxes due
for the fiscal periods ended June 30, 1997, 1996 and 1995 and had a carry
forward of approximately $23,000 expected to be used as a reduction in future
tax payments. Management believes this issue is a matter of interpretation of
the research and experimentation regulations. Management believes that the IRS
may seek a reduction in the amount of credit calculated which may have an
adverse effect to the financial statements of the Company. The Company is
entitled to indemnification up to $560,000 (subject to certain exclusions and
limitations) from the former principal stockholders of Atlas for amounts it may
be required to pay as a result of such audit.
Year 2000 Compliance
The Company is installing an "enterprise resource planning" system at
Atlas, which includes computer systems for its internal accounting and reporting
activities and its manufacturing operations and processes which are "Year 2000
compliant" (which means that such computer systems and other information
technology will accurately process date/time data regardless of whether the date
is in the twentieth or twenty-first century). The acquisition and installation
of the system are expected to cost approximately $340,000, of which $240,000
was expended in fiscal 1998. Because the system is being implemented as an
overall upgrade to Atlas's operations and not specifically to address Year 2000
compliance concerns, management has not estimated the portion of the cost which
may be allocable to Year 2000 compliance. Management has not yet assessed
whether or not the failure of Atlas's internal information technology to be Year
2000 compliant would have a material adverse effect upon the Company's financial
position, liquidity or results of operations although it is confident that
installation and operation of the new system will be accomplished in advance of
December 31, 1999.
The Company is also assessing its vendors, customers, utilities, banks and
others with whom it does business to determine if their failure to be Year 2000
compliant would have a material adverse effect upon the Company or its financial
position, liquidity or results of operations. To date, nothing has come to the
attention of management that leads it to conclude that the likelihood of such
adverse effect reasonably exists. The Company's and Atlas's operations utilize
relatively little electronic data interchange with vendors, customers and other
third parties. However, to the extent that such third parties, particularly
utilities and banks, may not be Year 2000 compliant, the Company and Atlas may
be adversely effected, although the magnitude of such effect cannot be
estimated. The cost to the Company of making its third-party Year 2000
compliance assessment is not expected to be material.
Certain Atlas products contain processors which address and utilize
date/time data. Management believes that such processors incorporated in
equipment sold within the past five years are virtually all Year 2000 compliant.
However, it is not able to determine the compliance status of processors used in
equipment sold in earlier periods with any reasonable degree of certainty.
Although such equipment is beyond the warranty periods applicable to Atlas's
products, it is possible that customers who purchased equipment from Atlas which
is not Year 2000 compliant may nevertheless assert claims against Atlas to
correct the compliance deficiencies or for resulting damages. While management
believes that Atlas would not be legally responsible to such persons, based on
the terms of its purchase orders and warranties, there can be no assurance that
this position would prevail if challenged. Management is unable to estimate the
potential cost that the Company might incur if such claims are made and
successfully sustained or whether or not such cost would have a material adverse
effect upon its financial position, liquidity or results of operations.
13
Recent Accounting Standards
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These statements are effective for
financial periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management has not determined the
impact, if any, these statements may have on future financial statement
disclosures.
Statement of Position (SOP) 98-5, "Reporting on the cost of Start-Up
Activities," was issued in April 1998 and SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June 1998. These statements
are effective in fiscal 2000 and are not expected to have a material impact on
the consolidated financial statements.
Forward-Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the following:
competitive pressures in the industry in which the Company is engaged; an
unfavorable outcome of the IRS audit for the fiscal year ending June 30, 1995,
adverse changes in the Company's banking loan requirements; major fluctuations
in the strength of the U.S. dollar versus international currencies; Year 2000
compliance; and general economic conditions. The Company has no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company as set forth on page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as follows:
Nominee Age Director Position
Since
Ray J. Friant, Jr........ 67 1993 Chairman of the Board
Samuel N. Seidman........ 64 1993 President and Director
Joseph K. Linman......... 59 1993 Director and Vice President
John S. Strance.......... 73 1993 Director and Vice President
Jesse A. Levine.......... 31 1993 Director, Chief Financial
Officer, Vice President,
Secretary and Treasurer
Alan H. Foster........... 72 1993 Director
Alan I. Goldman.......... 61 1993 Director
Ray J. Friant, Jr. has been Chairman of the Board of the Company since its
inception. Between 1988 and 1996, Mr. Friant was Managing Director of Seidman,
Friant, Levine Ltd., a crisis management company, where he specialized in
corporate restructuring and reorganization. In this capacity, he had management
control, and successfully restructured and/or stabilized the operations, of
three public companies, CMI Corp., Mr. Gasket Co. and Advanced Semiconductor
Materials International N.V. ("ASM"), which companies have manufacturing
operations in road building equipment, automotive aftermarket products and
semiconductor production equipment, respectively. Since 1982, Mr. Friant has
also been President and Director of Friant Associates, Inc., specializing in
corporate turnarounds. Mr. Friant was Group Vice President and General Manager
of Gulf+Western Industrial Products Group (IPG) from 1978 to 1982. IPG was a
group of ten companies involved in electronic systems, electronic connectors,
electronic components, electro-mechanical components, wire and cable, cutting
tools and hardware manufacturing. From 1973 to 1978, as an employee of ITT
Corp., Mr. Friant successfully reorganized several multi-million dollar
subsidiaries. In addition, he had a number of special worldwide assignments
involving ITT Corp. headquarters organization, resource allocation for product
development, and management succession. At Western Union Corp. from 1969 to
1972, Mr. Friant developed and implemented the business of teleprocessing at a
non-regulated subsidiary. From 1953 to 1969, Mr. Friant was employed by General
Electric Co. ("GE"), where he was responsible for initiating GE's phased array
radar business, for designing and implementing GE's Program Management System
for managing large, complex military contracts and for the business turnaround
of several unsuccessful organizations. Mr. Friant earned B.S. degrees in both
Mechanical Engineering and Electrical Engineering from West Virginia University.
He also graduated from General Electric's three-year graduate level Advanced
Engineering program and General Electric Management School.
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking and economic consulting firm, and serves as its President. In this
capacity, he has provided a broad range of investment banking services,
including financial analysis and valuations, private financings, and corporate
recapitalizations and debt restructurings. Mr. Seidman also serves as a director
of AMREP Corp., a real estate development corporation listed on the New York
Stock Exchange. He has acted as financial advisor to manufacturers of various
kinds of production systems and components for a number of industries, including
ASM, a multi-national producer of automated equipment and systems for the
production of semiconductors, traded on the Nasdaq National Market. Mr. Seidman
advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national
manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman
was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of
Sharon Steel Corp., an integrated manufacturer of finished steel products, and
served as financial advisor in Chapter 11 to Chyron Corp., a specialized
production systems company for video productions listed on the New York Stock
Exchange, and Mr. Gasket Co., a manufacturer of automobile aftermarket products.
Prior to founding Seidman & Co., Mr. Seidman worked in corporate finance at
15
Lehman Brothers. Mr. Seidman has served as director of numerous public and
private companies, including Penn Engineering Corporation, a manufacturer of
equipment for steel production and metal processing which had been listed on the
American Stock Exchange. Mr. Seidman earned a B.A. degree from Brooklyn College
and a Ph.D. in economics from New York University. He was a Fulbright Scholar
and a member of the graduate faculty of the City University of New York. Mr.
Seidman's nephew, Jesse A. Levine, is Vice President, Secretary, Treasurer and a
Director of the Company.
Joseph K. Linman has been Vice President and a Director of the Company
since its inception. Mr. Linman retired from the Ford Motor Company ("Ford") in
1989 after 25 years with that company, preceded by two years with RCA Defense
Electronics. During his career with Ford, Mr. Linman held numerous managerial
and executive positions in financial, marketing, technical, governmental
relations and external affairs capacities, including Chief Financial Officer of
Ford Latin America, S.A. de C.V., a wholly-owned Ford subsidiary responsible for
automotive operations in Latin America, South Africa and Egypt. Mr. Linman
served as a member of the boards of directors or executive committees of Ford
subsidiary companies in nine countries and as a member of the advisory committee
of the Council of the Americas and the Mexico-U.S. Business Committee that
pioneered the North American Free Trade Agreement. Mr. Linman earned a B.S.
degree from Oregon State University and an M.B.A. degree from Indiana
University.
John S. Strance has been Vice President and a Director of the Company from
its inception. He is currently a private investor. From 1986 to 1992, he was the
President of Star Controls Corporation, a provider of sophisticated
microprocessor control products for process control and automation systems,
which he founded. From 1983 to 1986, Mr. Strance was an independent consultant
assessing technology and market trends and identifying and evaluating companies
for acquisition. From 1980 to 1983, Mr. Strance performed the same services as
Director of Planning and Development for Gulf+Western Manufacturing, responsible
for product development using new technology. From 1954 until 1980, Mr. Strance
held management positions as president of several subsidiaries of Gulf+Western.
Mr. Strance has been granted 13 U.S. letters patent for new products and
production systems. Mr. Strance earned B.S. and M.S. degrees in Mechanical
Engineering from the University of Oklahoma and the Carnegie Institute of
Technology, respectively.
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company
since its inception, Chief Financial Officer since June 1995 and a Vice
President since May 1996. Since January 1992, Mr. Levine has been Vice President
and then Senior Vice President of Seidman & Co., Inc., specializing in financial
and business analysis, corporate finance, private placements and corporate
advisory services. From January 1991 to December 1991, Mr. Levine was Contracts
Administration Manager of The Newman Group Computer Services Corp., Inc., a
computer systems supplier. Previously, Mr. Levine served as a commercial credit
analyst for Society Bank, Michigan. Mr. Levine earned a B.A. degree in economics
from the University of Michigan and has been elected a chartered financial
analyst. Samuel N. Seidman, the President of the Company, is Mr. Levine's uncle.
Alan H. Foster has been a Director of the Company since its inception.
Since 1986, he has been an Adjunct Professor of Finance and Corporate Strategy
at the University of Michigan. In conjunction with the University of Michigan
School of Engineering, Mr. Foster is engaged in the study of the future of
"agile machines." Since 1978, Mr. Foster has been the principal of A.H. Foster &
Company, a consulting firm which serves as a consultant in corporate finance to
foreign governments and domestic and international clients. Currently, Mr.
Foster is a director of Code-Alarm, Inc., a manufacturer of automobile security
systems traded on the Nasdaq National Market. For the last 12 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.
16
Alan I. Goldman has been a Director of the Company since its inception.
Since 1985, Mr. Goldman has been self-employed as an investment banker and
management consultant, specializing in mergers and acquisitions, private
placements and business and organization consulting. From 1975 to 1985, Mr.
Goldman was Senior Vice President, Finance and Chief Financial Officer of
Management Assistance, Inc., a multi-national computer manufacturing, marketing
and maintenance company and a purchaser and user of productions systems and
components. From 1970 to 1974, Mr. Goldman was Vice President, Finance,
Treasurer and Chief Financial Officer of Interway Corporation, an international
company engaged in trailer and container leasing and fleet management. Mr.
Goldman is presently a director of Substance Abuse Technologies, Inc. Mr.
Goldman earned a B.A. degree from Cornell University and an M.B.A. degree from
New York University.
The Company's Board of Directors is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of office of the first class of directors,
consisting of Messrs. Goldman and Levine, will expire at the annual meeting of
stockholders to be held during the 2001 fiscal year; the term of office of the
second class of directors, consisting of Messrs. Friant and Strance, will expire
at the annual meeting of stockholders to be held during the 1999 fiscal year;
and the term of office of the third class of directors, consisting of Messrs.
Seidman, Linman and Foster, will expire at the annual meeting of stockholders to
be held during the 2000 fiscal year.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires officers, directors and persons
who beneficially own more than 10% of a registered class of equity securities of
the Company ("10% stockholders") to file reports of ownership and changes in
ownership with the Commission. Officers, directors and 10% stockholders also are
required to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms furnished to it,
and written representations that no other reports were required, the Company
believes that during the fiscal year ended June 30, 1998, each of its officers,
directors and 10% stockholders complied with the Section 16(a) reporting
requirements.
ITEM 11. EXECUTIVE COMPENSATION
In November 1997, the Board of Directors of the Company approved the
following annual salaries for its executive officers, effective as of December
1997: Chairman (presently Mr. Friant), $40,000; President (presently Mr.
Seidman), $65,000; Chief Financial Officer, Secretary and Treasurer (presently
Mr. Levine), $40,000; and Vice Presidents (presently Messrs. Linman, Strance and
Levine) $15,000. Such salaries are payable in equal monthly installments. An
officer holding more than one office will receive only the salary of the highest
paying office. All of such officers, in their capacities as directors,
participated in the deliberations of the Board of Directors concerning executive
officer compensation. The Board also approved fees of $12,000 per year for each
director who is not an employee of the Company (presently Messrs. Foster and
Goldman), which is payable in equal quarterly installments. In addition,
non-employee directors and officers other than Messrs. Friant and Seidman will
be paid at the rate of $500 to $1,000 per day, as determined by the Chairman and
the President, for actual days spent by them in consulting or other special
assignments for the benefit of the Company or its subsidiaries. Officers and
directors are also eligible for other compensation and benefits as may be
approved by the Board from time to time, including benefits under the Company's
1996 Performance Equity Plan which was adopted by the stockholders of the
Company on May 21, 1996. On July 30, 1996, the Board of Directors awarded
options under such plan to the Company's officers as follows: - Messrs. Friant
and Seidman - 70,833.33 shares each; Messrs. Linman and Strance - 42,500 shares
each; Mr. Levine - 28,333.33 shares. Such options are exercisable until July 30,
2001, at an exercise price of $5.00 per share. In November 1997, Messrs. Foster
and Goldman each were granted 10,000 options and Mr. Levine was granted 20,000
options, all of which are exercisable until November 2002 at an exercise price
of $4.125 per share.
The Company has no employment agreements with its executive
officers, each of whom presently serves at the discretion of the Board of
Directors.
17
Atlas Employment Agreements
Under the bonus restructuring plan, Messrs. Ronald M. Prime and Michael D.
Austin have entered into employment agreements with Atlas under which they serve
as the Chief Executive Officer Emeritus and Chief Executive Officer and
President of Atlas, respectively.
The employment agreements with Messrs. Prime and Austin are identical
except that the term of Mr. Prime's agreement will terminate on December 31,
1998 and that of Mr. Austin will terminate on December 31, 2001. Each agreement
requires the executive to devote substantially all of his business time and
attention to the affairs of Atlas. The agreements provide for base salaries of
$198,588 per year subject to cost-of-living increases for Mr. Austin after
December 31, 1998, for six weeks vacation per year, reimbursement of business
expenses, use of an automobile and mobile telephone, medical and life insurance
benefits and other benefits generally made available to other employees. The
agreements also provide that each executive, regardless of future employment,
will receive four annual payments of $207,571 commencing July 30, 1999. The
executives each were also issued, during fiscal 1999, 150,000 shares of
restricted Common Stock of the Company, which has been valued in the fiscal 1998
financial statements at market value less a 30% discount for lack of
marketability.
Each employment agreement also contains provisions restricting the
disclosure of confidential information and non-competition covenants.
18
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Name and Principal Position Period Salary ($) Options (#)
- ---------------------------------- -------------- ---------- --------------
Samuel N. Seidman, President & CEO 7/1/97-6/30/98 75,000 ---
7/1/96-6/30/97 65,000 70,833
7/1/95-6/30/96 6,250 ---
AGGREGATE YEAR-END OPTION VALUES
(June 30, 1998)
Number of unexercised options at Value of unexercised in-the-money options at
fiscal year-end(#) fiscal year-end($)
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ------------------- ------------------- ------------------- ---------------------------
Samuel N. Seidman 70,833 --- --- ---
19
Stock Price Performance Comparison
The following table compares cumulative total return of the Company's
Common Stock (symbol PRAC) with the cumulative total return of (i) the Standard
& Poor's Midcap 400 index ("S&P Index") and (ii) an industry peer group index
("Peer Index") consisting of six other publicly held production tooling
manufacturers. The table assumes $100 was invested on July 6, 1994 (the date the
Common Stock began trading on the OTC Bulletin Board) in shares of Common Stock,
stocks comprising the S&P Index and stocks comprising the Peer Index and the
reinvestment of dividends. The Peer Index includes Bethlehem Corp., DeVlieg
Bullard, Inc., Farrell Corp., Hurco Companies, Inc., Monarch Machine Tool Co.
and Thermwood Corp., equally weighted.
Date Peer Index S&P Index PRAC
------- ------------ ---------- -------
7/6/94 $100.00* $100.00* $100.00
6/30/95 119.71 119.65 106.25
6/30/96 147.43 143.83 132.81
6/30/97 128.44 180.49 65.63
6/30/98 128.57 229.11 100.00
- ---------------------
* 6/30/94.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of October 5, 1998 by (i) each
stockholder known by the Company to be beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company and (iii) all
directors and officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Number Percentage
Name of Beneficial Owner of Shares Beneficially Owned
- -------------------------- ----------- ------------------
Ray J. Friant, Jr.................. 218,083(1) 8.7%
30 Boxwood Drive
Convent Station, New Jersey 07960
Samuel N. Seidman.................. 217,083(1) 8.7%
520 Madison Avenue
New York, New York 10022
Joseph K. Linman.................. 114,250(1) 4.6%
John S. Strance................... 113,250(1) 4.6%
Jesse A. Levine................... 91,583(1) 3.7%
Alan H. Foster.................... 31,250 1.3%
Alan I. Goldman.................... 36,250 1.5%
All Officers and Directors
as a group (7 persons).......... 821,749(1) 29.7%
Ronald M. Prime................... 163,000 6.7%
6438 Brewer
Flint, Michigan 48507
Michael D. Austin................. 236,900 9.7%
3246 Fieldstone Drive
Flushing, Michigan 48433
- -----------------------
(1) Includes shares of Common Stock issuable upon immediately exercisable
Warrants and options as follows: Mr. Friant--91,833 shares; Mr.
Seidman--90,833 shares; Mr. Linman--46,500 shares; Mr. Strance--44,500
shares; Mr. Levine--48,333 shares; Mr. Foster - 10,000 shares; Mr. Goldman
- 10,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company office space, as well as certain office, administrative and secretarial
services as may be required by the Company. The Company paid Seidman & Co., Inc.
$5,000 per month for such services until May 22, 1996, including $8,000 during
the three months ended June 30, 1996. During the fiscal years ended June 30,
1998 and 1997, the Company paid Seidman & Co., Inc. approximately $40,000 in
each year for such services. Samuel N. Seidman, a director and President of the
Company, is President of Seidman & Co., Inc., and Jesse A. Levine, a director,
Chief Financial Officer, Vice President, Secretary and Treasurer of the Company,
21
is Senior Vice President of Seidman & Co., Inc. Seidman & Co., Inc. receives
reimbursement for any out-of-pocket expenses incurred in connection with the
Company's business. There is no limit on the amount of such out-of-pocket
expenses and there has not been nor will there be any review of the
reasonableness of such expenses by anyone other than the Company's Board of
Directors, which includes persons who have received, and may seek,
reimbursement.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements of the Company and Atlas listed in Item
8 are submitted as a separate section of this report.
2. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits as required by Item 601 of Regulation S-K:
Exhibit No. Description
3.1 Certificate of Incorporation(1)
3.1.1 Amendment to Certificate of Incorporation filed May 28, 1996(2)
3.2 By-laws(1)
4.1 Form of Common Stock Certificate of the Company(1)
4.2 Form of Warrant Certificate of the Company(1)
4.3 Unit Purchase Option between GKN Securities Corp. and the
Company(1)
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company(1)
10.5 Letter Agreement between Seidman & Co., Inc. and the Company
regarding administrative support(1)
10.6 Agreement of Merger dated as of December 18, 1995 (without
schedules or exhibits)(3)
10.6.1 Amendment to Agreement of Merger dated December 18, 1995(3)
10.7.1 Employment Agreement dated July 22, 1998 between Atlas
Technologies, Inc. ("Atlas") and Ronald M. Prime(5)
10.8.1 Employment Agreement dated July 22, 1998 between Atlas
Technologies, Inc. and Michael D. Austin(5)
10.9 1996 Performance Equity Plan of the Company(4)
10.10 Agreement dated July 22, 1998 by and between the Company,
Ronald M. Prime, Michael D. Austin and Atlas Technologies,
Inc.(5)
10.11 Tax Escrow Agreement dated July 22, 1998 by and among the
Company, Atlas Technologies, Inc., Ronald M. Prime, Michael D.
Austin and NBD/First of Chicago(5)
22 Subsidiaries of the Company(5)
27 Financial Data Schedule (filed electronically only)(5)
- -----------------------------
(Footnotes on next page)
23
- -----------------------------
(1) Filed as Exhibit to Registration Statement on Form S-1, No. 33-78188, and
incorporated herein by reference.
(2) Filed as Exhibit to Report on Form 8-K (Event dated May 23, 1996) and
incorporated herein by reference.
(3) Filed as Exhibit to Report on Form 8-K (Event dated December 18, 1995) and
incorporated herein by reference.
(4) Filed as Exhibit to Report on Form 10-K for fiscal year ended June 30, 1997
and incorporated herein by reference
(5) Filed herewith.
(b) During the last quarter of the period covered by this Report, the
Company did not file any reports on Form 8-K.
24
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Index
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations of The Company
and Statement of Operations of the Predecessor F-6
Consolidated Statements of Stockholders' Equity of The
Company and Statement of Stockholders' Equity of
the Predecessor F-7
Consolidated Statements of Cash Flows of The Company
and Statement of Cash Flows of the Predecessor F-8
Notes to Financial Statements F-10
Schedule II - Valuation and Qualifying Accounts F-25
F-1
Report of Independent Certified Public Accountants
Productivity Technologies Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiary ("The Company"), as of June 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended and for the period May 24, 1996 to June 30,
1996 (collectively, the "Successor period"). We have also audited the statements
of operations, stockholders' equity and cash flows of the Predecessor (see Note
1) for the period July 1, 1995 to May 23, 1996 ("Predecessor period"). We have
also audited Schedule II. These financial statements and Schedule II are the
responsibility of the Companies' managements. Our responsibility is to express
an opinion on these financial statements and Schedule II based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
the schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, all of the outstanding stock
of the Predecessor was sold in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the periods after the acquisition is presented on a different cost basis
than that for the period before the acquisition and, therefore, is not
comparable.
F-2
In our opinion, The Company's consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Productivity Technologies Corp. and Subsidiary at June 30, 1998 and 1997, and
the results of their operations and their cash flows for the Successor period in
conformity with generally accepted accounting principles. Further, in our
opinion, the Predecessor's financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Predecessor for the Predecessor period, in conformity with generally
accepted accounting principles.
Also, in our opinion, Schedule II presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
CERTIFIED PUBLIC ACCOUNTANTS
Troy, Michigan
August 21, 1998
F-3
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
June 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Assets (Note 6)
Current Assets
Cash $ 2,172,457 $ 843,709
Short-term investments, including accrued interest 482,280 929,204
Contract receivables, net of allowance for doubtful
accounts of $110,000 and $45,500 (Note 3) 5,217,421 9,199,302
Notes receivable 86,415 160,631
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 4) 5,435,957 8,640,731
Inventories 628,481 619,242
Prepaid expenses and other 773,522 675,070
Deferred income taxes (Note 9) 475,000 622,000
Assets held for sale (Note 5) - 937,549
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 15,271,533 22,627,438
- ---------------------------------------------------------------------------------------------------------------
Property and Equipment
Land 591,514 591,514
Buildings and improvements 4,854,799 1,329,113
Machinery and equipment 3,676,415 1,909,879
Transportation equipment 31,500 31,500
Construction in progress - 4,142,725
- ---------------------------------------------------------------------------------------------------------------
9,154,228 8,004,731
Less accumulated depreciation 865,473 337,350
- ---------------------------------------------------------------------------------------------------------------
Net Property and Equipment 8,288,755 7,667,381
- ---------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization
of $237,562 and $113,884 (Note 2) 2,587,164 2,490,842
Other assets 661,936 624,071
- ---------------------------------------------------------------------------------------------------------------
Total Other Assets 3,249,100 3,114,913
- ---------------------------------------------------------------------------------------------------------------
$ 26,809,388 $33,409,732
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
June 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,970,769 $ 2,629,828
Accrued Expenses
Executive bonus agreement (Note 14) 810,000 1,254,842
Commissions payable 482,512 437,185
Payroll and related withholdings 240,329 271,930
Other 770,096 811,220
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 4) 580,262 1,165,271
Current maturities of long-term debt (Note 6) 615,677 714,140
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 5,469,645 7,284,416
Deferred Income Taxes (Note 9) - 832,000
Executive Deferred Compensation Agreement (Note 14) 1,436,383 -
Long-Term Debt, less current maturities (Note 6) 11,254,127 15,327,253
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 18,160,155 23,443,669
- ----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11 and 14)
Stockholders' Equity (Notes 7 and 8)
Common stock; $.001 par value, 20,000,000 shares
authorized and 2,125,000 issued and outstanding 2,125 2,125
Common stock to be issued (Note 14) 695,520 -
Additional paid-in capital 9,177,488 9,177,488
Retained earnings (deficit) (1,225,900) 786,450
- ----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 8,649,233 9,966,063
- ----------------------------------------------------------------------------------------------------------------
$ 26,809,388 $33,409,732
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Operations of The Company
and Statement of Operations of the Predecessor
The Company Predecessor
--------------------------------------------------- ----------------
Year Ended Year Ended May 24, to July 1, 1995
June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 36,040,278 $ 34,437,625 $ 4,404,192 $ 31,598,669
Cost of Sales 27,562,608 24,824,582 3,029,113 21,773,080
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit 8,477,670 9,613,043 1,375,079 9,825,589
Selling, General and
Administrative Expenses (Note 12) 8,538,166 7,081,273 729,141 6,006,965
Officers' Bonuses (Notes 2 and 14) - 710,946 197,290 2,117,251
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations Before
Bonus Restructuring Expense (60,496) 1,820,824 448,648 1,701,373
Bonus Restructuring Expense (Note 14) 2,131,903 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations (2,192,399) 1,820,824 448,648 1,701,373
- ------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (1,057,725) (933,632) (57,331) (512,851)
Interest income 141,707 134,312 20,274 33,837
Gain (loss) on disposal of assets (Note 5) 89,628 - - (2,976)
Miscellaneous 56,439 21,226 (41,744) 151,198
- ------------------------------------------------------------------------------------------------------------------------------
Total Other Expense (769,951) (778,094) (78,801) (330,792)
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (2,962,350) 1,042,730 369,847 1,370,581
Income Tax Expense (Benefit) (Note 9) (950,000) 450,000 165,000 608,000
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (2,012,350) $ 592,730 $ 204,847 $ 762,581
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share (Note 1) $ (.95) $ .28 $ .10
- ------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share (Note 1) $ (.95) $ .28 $ .10
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Stockholders' Equity of The Company
and Statement of Stockholders' Equity of the Predecessor
Common Additional Retained Total
Common Stock Stock To Paid-In Earnings Stockholders'
Shares Amount Be Issued Capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1995 (Predecessor) 25,683 $ 25,683 $ - $ 73,465 $ 3,413,733 $ 3,512,881
Distribution to former stockholder
(Note 7) - - - - (700,000) (700,000)
Net income - - - - 762,581 762,581
- ------------------------------------------------------------------------------------------------------------------------------
Balance, May 23, 1996 (Predecessor) 25,683 $ 25,683 $ - $ 73,465 $ 3,476,314 $ 3,575,462
- ------------------------------------------------------------------------------------------------------------------------------
Balance, May 24, 1996 (Company) 1,785,001 $ 1,785 $ - $ 7,351,741 $ (11,127) $ 7,342,399
Reclassification of common stock
subject to possible redemption
(Note 7) 339,999 340 - 1,825,747 - 1,826,087
Net income - - - - 204,847 204,847
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Company) 2,125,000 2,125 - 9,177,488 193,720 9,373,333
Net income - - - - 592,730 592,730
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Company) 2,125,000 2,125 - 9,177,488 786,450 9,966,063
Common stock to be issued (Note 14) - - 695,520 - - 695,520
Net loss - - - - (2,012,350) (2,012,350)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Company) 2,125,000 $ 2,125 $ 695,520 $ 9,177,488 $ (1,225,900) $ 8,649,233
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Cash Flows of The Company
and Statement of Cash Flows of the Predecessor
The Company Predecessor
----------------------------------------------------- -------------
Year Ended Year Ended May 24, to July 1, 1995
June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ (2,012,350) $ 592,730 $ 204,847 $ 762,581
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation 544,990 346,873 27,931 360,726
Amortization 250,829 119,961 12,688 15,235
Provisions for losses on contract receivables 64,500 (117,971) - (68,649)
Inventory net realizable value reserve 80,000 (80,000) - 200,000
Deferred income taxes (685,000) (89,000) 46,000 164,000
(Gain) loss on disposal of assets (89,628) - - 2,976
Changes in operating assets and liabilities
Contract receivables 3,917,381 (1,123,172) (3,565,732) (133,052)
Inventories, prepaid expenses and other (187,691) (415,056) (488,818) 95,028
Costs and estimated earnings in excess of
billings on uncompleted contracts-net effect 2,619,765 (417,420) 1,365,906 (4,037,969)
Accounts payable, accrued expenses
and other 1,000,604 (206,733) 1,271,862 174,259
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Operating Activities 5,503,400 (1,389,788) (1,125,316) (2,464,865)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Expenditures for property and equipment
(including capitalized interest of
$75,699 in fiscal 1997) (1,193,618) (4,554,364) (49,549) (466,828)
Proceeds from sale of property
and equipment 1,054,431 - - 3,400
Proceeds from sale of short-term
investments - net 446,924 36,051 - -
Purchase of Atlas (220,000) - (6,900,000) -
Issuance of notes receivable (200,000) - - -
Collections on notes receivable 109,200 79,975 6,312 219,540
Maturity of U.S. Government securities
deposited in trust fund - - 7,120,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Investing Activities (3,063) (4,438,338) 176,763 (243,888)
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-8
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Cash Flows of The Company
and Statement of Cash Flows of the Predecessor
The Company Predecessor
--------------------------------------------------- ---------------
Year Ended Year Ended May 24, to July 1, 1995
June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net borrowings (payments) - revolving
credit agreement (4,100,450) 262,751 - -
Payments on long-term debt, capital
leases and notes payable (71,139) (222,006) (43,161) (2,072,398)
Proceeds from additions of long-term debt - 5,255,000 - 1,500,000
Net borrowings - line-of-credit - 863,911 589,300 3,990,320
Distribution to former stockholder - - - (700,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Financing Activities (4,171,589) 6,159,656 546,139 2,717,922
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash 1,328,748 331,530 (402,414) 9,169
Cash, at beginning of period 843,709 512,179 914,593 17,253
- ----------------------------------------------------------------------------------------------------------------------------------
Cash, at end of period $ 2,172,457 $ 843,709 $ 512,179 $ 26,422
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Period For
Interest, net of amounts capitalized $ 1,058,114 $ 878,207 $ 57,331 $ 522,637
Income taxes 173,135 827,451 - 570,175
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and
Financing Activities
Retirement of debt with proceeds from the
revolving credit agreement $ - $ 11,036,864 $ - $ -
Construction in progress financed
with accounts payable - 157,000 - -
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-9
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Formation of the Company and Basis of Presentation
Production Systems Acquisition Corporation ("PSAC") was incorporated in June
1993 with the objective of acquiring an operating business engaged in the
production systems industry. PSAC originally selected March 31 as its fiscal
year-end. PSAC completed an initial public offering ("Offering") of common stock
in July 1994 and raised net proceeds of approximately $9.0 million.
In December 1995, PSAC entered into a Merger Agreement with Atlas Technologies,
Inc. ("Atlas") whereby Atlas would become a wholly-owned subsidiary of PSAC.
(The acquisition was consummated May 23, 1996 - see Note 2). Subsequently, PSAC
changed its corporate name to Productivity Technologies Corp. ("PTC"). PTC's
operating results from inception through May 23, 1996 are summarized below (in
thousands):
June 1993
(Inception)
Year Ended Year Ended Through
April 1, 1996 March 31, March 31, March 31,
to May 23, 1996 1996 1995 1994
- ------------------------------------------------------------------------------
Interest income $ 56 $ 503 $ 343 $ -
Operating expenses (54) (266) (250) (2)
Income taxes (3) (132) (31) -
- -----------------------------------------------------------------------------
Net Income (Loss) $ (1) $ 105 $ 62 $ (2)
- -----------------------------------------------------------------------------
The above operating results of PTC are not included in the accompanying
financial statements.
F-10
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
The accompanying consolidated financial statements for the years ended June 30,
1998 and 1997 and the period May 24 to June 30, 1996 include the accounts of PTC
and its wholly-owned subsidiary, Atlas (collectively, "the Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
The accompanying financial statements presented for the period July 1, 1995 to
May 23, 1996 represent the financial statements of Atlas (the "Predecessor").
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery,
equipment, components and engineering services. It operates with two
manufacturing plants, sales and engineering offices. The manufacturing plants
are located in Fenton, Michigan.
Sales of products have principally been to automobile and automotive parts
manufacturers and appliance manufacturers. Other customers include manufacturers
of garden and lawn equipment, office furniture, heating, ventilation and air
conditioning equipment and aircraft. Sales to automotive- related customers have
accounted for the majority of total annual sales. Sales are predominantly in the
United States but, in recent years, the Company has targeted sales efforts in
Mexico, Europe and Asia. Export sales during the twelve months ended June 30,
1998, 1997 and 1996 amounted to approximately 30%, 20% and 13%, respectively, of
annual sales.
Short-term Investments
Short-term investments, representing U.S. Treasury Bills with maturities of
twelve months or less, are carried at cost, which approximates market.
F-11
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect (1) the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements, and (2) revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of contract receivables. The Company attempts to
minimize its credit risk by reviewing all customers' credit histories before
extending credit and by monitoring customers' credit exposure on a continuing
basis. The Company establishes an allowance for possible losses on contract
receivables, if necessary, based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
Fair Values of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, short-term
investments, contract receivables, accounts payable and accrued expenses
approximate fair value because of the short maturity of these items.
The carrying amounts of the revolving credit agreement and long-term debt
pursuant to the Company's bank credit agreements approximate fair value because
the interest rates on the majority of the loans outstanding change with market
rates.
Revenue and Cost Recognition
Contract revenues from fixed price contracts, and the related contract costs,
are recognized using the percentage-of-completion method, measured by the
percentage of contract costs incurred to date to total estimated costs for each
contract. The Company estimates the status of individual contracts when progress
reaches a point where experience is sufficient to estimate final results with
reasonable accuracy.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, repairs
and depreciation costs. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability, and final contract
settlement may result in revisions to costs and income, and are recognized in
the period the revisions are determined.
F-12
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
include mainly raw materials and spare parts.
Property and Equipment
Property and equipment are stated at cost. Beginning May 24, 1996, depreciation
is computed on the straight-line method, generally using the following estimated
useful lives:
Building and improvements 20 - 40 years
Machinery and equipment 3 - 10 years
Transportation equipment 2 - 5 years
Prior to May 24, 1996 depreciation was computed using straight-line and
accelerated methods over the estimated useful lives of the assets.
Intangible Assets
Goodwill, representing the excess of cost over the fair value of net assets
acquired in the acquisition of Atlas, is being amortized over twenty-five years
using the straight-line method.
Warranty
The Company warrants under certain circumstances that its products meet certain
agreed-upon manufacturing and material specifications. The Company records a
warranty liability based on anticipated future claims.
Income Taxes
Income taxes are calculated using the liability method specified by Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes".
Earnings Per Share
Earnings per share reflected in the consolidated statements of operations are
presented in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The following table presents the earnings per share calculations:
Period Ended June 30, 1998 1997 1996
- -----------------------------------------------------------------------------
Numerator for Basic and Diluted
Earnings Per Share
Net income (loss) $ (2,012,350) $ 592,730 $ 204,847
- -----------------------------------------------------------------------------
Denominator for Basic and Diluted
Earnings Per Share
Weighted average shares 2,125,000 2,125,000 2,125,000
- -----------------------------------------------------------------------------
F-13
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
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
(1) there was a net loss in fiscal 1998 and therefore any additional shares
would be antidilutive, and (2) in fiscal 1997 and 1996 the options' exercise
price was greater than the average market price of the common shares.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are evaluated
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment of the Company's long-lived assets has occurred through June 30,
1998.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These statements are effective for
financial periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management has not determined the
impact, if any, these statements may have on future financial statement
disclosures.
F-14
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued in June 1998. These statements
are effective in fiscal 2000 and are not expected to have a material impact on
the consolidated financial statements.
2. Acquisition
On May 23, 1996, PTC acquired all the outstanding shares of Atlas for cash of
$6,900,000, and related acquisition costs of approximately $337,060. During
fiscal 1998, a final purchase price adjustment resulted in $220,000 of
additional goodwill. The acquisition, which was pursuant to a Merger Agreement
dated December 18, 1995, also included certain employment agreements with bonus
arrangements involving the principal shareholders of Atlas (see Note 14).
The acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets purchased
and liabilities assumed based on the estimated fair values at the date of
acquisition. The excess of the final purchase price over the estimated fair
value of net assets acquired of $2,824,726 was recorded as goodwill and is being
amortized on a straight-line basis over twenty-five years.
The total purchase price was allocated as follows:
Working capital $ 2,238,011
Property and equipment 4,218,818
Other assets 363,985
Goodwill 2,824,726
Liabilities (2,188,480)
- ----------------------------------------------------
Purchase Price $ 7,457,060
- ----------------------------------------------------
F-15
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Since the purchase price assigned to the net assets acquired was based on their
estimated fair values at the May 23, 1996 acquisition date, the financial
statements for periods subsequent to May 23, 1996 are presented on a different
cost basis than those for prior periods and, therefore, are not comparable.
Pro forma results of operations, as if the acquisition had occurred July 1,
1995, are unaudited and are reflected below. Pro forma adjustments primarily
include (1) additional depreciation and amortization on the excess purchase
price allocated to property and equipment and goodwill, (2) elimination of
interest income on the portion of PTC's investment in U.S. government securities
deposited in a trust fund and liquidated upon consummation of the acquisition of
Atlas, (3) elimination of management bonuses and professional fees incurred by
Atlas prior to the merger that would not have been incurred in the normal course
of business had it not been stated that the Merger Agreement contemplated the
net worth of Atlas at a specific level at the date of the merger, (4) additional
salaries for PTC's management and additional bonuses to Atlas' senior management
under new employment agreements, and (5) provision for income taxes at an
effective rate of 43%. This pro forma financial data is not necessarily
indicative of the results that would have occurred had the acquisition occurred
July 1, 1995.
Year Ended June 30, 1996
- ----------------------------------------------------------------------------
Net sales $ 36,003,000
Net income 1,409,000
Basic earnings per common share .66
- ----------------------------------------------------------------------------
3. Contract Receivables
The contract receivables consisted of:
June 30, 1998 1997
- ---------------------------------------------------------------------------
Billed
Completed contracts $ 2,816,422 $ 1,458,721
Uncompleted contracts 2,276,987 7,680,830
Unbilled 234,012 105,251
- ---------------------------------------------------------------------------
Total Contracts Receivable 5,327,421 9,244,802
Less allowance for doubtful accounts (110,000) (45,500)
- ---------------------------------------------------------------------------
Total $ 5,217,421 $ 9,199,302
- ---------------------------------------------------------------------------
F-16
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
4. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the
following:
June 30, 1998 1997
- --------------------------------------------------------------------------
Costs incurred on uncompleted
contracts $ 23,105,651 $ 28,753,361
Estimated earnings 7,762,175 10,512,171
- --------------------------------------------------------------------------
30,867,826 39,265,532
Less billings to date 26,012,131 31,790,072
- --------------------------------------------------------------------------
Total $ 4,855,695 $ 7,475,460
- --------------------------------------------------------------------------
The above totals are included in the accompanying balance sheets under the
following captions:
June 30, 1998 1997
- -------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 5,435,957 $ 8,640,731
Billings in excess of costs
and estimated earnings on
uncompleted contracts (580,262) (1,165,271)
- -------------------------------------------------------------------------
Total $ 4,855,695 $ 7,475,460
- -------------------------------------------------------------------------
F-17
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
5. Assets Held For Sale
The land and building held for sale at June 30, 1997 was sold during fiscal 1998
resulting in a gain of approximately $85,000.
6. Long-Term Debt
Long-term debt consisted of:
Year Ended June 30, 1998 1997
- -----------------------------------------------------------------------------
$14,000,000 revolving credit agreement
with a bank. The amount that may be
borrowed under this agreement is limited
to specified percentages of contract
receivables, work in process and property
and equipment of Atlas. The revolving
credit agreement provides for outstanding
borrowings to bear interest at a rate
equal to the bank's prime rate (which was
8.5% at June 30, 1998 and 1997) less
1/4% or the 30, 60, or 90 day LIBOR
plus 230 basis points, at the option of
the Company. In addition, there is a
commitment fee of 1/8% per annum on the
unused portion of the revolving credit
which is payable quarterly. Principal
payments on this agreement are due
quarterly in the amount of $37,360 until
September 30, 1999, at which time the
entire balance is due. Borrowings under
this agreement are collateralized by
substantially all assets of Atlas. The
revolving credit agreement also contains
various financial covenants. The Company
was not in compliance with certain
covenants as of June 30, 1998 and the bank
waived compliance with such covenants as
of June 30, 1998. $ 7,199,165 $ 11,299,615
First mortgage note payable (1) 4,500,000 4,500,000
Other 170,639 241,778
- ------------------------------------------------------------------------------
Total 11,869,804 16,041,393
Less current maturities 615,677 714,140
- -----------------------------------------------------------------------------
Long-Term Debt $ 11,254,127 $ 15,327,253
- -----------------------------------------------------------------------------
F-18
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
(1) In January 1997, the Company borrowed $4,500,000 in connection with
variable rate industrial revenue bonds issued by The Economic Development
Corporation of the County of Genesee. The note is payable in amounts of
$400,000 per year for fiscal years 1999-2001 and then $300,000 per year
through fiscal 2012. Interest is payable quarterly and is set weekly by the
remarketing agent at a level which allows the bonds to be sold at par. The
interest rate at June 30, 1998 was approximately 4.0%. To enhance the
marketability of the bonds and guarantee payment of the bonds on the
Company's behalf, a bank has issued its letter of credit through December
2001. The commission on the letter of credit is 1% annually, and is payable
quarterly. Also, the bonds are secured by a first mortgage note
collateralized by substantially all assets of the Company.
Scheduled maturities of long-term debt for future years ending June 30 are as
follows: 1999 - $615,677; 2000 - $7,496,058; 2001 - $441,004; 2002 - $317,065;
2003 - $300,000 and $2,700,000 thereafter.
7. Stockholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units ("Units").
(425,000 shares had been previously issued for $25,000.) Each Unit consisted of
one share of PTC's common stock, $.001 par value, and two Redeemable Common
Stock Purchase Warrants ("Warrants"). Each Warrant entitles the holder to
purchase from PTC one share of common stock at an exercise price of $5.00 during
the period commencing May 24, 1996, and ending June 24, 2001. The Warrants will
be redeemable at a price of $.01 per Warrant upon 30 days notice at any time,
only in the event that the last sale price of the common stock is at least $8.50
per share for 20 consecutive trading days ending on the third day prior to date
on which notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are identical to
the Warrants discussed above.
At June 30, 1998, 4,210,000 shares of common stock were reserved for (1)
issuance upon exercise of the warrants described above, and (2) for the
securities underlying a purchase option granted the underwriter of the Offering.
This option, which allows the underwriter the right to purchase up to 170,000
Units, is exercisable initially at $7.50 per Unit until June 23, 1999. Each Unit
consists of one share of PTC common stock and two Warrants. The Units issuable
upon exercise of the purchase option are identical to those described above
except that the Warrants contained therein expire June 23, 1999.
No Warrants have been exercised or granted subsequent to May 23, 1996.
The Company is authorized to issue 1,000,000 shares of preferred stock ($.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.
In connection with the May 23, 1996 acquisition of Atlas, a total of 339,999
shares of common stock that were previously subject to possible redemption were
reclassified to permanent equity by the Company.
In accordance with the December 18, 1995 Merger Agreement, a $700,000
distribution was paid to a former shareholder in May 1996.
8. Employee Benefit Plans
Atlas previously sponsored an Employee Stock Ownership Trust (ESOT) for all of
the Company's employees. Atlas elected to contribute $200,000 to the ESOT during
the period ended May 23, 1996. At May 23, 1996, the Company's stock owned by the
ESOT was acquired as part of the purchase transaction. The Company liquidated
the ESOT during fiscal year 1997.
The Company has a 401(k) plan covering substantially all the Company's
employees. The plan allows for eligible employees to defer a portion of their
salary. In addition, discretionary contributions may be made by the Company. The
Company contributed $148,700 for the year ended June 30, 1997. The Company made
no contributions for the year ended June 30, 1998, the period ended May 23, 1996
or for the Predecessor period.
F-19
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
PTC adopted a Performance Equity Plan in 1996 to enable the Company to offer to
selected personnel an opportunity to acquire an equity interest in the Company
through the award of incentives such as stock options, stock appreciation rights
and/or other stock-based awards. The total number of shares of common stock
reserved and available for distribution under the Plan is 330,000 shares.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the Plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income and income per share amounts would
have been the pro forma amounts indicated below:
Year Ended June 30, 1998 1997
- ------------------------------------------------------------------------------
Net income (loss) - as reported $ (2,012,350) $ 592,730
Net income (loss) - pro forma (2,081,456) 259,445
Basic earnings per share - as reported (.95) .28
Basic earnings per share - pro forma (.98) .12
- ------------------------------------------------------------------------------
The fair value of each option grant is established on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions for
1998 and 1997, respectively: dividend yield of 0% for both years; expected
volatility of 68% and 23%; risk-free interest rate of 6.0% and 5.4%; and
expected lives of 2 years for both years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not necessarily indicative of future amounts.
A summary of the status of the Company's stock options is as follows:
Weighted-
Average
Exercise
Shares Price
- ----------------------------------------------------------------------------
Outstanding and exercisable at July 1, 1996 - $ -
Granted 255,000 5.00
Expired - -
Exercised - -
- ---------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1997 255,000 $ 5.00
Granted 40,000 4.13
Expired - -
Exercised - -
- ---------------------------------------------------------------------------
Outstanding And Exercisable at June 30, 1998 295,000 $ 4.88
- ---------------------------------------------------------------------------
F-20
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
The weighted-average grant date fair value of options during fiscal 1998 and
1997 was approximately $1.73 and $1.31, respectively.
The following table summarizes information regarding stock options outstanding
and exercisable at June 30, 1998:
Weighted Average
Options --------------------------
Outstanding Remaining
Range of and Contractual Exercisable
Exercise Prices Exercisable Life Price
- ------------------------------------------------------------------------------
$4.125 - $5.00 295,000 3 years $ 4.88
- ------------------------------------------------------------------------------
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:
Year Ended June 30, 1998 1997
- ------------------------------------------------------------------------------
Current
Accrual for executive bonus agreement $ 237,000 $ 285,000
Research credit carryforward 137,000 218,000
Other 101,000 119,000
- ------------------------------------------------------------------------------
Net Current Deferred Tax Asset $ 475,000 $ 622,000
- ------------------------------------------------------------------------------
Non-Current
Depreciation and basis of assets $ (569,000) $ (715,000)
Executive deferred compensation agreement 488,000 -
Research credit carryforward 119,000 -
Other (38,000) (117,000)
- ------------------------------------------------------------------------------
Net Non-Current Deferred Tax Liability $ - $ (832,000)
- ------------------------------------------------------------------------------
F-21
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Significant components of income tax expense (benefit) are as follows:
The Company Predecessor
-------------------------------------------- --------------
Year Ended Year Ended May 24, to July 1, 1995
June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996
- -------------------------------------------------------------------------------
Federal
Current $ (315,000) $ 481,000 $ 108,000 $ 401,000
Deferred (685,000) (89,000) 46,000 164,000
State
Current 50,000 58,000 11,000 43,000
- ------------------------------------------------------------------------------
Total $ (950,000) $ 450,000 $ 165,000 $ 608,000
- ------------------------------------------------------------------------------
The reconciliation of income tax computed at the federal statutory rate (34%) to
income tax expense (benefit) is as follows:
The Company Predecessor
-------------------------------------------- --------------
Year Ended Year Ended May 24, to July 1, 1995
June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996
- -------------------------------------------------------------------------------
Tax expense
(benefit) at
statutory rate $ (1,007,000) $ 355,000 $ 126,000 $ 466,000
Goodwill
amortization
and other non-
deductible items 62,000 55,000 6,000 70,000
State income taxes,
net of federal
income tax benefit 33,000 38,000 7,000 28,000
Research credit - (40,000) - -
Other - net (38,000) 42,000 26,000 44,000
- -----------------------------------------------------------------------------
Income Tax Expense
(Benefit) $ (950,000) $ 450,000 $ 165,000 $ 608,000
- -----------------------------------------------------------------------------
F-22
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
Atlas has tax research credit carryforwards totalling $256,000 that will begin
to expire in 2008.
10. Major Customers
For the twelve months ended June 30, 1998, 1997 and 1996, the Company's sales to
its major customers (each representing more than 10% of total net sales)
amounted to approximately 50%, 44% and 64% of total annual sales, respectively.
During 1998, there were three major customers representing 27%, 14% and 10% of
total net sales; during 1997 there were three major customers representing 20%,
12% and 12% of total net sales; and during 1996, there were four major customers
representing 30%, 13%, 11% and 10% of total net sales.
11. Contingency
Atlas is undergoing an Internal Revenue Service audit for the fiscal year ended
June 30, 1995. The main area of review is a research and experimentation tax
credit the Company has calculated and filed for over the past six years. The
Company has applied approximately $459,000 of credit toward Federal taxes due
for the fiscal periods ended June 1997, 1996 and 1995 and had a carryforward of
approximately $23,000 expected to be used as a reduction in future tax payments.
Management believes this issue is a matter of interpretation of the research and
experimentation regulations. Management believes that the IRS may seek a
reduction in the amount of credit calculated which may have an adverse effect to
the financial statements of the Company. The Company is entitled to
indemnification up to $560,000 (subject to certain exclusions and limitations)
from the former principal stockholders of Atlas for amounts it may be required
to pay as a result of such audit.
12. Arbitration Settlement
On October 1, 1996, the Company received a "Demand For Arbitration" by a former
customer that alleged, among other issues, a $15,400,000 claim for damages
resulting from a breach of contract and breach of warranties related to the
design and manufacture of certain industrial equipment. During fiscal 1998, a
"Settlement Agreement and Release Of All Claims" was executed. The Company
settled with the former customer for $700,000, of which $210,000 was recovered
from insurance coverage. The net expense of $490,000 has been included in
selling, general and administrative expenses during fiscal 1998.
F-23
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
13. Material Fourth Quarter Adjustments
During the fourth quarter of fiscal 1998, the Company made adjustments which are
material to the fourth quarter results. These adjustments include a $736,000
decrease in the $2,868,000 bonus restructuring expense previously recorded in
the third quarter of fiscal 1998 and the following changes in estimates: (1) a
$381,000 write-off to reduce a cancelled uncompleted contract to its estimated
net realizable value, (2) additional allowances of $145,000 to reduce accounts
receivable and inventory to their estimated net realizable value and (3)
additional reserves of $126,000 for warranties and health insurance based on
anticipated future claims. The third quarter 10-Q will be amended to reflect the
bonus restructuring expense as a fourth quarter transaction.
14. Bonus Restructuring
During fiscal 1998, the Company amended the employment agreements of two
executive officers of Atlas that were previously entered into in connection with
the Merger Agreement (see Note 2). These amended employment agreements are
identical except that one agreement expires on December 31, 1998, and the other
expires on December 31, 2001. Each agreement requires the executive to devote
substantially all of his business time and attention to the affairs of the
Company. Annual compensation under each agreement is $198,588, subject to cost
of living increases for one of the officers. The amended agreements also provide
that each executive, regardless of future employment, will receive four annual
payments of $207,571 commencing July 30, 1999. Each executive will also receive
150,000 shares of restricted common stock of the Company to be issued during
fiscal 1999. The restricted common stock has been valued at market value less a
30% discount for lack of marketability. Included in the accompanying financial
statements as of and for the year ended June 30, 1998 related to these amended
agreements are the following.
Balance Sheet
Executive Deferred Compensation Agreement $ 1,436,383
Common stock to be issued 696,520
- ------------------------------------------------------------------------------
Statement of Operations
Bonus restructuring expense $ 2,131,903
- ------------------------------------------------------------------------------
The superseded employment agreements provided for two bonus calculations based
on earnings of the Company. These bonus calculations were to be in effect
through December 31, 2000 and December 31, 2001, respectively. As of June 30,
1998, there was $810,000 to be paid under these superseded agreements.
F-24
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
- -------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 45,500 $ 64,500 $ - $ 110,000
Inventory net realizable value reserve 120,000 80,000 - 200,000
Warranty reserve 24,078 622,717 (3) (527,605) 119,190
- -------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 $ (78,753) (1) $ (39,218) $ 45,500
Inventory net realizable value reserve 200,000 - (2) (80,000) 120,000
Warranty reserve 25,000 364,823 (3) (365,745) 24,078
- -------------------------------------------------------------------------------------------------------------------------
Period May 24, 1996 to June 30, 1996 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 $ - $ - $ 163,471
Inventory net realizable value reserve 200,000 - - 200,000
Warranty reserve 25,000 11,160 (3) (11,160) 25,000
- -------------------------------------------------------------------------------------------------------------------------
Period July 1, 1995 to May 23, 1996 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 232,120 $ 180,337 (1) $(248,986) $ 163,471
Inventory net realizable value reserve - 200,000 - 200,000
Warranty reserve 25,000 122,756 (3) (122,756) 25,000
- -------------------------------------------------------------------------------------------------------------------------
(1) Accounts deemed to be uncollectible (net of accounts collected that were
previously deducted).
(2) Inventory disposed of, charged to reserve.
(3) Actual warranty charges incurred, charged to reserve.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
October 12, 1998 PRODUCTIVITY TECHNOLOGIES CORP.
/s/ Samuel N. Seidman
By: _____________________________
Samuel N. Seidman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ray J. Friant, Jr. Chairman of the Board October 12, 1998
- ----------------------
Ray J. Friant, Jr.
/s/ Samuel N. Seidman Chief Executive Officer, October 12, 1998
- ---------------------- President and Director
Samuel N. Seidman
Vice President and Director
- ---------------------
Joseph K. Linman
/s/ John S. Strance Vice President and Director October 12, 1998
- ---------------------
John S. Strance
/s/ Jesse A. Levine Vice President, Secretary, October 12, 1998
- --------------------- Treasurer and Director and
Jesse A. Levine Chief Financial Officer
Director
- ---------------------
Alan H. Foster
Director
- ---------------------
Alan I. Goldman