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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended June 30, 2001
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from _______________ to _______
Commission file number 0-24242
PRODUCTIVITY TECHNOLOGIES CORP.
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(Exact name of registrant as specified in its charter)
Delaware 13-3764753
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
201 South Main Street, 8th Floor, Ann Arbor, Michigan 48104
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(Address of Principal Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code (734) 996-1700
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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
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(Title of class)
Redeemable Common Stock Purchase Warrants
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(Title of class)
Units, each consisting of one share of Common Stock
and two Redeemable Common Stock Purchase Warrants
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(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 ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
State the approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant at September 30, 2001: $700,000
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 2001
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Common stock, $.001 par value 2,475,000 shares
Documents Incorporated by Reference: Not applicable
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Productivity Technologies Corp. (the "Company") was incorporated in June
1993 under the name Production Systems Acquisition Corporation with the
objective of acquiring an operating business engaged in the production systems
industry. The Company completed an initial public offering ("IPO") of common
stock in July 1994 and raised net proceeds of approximately $9.0 million. In May
1996, the Company changed its name to Productivity Technologies Corp. and
acquired, through a merger, Atlas Technologies, Inc. ("Atlas") as a wholly owned
subsidiary. On February 23, 2000, the Company purchased, through a wholly owned
subsidiary formed for this purpose, substantially all of the assets of Westland
Control Systems, Inc. ("Westland"). The Company has no other subsidiaries or
operations. The Company, which produces industrial machinery, operates in a
single segment through its Atlas and Westland subsidiaries.
Sales of Atlas products have principally been to automobile and automotive
parts manufacturers and appliance manufacturers. Other customers include steel
service centers and manufacturers of lawn and garden equipment, office
furniture, heating, ventilation and air conditioning equipment, and large
construction equipment. Sales to automotive related customers account for the
majority of sales. Westland's customers participate in the automotive, food
processing, adhesive and sealant, and other industries.
Atlas is a leading innovator and supplier of quick die change, flexible
transfer, and stacking/destacking equipment used to automate automotive and
other metal stamping operations. Atlas operates two manufacturing plants in
Fenton, Michigan and has sales and engineering offices in Michigan, Europe and
China.
Metal stamping presses are used to form a wide variety of sheet metal
components used in automobiles, appliances and other consumer and industrial
products. Atlas offers a complete range of products within three categories
critical to the operation of metal stamping presses: quick die changing
equipment, press automation equipment, and stacking and destacking equipment,
which, together, have historically accounted for approximately 85% to 90% of its
sales revenues. It also sells, on a turnkey basis, fully integrated metal
stamping systems comprised of components provided by Atlas and other
manufacturers. During 1998, Atlas began producing and selling finger tooling for
use with its and third party transfer press automation equipment. During fiscal
2000, Atlas also began to offer standard transfer press cells where Atlas acts
as the systems integrator for its customers.
Metal stamping involves setting pieces of flat sheet metal over a shaped
die, which is set in a press, and then lowering a matching die onto the sheet
metal to form it into the desired shape. The sheet metal pieces typically pass
through several stamping press operations, each performing a different forming
function. Atlas' products stack cut sheet metal blanks for feeding into the
presses, move components from one press station to another within a multi-
station transfer press or between presses within a tandem line of presses,
facilitate the changing of dies on a press and subsequent die handling
operations (storage, retrieval, and maintenance). Certain Atlas products also
handle stamped parts after they have passed through the stamping presses,
functions known as "End-of-Line" applications.
In recent years, the increasing complexity and precision required in
stamped metal components, such as automobile body and appliance parts, coupled
with the large variety of such components necessary to meet consumer
preferences, has required manufacturers of such products to increase the
flexibility and efficiency of the machinery used in their manufacture. The
presses must accommodate rapid changes in production schedules and produce
profitable batch runs of varying sizes. Equipment such as that made by Atlas is
important to meet the needs of the manufacturers.
Westland manufactures custom electrical control panels primarily for use in
production machinery and machine tools utilized in automotive, adhesive &
sealant, food processing, and other industrial applications. Westland operates
one manufacturing plant in Westland, Michigan, which is located less than one
hour from Atlas'
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plants in Fenton, Michigan. Westland's plant comprises approximately 34,000
square feet of manufacturing space and 4,000 square feet of offices. Its
Westland location is centrally located in Southeastern Michigan nearby numerous
machinery manufacturers.
The manufacture of control panels for industrial machinery often occurs in
the latter stages of construction. Machinery typically is first built and
subsequently wired. Machine wiring is conducted through the control panel. While
machine wiring and control panels are manufactured in the latter stages of
machine production, they are essential to effective machinery operation as they
turn stationary metal into functional machines. As a result, control panels are
considered a high value added machinery module.
Management believes the Company has been a leader in the refinement of the
processes by which custom electrical panels are built. In particular, management
believes it has effective internal processes to convert the production of a
custom panel into more of a mass production process. At many stages in the panel
build process, Westland has reduced or eliminated certain steps, which incur
costs or extend production time. Westland also focuses on tight inventory
control. Often, the more expensive panel components are received into the
factory within one to two weeks of when the entire panel will be built, quality
tested, and shipped to the customer, thus reducing inventory carrying costs.
Inventory consignment arrangements also exist for some component and component
classes.
Management believes Westland's processes help its customers. A number of
Westland's customers seek to outsource a substantial portion of their panel
building requirements. Often, machinery builders, which outsource the production
of their control panels, are focused on machinery construction first, while the
outsourcing of panel design and production remains a secondary concern. This can
lead to a situation where panels are required within three to four weeks, rather
than the six to eight weeks which management believes is more typical of the
control panel production industry in general. Westland's streamlined production
processes allow the Company to satisfy the rapid delivery requirements of
customers.
Customers and Marketing
Sales of Atlas products have principally been to two customer markets -
automobile and automotive parts manufacturers, and, to a lesser extent,
appliance manufacturers. Other customers include manufacturers of garden and
lawn equipment, office furniture, heating, air conditioning and ventilation
(HVAC) equipment and aircraft. Westland's products are utilized in machinery for
automotive adhesive and sealant, engine part machining, food processing and
other industrial applications.
In the 1999, 2000 and 2001 fiscal years, automotive industry customers for
the Company accounted for approximately 96%, 91% and 68% of sales, respectively.
For such fiscal years, sales by the Company to General Motors Corporation
represented 14%, 18% and 8%, respectively, sales to DaimlerChrysler Corporation
(formerly Chrysler Corporation) represented 7%, 10% and 8%, respectively and
sales to The Ford Motor Company represented 8%, 16% and 28%, respectively, of
total sales. Sales are predominantly in the United States and Canada but, in
recent years and especially for the second half of fiscal year 2001, the Company
targeted sales efforts in Mexico, Brazil, Europe and Asia. International sales
for the 1999, 2000 and 2001 fiscal years represented approximately 40%, 15% and
28%, respectively, of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Porthcawl, South Wales, U.K., and Beijing,
China; commissioned sales representatives; and original equipment manufacturers
(OEMs) specializing in metal presses and related equipment. Westland's sales are
primarily direct and on occasion it has utilized outside manufacturers' sales
representatives.
The order backlogs were approximately $16.0 million, $13.5 million and
$17.0 million at June 30, 1999, 2000 and 2001, respectively. The Company
believes substantially all of the June 30, 2001 backlog will be produced during
fiscal 2002.
3
Products
Atlas offers critical, high technology products based on proven designs and
engineering, which it believes offer superior technology, engineering and
features to those offered by its competitors. Atlas products are modular and may
be used with existing systems as well as with completely new systems. As a
result of their modular design, a variety of pieces of equipment can be combined
to form an appropriate solution for a customer's metal stamping needs. Virtually
all of its products are manufactured on a made-to-order basis. Because of their
many desirable features, Atlas products are positioned at an above-average price
comparative to its competitors. The raw materials and components used by Atlas
in the manufacturing process are readily available and, generally, there are
numerous suppliers that are capable of providing these materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues to
implement a program to achieve greater standardization in the engineering and
design of its products. To date, the program has resulted in faster order
fulfillment and production, and improved fabrication. Atlas believes that
significant cost-reducing improvements can still be made in the manufacturing
process, particularly from further standardization.
Quick die change equipment made by Atlas includes automated die carts, die
tables and high rise automated storage-retrieval systems which are used to
maneuver stamping press dies and molds weighing up to 100 tons. The Atlas-
developed products allow die swapping to be accomplished in minutes as compared
to hours if conventional equipment is used. Atlas storage-retrieval systems
permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured for
use with either manually controlled or fully automated presses. Atlas believes
that its equipment is instrumental in increasing the "up-time" of presses while
also facilitating short run capability, gentle die handling, safer and improved
ergonomics and easier and more efficient die maintenance.
Transfer press automation equipment is sold by Atlas under the names Flex
2000 and Flex 5000(R). Transfer presses use as many as ten dies within a single
press to progressively form the component (typically including tasks such as
drawing or forming, trimming, piercing and flanging). Unlike tandem press lines,
which use multiple presses arranged in a line and require multiple devices to
move a component, transfer presses move the component being processed from one
die station to another using a single automation device. Compared to tandem
presses, transfer presses generally operate at higher production rates, require
less floor space, consume less energy and allow more component processes per
press. Because of this, and because they have fewer parts and require less
expensive quick die change equipment than tandem presses, transfer presses have
become the preferred type of press for new purchases although many tandem
presses will remain in use for many years and can be refitted with automation
equipment. Atlas recently began offering standard Transfer Press Cells as a
systems integrator, comprised of Atlas equipment and presses made by other
manufacturers to more aggressively pursue the transfer press process market
segment.
Stacking and destacking automation equipment is used to handle the sheet
metal in the initial stages of the stamping process. Stackers stack flat blanks
cut from the coiled rolls, which are delivered to the manufacturer. Destacking
equipment feeds the flat blanks into the press and includes functions to
wash/scrub or roll-coat the metal blanks and to queue them to assure a steady
flow. Atlas also produces and sells precision steel pallets for handling the
stacks of sheet metal so as to reduce handling damage and to eliminate the need
for strapping the stack of sheets together.
Westland manufactures custom electrical control panels primarily for use in
production machinery and machine tools utilized in automotive, adhesive &
sealant, food processing, and other industrial applications. The design and
manufacture of control panels for machinery occasionally occurs in the later
stages of the machinery design and construction process. Machinery must first be
constructed, and then wired, where the wiring is conducted through the control
panel. While the wiring of machinery occurs later in the construction process,
the wiring and
4
control panels are essential to effective machinery operation. It is the wiring
and controls, which convert the machinery from stationary metal to functional
machines.
Westland's products range from small, single door electrical panels to
larger six door panels. Selling prices for Westland's products range from less
than $5,000 to more than $100,000 per unit. The electrical control panels are
used by customers to control the mechanical functions of machinery used in
applying adhesives and sealants in automobile production, material handling
equipment for metal forming for automobiles and appliances, the machining of
cylinders for the manufacture of vehicle engines, and the fabrication of
containers for food and juice packaging.
Competition
Atlas management believes Atlas' products are sold in specialized markets
that have limited customers and few competitors. In many instances, Atlas
products are procured through competitive bidding. Because of the capital cost
and the need for skilled personnel, such as engineers, designers, mechanics and
sales persons, entry into this industry is expensive and difficult to achieve
and Atlas does not expect competition to increase significantly over present
levels. Primary competitors of Atlas include ABB Flexible Automation (Sweden),
Herwo Die Changing (Sweden), Orchid International (Canada), Hirotec (Japan), HMS
Products Co. and Aisaku (Japan). Each of these companies offers components,
which compete with certain components manufactured or sold by Atlas. A number of
the competitors are well established with substantial financial resources,
recognized brand names, customer loyalty and established market positions,
capable engineering, strong distribution networks and comprehensive
manufacturing capabilities.
Westland management believes Westland's competitors sell their products
primarily regionally. Typically, custom-built control panels are commodity type
products purchased by customers on the basis of quality and reliability,
delivery timing, and pricing. Westland's competitors in Southeast Michigan
include Stegnar Electric, Consistent, JIC Electric, X-Bar Automation,
Electromatic (formerly a distributor but which is moving into panel building
also), Control Technique, Innovative Control Systems, Venus Controls, and
Quantum. The two latter companies are minority owned, and are believed to have
an advantage as suppliers to the auto industry given U.S. automaker commitments
made in April 1998 to increase, and encourage their leading suppliers to
increase, purchases of auto parts from minority owned companies.
In contrast to the possible regional focus of certain competitors, Westland
is focused on customers both within and outside its local region. Westland also
seeks to sell more than control panel building services. It seeks to educate
customers on how they can reduce their internal labor costs by having Westland,
at a cost lower than the customers' labor expenses, more fully prepare the
control panels for final, and more rapid, installation on the customers'
machinery.
5
Trademarks and Patents
Atlas has an agreement to use components in the FLEX 5000(R) transfer press
automation equipment that it manufactures and sells that are based on patents
owned by the estate of Mr. John Maher. The agreement grants Atlas an exclusive
worldwide license to use the patents for a term equal to the life of the
patents, including any extensions as a result of modifications to the patents.
Currently, the patents registered with the United States Patent and Trademark
Office expire on various dates between June 23, 2005 and June 21, 2007. Atlas is
obligated to pay the estate of Mr. Maher a royalty based on a portion of the
sales price of the FLEX 5000(R) as it relates to the value of the patented
components. For Atlas' fiscal years ended June 30, 1999, 2000 and 2001 the
Company expensed approximately $241,000, $122,000 and $127,000, 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.
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)" that it uses to market its line of transfer
equipment.
Atlas owns and has registered with the United States Patent and Trademark
Office four patents, one for an asynchronous conveyer construction, one for a
transfer arm for supporting work pieces, one for a magnetic sheet separator
construction, and one for apparatus and methods for forming workpieces. Foreign
patents for the latter are held in Australia, China, France, Germany, Italy,
Spain and Sweden with patent applications pending in Brazil, Canada, Korea,
Mexico and Poland. Atlas has applied for five United States patents for an
articulating work piece transfer apparatus, a magnetic sheet fanner, a tooling
gage, a finger tooling receiver for transfer press automation equipment and a
pin pallet cover. Foreign patent applications have been filed for the
articulating work piece transfer apparatus.
Atlas holds an exclusive license agreement that covers two more U.S.
patents for a system for transferring work pieces through a series of
workstations and a synchronized dual axis actuator. The system for transferring
work pieces through a series of workstations is protected by foreign patents in
Canada, China, France, Germany, Great Britain, Japan, Republic of Korea, Russian
Federation, Spain and Sweden. This license agreement also encompasses rights to
transfer system patents that are pending in the U.S. and several foreign
countries covered under the Patent Coordination Treaty.
Westland owns one patent related to a lay-in wire way for cords and wires
for use in connection with the field installation of machinery. The product is
trademarked as "Cheeta-Duct(R)".
Management and Employees
The Company employs approximately 185 persons. None of these persons is a
member of a union. The Company believes that its employee relations are good.
The Company's facilities are located in highly industrialized areas that benefit
the Company by reason of their proximity to customers and a quality labor force.
ITEM 2. PROPERTIES
Atlas owns and operates two manufacturing facilities in Fenton, Michigan
and Westland leases and operates one manufacturing facility in Westland,
Michigan. The two Fenton facilities have an aggregate of 94,200 square feet of
space. One of these facilities, built in 1997, has higher roofs and heavier
cranes to facilitate manufacturing of larger equipment and provides
approximately 51,000 square feet of manufacturing space and 8,000 square feet of
office space. This facility also is capable of expanding at a later date to
approximately 130,000 square feet of manufacturing and 25,000 square feet of
office space. Operations performed in the two Fenton facilities include
fabrication, machining, assembly, electrical panel construction and testing.
Project management, engineering, finance, service, quality, purchasing and sales
offices are also located in Fenton.
The Westland plant, which is leased, has approximately 34,000 square feet
of manufacturing and assembly
6
space and 4,000 square feet for offices. Operations performed in the Westland
facility are manufacturing, assembly, quality control and testing. Sales,
operations, finance and administration are all located in Westland, MI.
The principal executive offices of the Company are located at 201 South
Main Street, 8th Floor, Ann Arbor, Michigan 48104.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and the estate of John Maher, the owner of the patent for
the FLEX 5000(R) Transfer which is licensed to Atlas, initiated an action
against Orchid International Group Inc. ("Orchid") in the Federal Court of
Canada, Trial Division, claiming infringement and wrongful sale, manufacture and
use by Orchid of the inventions protected by such patent and seeking, among
other relief, a declaration that the patents are valid and have been infringed
by Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). The
defendant has filed an answer denying the material allegations of the complaint
and asserting a counterclaim requesting that the patents be declared invalid. A
court trial is expected in 2002.
In March 2001, the Company filed suit as plaintiff in the State of Michigan
Sixth Judicial District Court in Oakland County, Michigan against Thomas G. Lee,
the former owner and operator of Westland. The lawsuit contends Mr. Lee made
fraudulent misrepresentations and omitted material facts prior to the purchase
of Westland by the Company. The lawsuit seeks one or more remedies, including
damages. Mr. Lee has filed a response and counterclaim seeking payment for
contractual obligations structured at the time of the Westland purchase and for
related employment compensation. This litigation is early in the discovery
phase.
The Company is a party to routine litigation matters in the ordinary course
of its business. No such pending matters, individually or in the aggregate, if
adversely determined, are believed by management to be material to the business
or financial condition of the Company. The Company maintains general liability
insurance, workers' compensation insurance, property insurance, automobile
insurance, employee benefit liability insurance, fidelity insurance and
directors' and officers' liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of securityholders during the fourth
quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective as of the close of business on May 4, 2001, the Company's Common Stock
was delisted for trading on the Nasdaq SmallCap Market. Trading in the Company's
Common Stock, Warrants and Units is now conducted in the over-the-counter
markets on the NASD Electronic Bulletin Board. The OTC Bulletin Board is an
inter-dealer automated quotation system sponsored and operated by the NASD for
equity securities not included in the Nasdaq Stock Market. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions. The delisting
could have a material adverse effect upon the Company in a number of ways,
including its ability to raise additional capital. In addition, the absence of a
trading system may adversely affect the ability of broker-dealers to sell the
Company's Common Stock, and consequently may limit the public market for such
Stock and have a negative effect upon its trading price. There can be no
assurance that the Company's Common Stock will be relisted on the NASDAQ
National Market at any future date or that such stock will be listed or traded
on any market or trading system.
7
The following table sets forth the range of high and low closing bid prices
for Common Stock and Warrants, as reported by the Nasdaq Small Cap Market for
fiscal 2000 and the first three quarters of fiscal 2001 and the OTC Bulletin
Board for the fourth quarter of fiscal 2001. Within the last two fiscal years
there has been no material activity in the Company's Units and therefore, no
trading information is provided.
Common Stock Warrants
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High Low High Low
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Year ended June 30, 2000:
First Quarter 1.75 1.75 0.50 0.25
Second Quarter 1.63 1.25 0.38 0.13
Third Quarter 2.63 1.38 0.63 0.19
Fourth Quarter 1.50 1.28 0.63 0.06
Year ended June 30, 2001:
First Quarter 1.25 1.00 0.19 0.13
Second Quarter 0.63 0.25 0.06 0.06
Third Quarter 0.63 0.44 0.13 0.06
Fourth Quarter 0.38 0.25 0.00 0.00
As of September 30, 2001, the Company had 16 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.
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, 1997,
1998, 1999 and 2000, for the years ended June 30, 1997, 1998, 1999 and 2000.
Effective July 24, 2001, the registrant appointed Doeren Mayhew to serve as its
independent auditors as of and for the year ended June 30, 2001. During the
fiscal years 1999 and 2000, there were no disagreements with BDO on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO, would have caused it to make a reference to the subject
matter of the disagreement in connection with its reports. The Registrant
dismissed BDO and engaged another accounting firm as part of its continuing
effort to reduce the Registrant's operating expenses. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Report and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Report.
8
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data
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The Company
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Year Year Year Year Year
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Revenues Earned $27,992 $33,230 $34,001 $36,040 $34,438
Cost of Revenues Earned 22,155 26,335 24,610 27,563 24,825
Gross profit 5,837 6,895 9,391 8,478 9,613
Selling, general and administrative 8,004 6,333 7,526 8,538 7,081
Officers' bonuses -- -- -- -- 711
Bonus restructuring expense -- -- -- 2,132 --
Income (loss) from operations (2,167) 562 1,865 (2,192) 1,821
Net income (loss) (3,114) (256) 974 (2,012) 593
Net income per share of common stock ($1.26) ($0.10) $0.40 ($0.95) $0.28
Weighted average common shares 2,475 2,475 2,432 2,125 2,125
Consolidated Balance Sheet Data
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The Company
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June 30, June 30, June 30, June 30, June 30,
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Current assets $15,822 $22,972 $19,148 $15,272 $22,627
Current liabilities 17,355 8,155 5,330 5,470 7,284
Working capital (1,533) 14,817 13,818 9,802 15,343
Property, plant and equipment, net 7,231 7,708 7,844 8,289 7,667
Total assets 31,757 39,238 30,108 26,809 33,410
Long-term debt, less current maturities 7,710 20,862 13,951 11,254 15,327
Total liabilities 25,410 29,777 20,391 18,160 23,444
Stockholders' equity 6,347 9,461 9,717 8,649 9,966
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Revenues at Atlas are recognized using the percentage-of-completion method,
which measures the percentage of contract costs incurred to date and compares
these costs to the total estimated costs for each contract. Atlas estimates the
status of individual contracts when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract costs
include all direct material and labor costs, and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
condition, estimated profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the period in which such
revisions are determined. Sales at Westland are recognized when products are
shipped.
Results of Operations
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues earned for the year ended June 30, 2001 were $27,992,487 as
compared to $33,230,195 for the year ended June 30, 2000, a decrease of 16%,
principally as a result of lower order volume at Atlas during fiscal 2001. The
revenues earned at Westland, which was acquired by the Company on February 23,
2000, represented 15% of the total revenues earned by the Company in fiscal
2001.
The order backlog as of June 30, 2001 increased 27% to $17,100,000 from the
June 30, 2000 backlog of $13,500,000. The Company attributes its backlog
increase to more focused and efficient sales efforts by personnel at both of its
locations, which, in turn, were facilitated by management changes at both
facilities during the second and third quarters of fiscal year 2001. Management
believes the Company's quotation activity is increasing worldwide relative to
one year ago.
Gross profit for the year ended June 30, 2001 was $5,837,396, representing
a 15% decrease from the $6,895,369 gross profit for the year ended June 30,
2000. Gross profit decreased during fiscal 2001 primarily due to volume
reduction associated with lower than anticipated orders for Atlas and cost
overruns incurred late in the production cycle for certain products. As was
stated in the third quarter 10-Q, the Company made management changes in the
middle of the second quarter of fiscal 2001 and now believes production problems
which caused cost overruns in prior periods have been corrected and that Atlas
will experience lower cost overruns relative to initial project quotations in
the future.
Consolidated selling, general and administrative (SG&A) expenses were
$8,004,219, up 26% as compared to SG&A expenses of $6,332,966 for the year ended
June 30, 2000. The increase is associated with the inclusion of the Westland
facility, which was acquired on February 23, 2000.
Loss from operations for the year ended June 30, 2001 was $2,166,823
compared to income from operations of $562,403 for the year ended June 30, 2000.
The decline in income from operations was principally due to lower volume,
production costs overruns and the inclusion of a full year of Westland's SG&A
expenses.
Interest expense for the year ended June 30, 2001 was $1,605,164, up 23%
from $1,307,732 for the year ended June 30, 2000. Higher interest costs during
fiscal 2001 were due to the indebtedness incurred by the Company for the
purchase of Westland.
For the year ended June 30, 2001, the income tax benefit was $572,000. See
note 8 in the consolidated financial statements for additional analysis. At June
30, 2001 the balance sheet includes a deferred tax asset whose realization is
dependent upon future earnings. Based on historical operating losses and
uncertainty of future earnings, a valuation allowance of $646,000 has
10
been recorded at June 30, 2001. This asset includes research and experimentation
(R&E) credit carryforwards totaling approximately $168,400 that will begin to
expire in 2012 and net operating loss carryforwards valued at approximately
$1,269,000 that will begin to expire in 2020.
For the year ended June 30, 2001, a net loss of $3,113,741 was incurred as
compared to net loss for the year ended June 30, 2000 of $256,280. The net loss
during fiscal 2001 was due to factors cited above, including cost overruns on
certain projects, lower volume, lower gross margins, and increased interest
expense.
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues earned for the year ended June 30, 2000 were $33,230,195 as
compared to $34,001,248 for the year ended June 30, 1999, a decrease of 2%,
principally as a result of lower order volume at Atlas during fiscal 2000. The
revenues earned at Westland, which was acquired by the Company on February 23,
2000, represented 4% of the total revenues earned by the Company in fiscal 2000.
The order backlog as of June 30, 2000 was $13,500,000, down from the June 30,
1999 backlog of $16,000,000. The decline in backlog was mainly due to slower
closings of new orders at Atlas.
Cost of revenues earned for the year ended June 30, 2000 was $26,334,826,
up 7% from costs of $24,609,631 for the year ended June 30, 1999. Cost of
revenues earned as a percentage of revenues increased to 79% of revenues earned
during the year ended June 30, 2000 as compared to 72% for year ended June 30,
1999. The increase in cost of revenues earned as a percentage of revenues for
the year ended June 30, 2000 was primarily due to product mix and cost overruns
incurred by Atlas late in the production cycle for certain products.
Gross profit for the year ended June 30, 2000 was $6,895,369, representing
a 27% decrease from the $9,391,617 gross profit for the year ended June 30,
1999. Gross profit decreased during fiscal 2000 principally for the reasons
cited above related to the increase in cost of revenues earned as a percentage
of revenues. Westland's contribution to the Company's total gross profit was
approximately 3.5% in fiscal 2000.
Consolidated selling, general and administrative (SG&A) expenses were
$6,332,966, down 16% as compared to SG&A expenses of $7,526,448 for the year
ended June 30, 1999. In January 1999, and continuing through June 2000, the
Company reduced fixed costs as part of a cost reduction initiative. The decline
in SG&A expenses for fiscal 2000 as compared to fiscal 1999 is due principally
to cost reductions at Atlas, partially offset by the inclusion of Westland's
SG&A expenses for an approximately four month period following its acquisition
by the Company on February 23, 2000. The Company's corporate expenses also were
lower in fiscal 2000 than in fiscal 1999 due in part to the decrease in the
number of directors effective as of December 31, 1999.
Income from operations for the year ended June 30, 2000 was $562,403
compared to income from operations of $1,865,169 for the year ended June 30,
1999. The decline in income from operations was principally the result of lower
gross margins described above, partially offset by decreased SG&A expenses.
Interest expense for the year ended June 30, 2000 was $1,307,732, up 57%
from $835,619 for the year ended June 30, 1999. Higher interest costs during
fiscal 2000 were due to higher financing requirements as a result of increased
accounts receivables, inventories, and work-in-process for Atlas, higher
interest rates and the indebtedness incurred by the Company for the purchase of
Westland.
For the year ended June 30, 2000, the income tax benefit was $363,000. This
tax benefit differs from what it would have been under the statutory rate due
primarily to research and experimentation (R&E) tax credits the Company has
calculated.
At June 30, 2000 the balance sheet included a deferred tax asset whose
realization depends on generating future taxable income. This asset includes R&E
credit carry forwards totaling approximately $844,000 that will
11
begin to expire in 2012 and net operating loss carry forwards totaling
approximately $1,074,000 that will begin to expire in 2020. Taking into
consideration the historical results of operations of Atlas and Westland, the
Company believes it is more likely than not that these carry forwards will be
realized in the future. However, due to the past IRS audit with respect to the
R&E tax credits and the costs the Company incurred in defending these credits,
the R&E credit carry forwards for fiscal 2000 included a 50% reserve.
For the year ended June 30, 2000, a net loss of $256,280 was incurred as
compared to net income for the year ended June 30, 1999 of $974,290. The net
loss during fiscal 2000 was due to factors cited above, including cost overruns
on certain projects, lower volume, lower gross margins, and increased interest
expense. These factors were partially offset by a decrease in SG&A expenses.
Liquidity and Capital Resources
Management believes financing facilities currently in place, including a
$1.0 million Atlas work-in-process "over-advance" facility being negotiated
presently, along with anticipated cash available from operations, may be
sufficient for general operations. On July 31, 2000, the Company was scheduled
to repay approximately $417,000 (including interest) of the subordinated
deferred indebtedness totaling, at the time, $1,108,352 due to the former owners
of Atlas. This repayment was postponed, and a partial payment of $200,000 was
made prior to December 31, 2000. The duration of the repayment was postponed
until October 31, 2001. As a result of the postponements, cash was conserved for
ongoing operations. In addition, the Company's bank has requested the
postponement of the payment of the $417,000 until the Company's financial
results improve.
At June 30, 2001, the Company had (1) debt of $7,858,000 under the line of
credit, and $3,300,000 of Industrial Revenue Bond obligations, payable over the
12 years remaining in their term, (2) deferred executive compensation
obligations of $974,933 scheduled to be paid over three equal annual
installments during the period from July 2000 through July 2002, (3) five year
term debt of $3,600,000, bearing interest at 125 basis points over the prime
rate, incurred in February 2000 to purchase Westland, (4) five year subordinated
term debt of $2,750,000, payable to the former owner of Westland and bearing a
fixed interest rate of 9.25%, incurred in February 2000 to purchase Westland,
and (5) other debt of $33,899. This total of $18,516,832 compares to a total
combined long-term debt financing and line of credit balance of $22,961,403 as
of June 30, 2000. The decrease in indebtedness at June 30, 2001 is principally
due to paying down the line of credit.
The Company believes that its short-term credit availability is adequate to
support its business operation at current and near-term anticipated sales
levels. This excludes the repayment of previously scheduled subordinated
deferred indebtedness as noted above. Working capital deficit at June 30, 2001
was ($1,533,171) and the current ratio was .91 to 1, as compared to working
capital of $14,816,624 and a current ratio of 2.8 to 1 for the Company at June
30, 2000.
The Company's revolving credit agreement and term loan with a bank impose
financial levels of tangible capital funds, specified leverage ratios (debt to
equity), and fixed expense coverage. At June 30, 2001, the Company was not in
compliance with the financial covenants specified in the agreements. On October
12, 2001, the Company obtained a letter agreement from the bank whereby the
financial covenants were waived by the bank for the fiscal year ended June 30,
2001. Based on current projections for the year ending June 30, 2002, management
believes operations will provide sufficient funds to enable the Company to meet
the amended requirements.
The Company's banking facilities are scheduled to mature in January 2002.
The Company's bank indebtedness, which in prior periods was listed as long-term,
has in the ordinary course of business been reclassified as short-term, which is
defined as a liability which matures in twelve (12) months or less. The Company
currently is in discussions with its lender concerning the renewal of its loan
facilities. In the past, the facility renewal has been for approximately two
years. Management believes a proposal from its lender for the renewal of its
loan facilities
12
will be forthcoming prior to their maturity. However, no assurance can be given
that such renewal will be obtained or that alternative loan facilities will be
made available to the Company by another lender under the tight credit markets
currently prevailing. The Company does not currently have sufficient proceeds
available to it from operations or otherwise to repay these existing loan
facilities when due. The Company's inability to renew its revolving credit
agreement could have a material adverse affect on Company operations.
Contingencies
Atlas has accrued certain financial reserves for contingencies of bad
debts, product warranty and health insurance run off costs.
Recent Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101. "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. The adoption of SAB No. 101 did not have a
material impact on the Company's results of operation or its financial position.
In July 2000, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF
No. 00-10"). When adopted, EITF No. 00-10 requires that all amounts billed to
customers in sale transactions related to shipping and handling be classified as
revenue. In addition, EITF No. 00-10 requires that shipping and handling fees
and costs in financial statements for prior periods presented for comparative
purposes be reclassified. EITF No. 00-10 must be adopted prior to, or concurrent
with, the adoption of SAB No. 101. The adoption of EITF No. 00-10 did not have a
material impact on the Company's results of operation or its financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires companies
to apply the purchase method of accounting for all business combinations
initiated after June 30, 2001 and prohibits the use of the pooling-of-interest
method. SFAS No. 142 changes the method by which companies may recognize
intangible assets in purchase business combinations and generally requires
identifiable intangible assets to be recognized separately from goodwill. In
addition, it eliminates the amortization of all existing and newly acquired
goodwill on a prospective basis and requires companies to assess goodwill for
impairment, at least annually, based on the fair value of the reporting unit.
The Company will be required to adopt SFAS Nos. 141 and 142 on July 1, 2002;
however, early adoption as of July 1, 2001 is permitted. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
13
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
Management has not determined the impact the adoption of SFAS Nos. 141 and 142
will have on the Company's financial statements or when the Company will elect
to adopt these statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 is
effective for fiscal years beginning after June 15, 2002, and establishes an
accounting standard requiring the recording of the fair value of liabilities
associated with the retirement of long-lived assets in the period in which they
are incurred. The Company is in the process of determining the future impact
that the adoption of FAS 143 may have on our earnings and financial position.
Forward-Looking Statements
Various statements in this Report concerning the manner in which the
Company intends to conduct its future operations and potential trends that may
affect future results of operations are forward-looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors. These factors include but are not limited to what management believes
is a current softening of the domestic and foreign markets for automobiles and
automotive parts resulting in reduced demand for the Atlas' automation
equipment; potential technological developments in the metal forming and
handling automation equipment markets which may render Atlas' automation
equipment noncompetitive or obsolete; the risk that Atlas may not succeed in its
ongoing patent suit against Orchid; the risk that Westland's customers may be
unwilling or unable to continue ordering control panels; the tightening of
credit availability generally or under the Company's credit facility which may
render the Company unable to access needed working capital; and general economic
and business conditions, both nationally and in our markets, particularly in
light of the events of September 11, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $18,516,832 at June 30, 2001, obligations
in the amount of $7.75 million were fixed rate or fixed rate based obligations
and the balance of approximately $10.76 million, were variable rate obligations.
Assuming an immediate 10% increase, as of September 30, 2001, in the interest
rates on all of the Company's variable rate obligations, the impact to the
Company in annualized interest payable would be approximately $100,000.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements of the Company as set forth on page F-1 herein. In
early fiscal 2001, the Company sought to save additional operating costs, and
the Company did not engage BDO Seidman to re-certify its audit reports for the
fiscal years ended 1999 and 2000. As a result, while BDO Seidman certified its
audits for the fiscal years ending 1999 and 2000 in October 2000 when the
Company's 10-K was filed for fiscal 2000, the figures for fiscal 1999 and 2000
as presented herein have not been recertified by BDO Seidman.
The Company and BDO Seidman could not reach agreement on appropriate
compensation for BDO Seidman to re-certify its audit report dated September 12,
2000, except for Note 5 which is as of October 13, 2000. Accordingly, BDO
Seidman has not been engaged to re-certify this report. Therefore, it has not
conducted a "keep current" review of the Company's operations or financial
condition, has not reviewed this annual report or Form 10-K or the financial
statements included herein and has not re-issued its audit report dated
September 12, 2000, except for Note 5 which is as of October 13, 2000. The
Company hereby incorporates by reference from its annual report on Form 10-K for
the year ended June 30, 2000, the following: consolidated balance sheets of the
Company at June 30, 1999 and 2000; consolidated statements of operations for
each of the years in the three year period ended June 30, 2000; consolidated
statements of cash flows for each of the years in the three year period ended
June 30, 2000; and the report of BDO Seidman dated September 12, 2000, except
for Note 5 which is as October 13, 2000, issued in connection with the
foregoing, which financial statements and report are set forth in Exhibit 99.1
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As pereviously reported in the Company's Form 8-K filed on July 31, 2001,
the Company, in a cost-saving move, dismissed its former auditors. As disclosed
in the Form 8-K, there were no disagreements with the former accountants on
accounting matters or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Set forth below is information concerning each director of the Company,
including his business experience during at least the past five years, his
positions with the Company, and certain directorships held by him. Except as
hereinafter described, there are no family relationships among any of the
directors or any arrangements or understandings between any director and another
person pursuant to which he was selected as a director.
Director
Director Age Since Current Position
-------- --- ----- ----------------
Class I Directors
Alan I. Goldman.................. 64 1993 Director
Jesse A. Levine.................. 34 1993 Director, Chief Financial Officer,
Vice President, Secretary and Treasurer
Class II Director
Michael D. Austin................ 50 1999 Director, President of the Company's Atlas
Technologies, Inc. subsidiary and Vice
President of Strategic Planning and Marketing
of the Company
Class III Directors
Samuel N. Seidman................ 67 1993 Director, Chairman of the Board, President and
Chief Executive Officer
Alan H. Foster................... 76 1993 Director
The Company's Board of Directors is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of office of the Class I directors will continue
until the next annual meeting of the Company. The term of office of the Class II
directors will continue until the
15
annual meeting of the Company held in fiscal 2002. The term of office of the
Class III directors will continue until the annual meeting of the Company held
in fiscal 2003. In each case, a director will hold office until the next annual
meeting of stockholders at which his class of directors is to be elected.
Class I Directors
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. Since 1999, Mr. Goldman has
also served as Chairman of the Board, Chief Financial Officer and Treasurer of
SGAinteractive, Inc., a privately held Internet training and communications
company. 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 was also a director of Substance Abuse
Technology, Inc. at the time it filed a Chapter 11 bankruptcy petition in 1997.
Mr. Goldman earned a B.A. degree from Cornell University and an M.B.A. degree
from New York University.
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company
since its inception, Chief Financial Officer since June 1995 and a Vice
President since May 1996. Since January 1992, Mr. Levine has been Vice President
and then Senior Vice President of Seidman & Co., Inc., specializing in financial
and business analysis, corporate finance, private placement financing, merger
and acquisition, and corporate advisory services. Previously, Mr. Levine served
as a commercial credit analyst for Society Bank, Michigan. Mr. Levine earned a
B.A. degree, with highest honors distinction, in economics from the University
of Michigan and has been elected a chartered financial analyst. Samuel N.
Seidman, the President, Chief Executive Officer, and Chairman of the Company, is
Mr. Levine's uncle.
Class II Director
Michael D. Austin is currently the President of the Company's Atlas
Technologies, Inc. subsidiary and Vice President of Strategic Planning and
Marketing of the Company. From 1998 to 2000, Mr. Austin held the position of CEO
and President of Atlas Technologies, Inc. From 1996 to 1998, Mr. Austin held the
position of President of Atlas Technologies, Inc., and was primarily responsible
for directing the marketing and sales activities of the company for determining
the overall product directions, managing product research and development, and
managing the application engineering department. From 1977 to 1996, Mr. Austin
held various other management positions at Atlas Technologies, Inc., including
Vice President of Operations, Vice President of Sales and Marketing, Sales
Manager, and Controls Manager. From 1973 to 1977, Mr. Austin held various
controls engineering and management positions at Fluid & Electric Control Co.,
including Chief Engineer. Mr. Austin serves on the board of directors or board
of advisors of the Society of Manufacturing Engineers, the Flint-Genesee
Economic Growth Alliance, the Genesee Area Focus Council, the Manufacturers
Innovation Council, Kettering University, Baker College and Mott Community
College. Mr. Austin holds U.S. and foreign patents for certain apparatus and
methods for forming workpieces.
Class III Directors
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking firm, and serves as its President. In this capacity, he has provided a
broad range of investment banking services, including financial analysis and
valuations, private financings, and corporate recapitalizations and debt
restructurings. Mr. Seidman also serves as a director of AMREP Corporation, a
real estate development corporation listed on the New York Stock Exchange. He
has acted as financial advisor to manufacturers of various kinds of production
systems and components for a number of industries, including ASM International,
N.V., and a multi-national producer of automated equipment and systems
16
for the production of semiconductor traded on the Nasdaq National Market. Mr.
Seidman advised in the sale of ASM Fico Tooling, Inc., a European-based multi-
national manufacturer of specialized tooling for the semiconductor industry. Mr.
Seidman was Co-Chairman of the Creditors' Committee in the Chapter 11
reorganization of Sharon Steel Corp., an integrated manufacturer of finished
steel products, and served as financial advisor in Chapter 11 to Chyron Corp., a
specialized producer of television character generation equipment for video
productions listed on the New York Stock Exchange, and Mr. Gasket Co., a
manufacturer of automobile aftermarket products. Prior to founding Seidman &
Co., Mr. Seidman worked in corporate finance at Lehman Brothers. Mr. Seidman
earned a B.A. degree from Brooklyn College and a Ph.D. in economics from New
York University. He was a Fulbright Scholar and a member of the graduate faculty
of the City University of New York. Mr. Seidman's nephew, Jesse A. Levine, is
Vice President, Chief Financial Officer, Secretary, Treasurer and a Director of
the Company.
Alan H. Foster has been a Director of the Company since its inception. From
1986, until September 2001 he served as an Adjunct Professor of Finance and
Corporate Strategy at the University of Michigan. Since 1978, Mr. Foster has
been the principal of A.H. Foster & Company, a consulting firm, which serves as
a consultant in corporate finance to foreign governments, and domestic and
international clients. Currently, Mr. Foster is a director of Code-Alarm, Inc.,
a manufacturer of automobile security systems. For the last 12 years, Mr. Foster
has served numerous times as a court-appointed trustee in bankruptcy for both
Chapter 7 and Chapter 11 cases. He was employed by the American Motors
Corporation from 1963 to 1978, where he first served as Director, Financial
Planning and Analysis and then as Vice President and Treasurer for the last ten
of those years. From 1953 to 1963, Mr. Foster worked at Sylvania Electric
Products in various capacities, including Manager, Corporate Planning and
Control. Mr. Foster is the author of Practical Business Management, published in
1962. Mr. Foster earned a B.S.B.A. degree from Boston College and an M.B.A.
degree from Harvard Business School.
Executive Officers
The following table sets forth certain information concerning each
individual who currently serves as an executive officer of the Company.
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board. Except as specifically described, there are no family
relationships among any of the executive officers or any arrangements or
understandings between any executive officer and another person pursuant to
which he was selected as an executive officer.
Executive Officers Current Position
------------------ ----------------
Samuel N. Seidman............... Chairman of the Board, President and Chief Executive Officer
Jesse A. Levine................. Chief Financial Officer, Vice President, Secretary
and Treasurer
James A. Kolinski............... Vice President, Operations of the Company and
Chief Executive Officer of Atlas Technologies,
Inc.
Michael D. Austin............... Vice President of Strategic Planning and Marketing
of the Company and President of Atlas
Technologies, Inc.
Robert J.Cuccaro................ Vice President, Corporate Controller of the
Company and President of Westland Control Systems,
Inc.
See "Directors" in this Item 10 for a description of the business
experience during at least the past five years of Messrs. Seidman, Levine and
Austin.
Robert J. Cuccaro, 46 years of age, joined the company on May 26, 2000 as
Vice President, Corporate Controller. In January 2001, Mr. Cuccaro was promoted
to President of Westland Control Systems, Inc. From 1998 to 2000, Mr. Cuccaro
held positions of General Manager and Controller for the Ring Group and Karmazin
Products Corporation and was responsible for directing sales, human resources,
production control, accounting and finance. From 1996 to 1998, Mr. Cuccaro held
the position of Chief Financial Officer/Division Controller for Stewart
Connectors Division, Inc. a subsidiary of Insilco Corporation. From 1994 to
1996, Mr. Cuccaro held various
17
positions including Plant Controller and Corporate Controller with Clark
Material Handling Corporation, a subsidiary of Terex Corporation. Previously,
from 1982 to 1994, Mr. Cuccaro held various financial positions at UNISYS
Corporation including Controller and Sales Director. Mr. Cuccaro has extensive
international, manufacturing, financial reporting and systems experience. Mr.
Cuccaro earned his B.S. degree from Rutgers University and attended graduate
studies classes at Fairleigh Dickinson University in New Jersey.
James A. Kolinski, 60 years of age, was hired by the Company on October 16,
2000, as Vice President - Operations. In November 2000, Mr. Kolinski was
promoted to CEO of Atlas Technologies, Inc. in addition to being the Vice
President - Operations for the Company. Mr. Kolinski had been Chief Executive
Officer and President of HPM Corporation, a $110 million manufacturer of
equipment for plastic injection molding, metal extrusion and metal die-casting
applications. Previously, for 6 years, Mr. Kolinski was President and Chief
Operating Officer at Grove Worldwide LLC, a leading manufacturer of aerial work
platforms with operations in the United States, United Kingdom, and France. Mr.
Kolinski assisted in the development of Grove's strategic plan, which resulted
in sales growth from $56 million to $205 million per annum. Mr. Kolinski had
full Profit and Loss Statement responsibility at HPM, Grove, and previously as
President and Director of Simon Aerials, a $55 million subsidiary of a $1
billion dollar per annum parent company, and before that with AAR Corporation, a
$25 million per annum producer of powered industrial sweepers and scrubbers, and
material handling equipment. Mr. Kolinski's employment arrangements provide
incentives for Mr. Kolinski if the Company reaches certain higher levels of
sales, sales growth, and earnings targets.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its officers and persons who own more than 10% of the
Company's Common Stock to file reports of ownership and changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms furnished to it, and written representations
that no other reports were required, the Company believes that during the fiscal
year ended June 30, 2001, each of its officers, directors and 10% stockholders
complied with the Section 16(a) reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
During fiscal 2001, the Company's non-employee directors, Alan I. Goldman
and Alan H. Foster, each received $15,000 per annum, payable quarterly. All non-
employee directors other than the Chairman are entitled to receive payment of
$1,000 per day, as determined by the Chairman, for actual days spent by them
providing consulting services to the Company or performing other special
services for the benefit of the Company.
Executive Officer Compensation
The following table shows all compensation paid by the Company for the
fiscal years ended June 30, 1999, 2000 and 2001 to (1) the person who has served
as the chief executive officer of the Company at all times since the beginning
of fiscal 2001 (Samuel N. Seidman), and (2) the only executive officer of the
Company, other than the chief executive officer, who served as an executive
officer at any time during fiscal 2001 and whose income exceeded $100,000
(Michael D. Austin) (collectively, the "Named Executive Officers").
18
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Fiscal Year Restricted Securities
Principal Position ended June 30, Salary ($) Bonus ($) Stock Awards(#) Underlying Options (#)
--------------------- ------------- ---------- --------- --------------- ---------------------
Samuel N. Seidman 2001 120,000 --- --- ---
2000 78,750 --- --- ---
1999 65,000 --- --- ---
Michael D. Austin 2001 203,770 --- --- ---
2000 203,770 --- --- ---
1999 201,179 --- --- ---
James A. Kolinski (1) 2001 170,000 --- --- ---
2000 --- --- --- ---
1999 --- --- --- ---
_______________
(1) Mr. Kolinski was not an executive officer during fiscal 2001, but would
have qualified for inclusion as one of the Company's four most highly-
compensated executive officers had he served as an executive officer during such
fiscal year.
Option Awards and Values. No options or stock appreciation rights were
awarded to any of the Named Executive Officers in fiscal 2001. The following
table sets forth information concerning the aggregate number and values of
options held by the Named Executive Officers as of June 30, 2001. None of the
Named Executive Officers holds stock appreciation rights and none of such
persons exercised any options in fiscal 2001.
Aggregate Year-End Option Values
Number of unexercised options Value of unexercised in the money
at fiscal year end (#) options at fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Samuel N. Seidman 158,833 --- --- ---
Michael D. Austin --- --- --- ---
Employment Agreements
In May 1996, Mr. Michael D. Austin entered into an employment agreement
with Atlas Technologies, Inc. (subsequently amended in June 1998) under which he
currently serves as the President and Chief Executive Officer of Atlas
Technologies, Inc. Mr. Austin's agreement terminates on December 31, 2001. The
agreement requires Mr. Austin to devote substantially all of his business time
and attention to the affairs of Atlas Technologies, Inc. The
19
agreement provides for a base salary of $198,588 per year, subject to cost-of-
living increases after December 31, 1998, for six weeks vacation per year,
reimbursement of business expenses, use of an automobile and mobile telephone,
medical and life insurance benefits and other benefits generally made available
to other employees. The employment agreement also contains provisions
restricting the disclosure of confidential information and non-competition
covenants. As part of the fiscal 1998 bonus restructuring agreement, Atlas
Technologies, Inc. also is scheduled to pay to Mr. Austin deferred compensation
of $718,192 payable in annual installments with 6.1% interest with final payment
due July 2002.
Compensation Committee Interlocks and Insider Participation
The full Board of Directors of the Company serves as the Company's
Compensation Committee. There have not been since the beginning of fiscal 2001
any interlocking relationships, as defined in the regulations of the Securities
and Exchange Commission, involving any person who has served on the Company's
Board of Directors since that time. See Item 13 for a description of certain
transactions and relationships of the Company with directors of the Company
since the beginning of fiscal 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying footnotes set forth certain
information as of September 30, 2001 with respect to the stock ownership of (1)
each stockholder known by the Company to be a beneficial owner of more than 5%
of the Company's Common Stock, (2) each director and nominee of the Company, (3)
the Company's Chief Executive Officer, and (4) all directors and executive
officers of the Company as a group (based upon information furnished by such
persons). Shares of Common Stock issuable upon exercise of options which are
currently exercisable or exercisable within 60 days of the date of this report
have been included in the following table. See Item 11 for additional
information regarding the stock options granted to the indicated persons. The
business address of the persons listed below is Productivity Technologies Corp.,
201 South Main Street, 8th Floor, Ann Arbor, Michigan 48104.
Name of Beneficial Number of Shares Percentage of Shares
Owner Beneficially Owned Beneficially Owned
Michael D. Austin 312,600 12.6
Samuel N. Seidman 285,083 (1) 10.8 (3)
Ronald Prime 153,000 (4) 6.2
Jesse A. Levine 149,583 (1)(2) 5.8
Alan I. Goldman 48,250 (1) 1.9
Alan H. Foster 43,250 (1) 1.7
All directors and
executive officers as
a group (4) 813,666 (4) 32.9
______________________
(1) Includes shares of Common Stock issuable upon immediately exercisable
warrants and options as follows: Mr. Seidman - 158,833 shares; Mr. Levine -
106,333; Mr. Foster - 22,000 shares; Mr. Goldman - 22,000 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
20
(3) The percentage in this column is calculated by dividing the number of
shares beneficially held by the individual or group shown on each line by
the sum of (i) the number of outstanding shares of Common Stock and (ii)
any shares of Common Stock issuable upon the exercise of options held by
such individual or group members, but for no other person. Consequently,
although Mr. Seidman beneficially owns more shares than Mr. Austin, the
shares included in the denominator to calculate his percentage includes the
shares issuable to him upon the exercise of his options and, therefore, his
deemed ownership percentage in that of the Company is less than that of Mr.
Austin.
(4) Includes shares of Common Stock issuable upon immediately exercisable
warrants and options to Mr. Seidman, Mr. Levine, Mr. Foster and Mr.
Goldman, as disclosed in note 1. Mr. Prime's shares are not included in
the total as he is not a director or officer of the Company. Excludes
2,500 shares, which shall be beneficially owned by Mr. Cuccaro on
November 26, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company office space, as well as certain office, administrative and secretarial
services as may be required by the Company. The Company paid Seidman & Co., Inc.
approximately $53,000 in the fiscal year ended June 30, 2001 for such services.
Samuel N. Seidman, a director and the Chairman, President and Chief Executive
Officer of the Company, is President of Seidman & Co., Inc., and Jesse A.
Levine, a director, Chief Financial Officer, Vice President, Secretary and
Treasurer of the Company, is Senior Vice President of Seidman & Co., Inc. See
Item 11 for a description of the employment agreement entered into between the
Company and Michael D. Austin, the President of Atlas Technologies, Inc.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on the Exhibit Index.
(b) Reports on Form 8-K.
On June 18, 2001, the Company filed a Form 8-K regarding the extension of
the expiration date of the Company's Warrants.
Also, on July 31, 2001, the Company filed a Form 8-K regarding its
change of auditors.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned herewith duly authorized.
October 15, 2001 PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
----------------------
Samuel N. Seidman
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of The Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
/s/ Samuel N. Seidman Chairman, Chief Executive Officer, October 15, 2001
---------------------- President and Director (Principal
Samuel N. Seidman Executive Officer)
/s/ Michael D. Austin Director October 15, 2001
----------------------
Michael D. Austin
/s/ Jesse A. Levine Vice President, Secretary, Treasurer October 15, 2001
-------------------- and Director and Chief Financial
Jesse A. Levine Officer (Principal Financial Officer)
/s/ Robert J. Cuccaro Vice President, Corporate Controller October 15, 2001
--------------------- (Principal Accounting Officer)
Robert J. Cuccaro
/s/ Alan H. Foster Director October 15, 2001
------------------
Alan H. Foster
-------------
/s/ Alan I. Goldman Director October 15, 2001
--------------------
Alan I. Goldman
22
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Certificate of Incorporation filed May 28, 1996 (2)
3.3 By-laws (1)
4.1 Form of Common Stock Certificate of the Company (1)
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)
10.1 Employment Agreement dated as of May 23, 1996 between Atlas
Technologies, Inc. and Michael D. Austin (3)
10.2 Bonus Restructuring Agreement dated June 30, 1998 between Atlas
Technologies, Inc. and Messrs. Michael D. Austin and Ronald Prime (4)
10.3 1996 Performance Equity Plan of the Company (3)
10.4 Asset Purchase Agreement dated as of February 23, 2000 among WCS
Acquisition Corp., Productivity Technologies Corp., Westland Control
Systems, Inc. and Thomas G. Lee (5)
16.1 Letter regarding change in certifying accountant (6)
99.1 Consolidated balance sheets of the Company at June 30, 1999 and 2000;
consolidated statements of operations for each of the years in the
three year period ended June 30, 2000; consolidated statements of cash
flows for each of the years in the three year period ended June 30,
2000; and the report of BDO Seidman dated September 12, 2000, except
for Note 5 which is as of October 13, 2000, issued in connection with
the foregoing, all as filed in the Company's annual report on Form
10-K for the year ended June 30, 2000, and incorporated herein by
reference. (7)
_____________________________
(1) Filed as an exhibit to Registration Statement on Form S-1, No. 33-78188,
and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K filed June 7, 1996 and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for fiscal year ended March 31,
1996 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-K for fiscal year ended March 31,
1998 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 8-K/A dated May 3, 2000 and
incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 8-K dated July 31, 2001 and
incorporated herein by reference.
(7) Filed herewith.
23
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
C O N T E N T S
- - - - - - - -
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of independent certified public accountants F-1
Consolidated balance sheet F-2
Consolidated statement of operations F-3
Consolidated statement of shareholders' equity F-4
Consolidated statement of cash flows F-5
Notes to consolidated financial statements F-6 to F-21
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Shareholders of
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Productivity Technologies Corp. and Subsidiaries as of June 30, 2001, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
DOEREN MAYHEW
August 24, 2001
Troy, Michigan
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
ASSETS
Current Assets
Cash $ 766,052
Short-term investments, including accrued interest 243,136
Contract receivables, net of allowance for doubtful
accounts of $340,000 (note 3) 5,533,773
Costs and estimated earnings in excess of
billings on uncompleted contracts (note 4) 7,172,626
Inventories 1,463,559
Prepaid expenses and other current assets 356,102
Deferred income taxes (note 8) 287,000
------------
Total current assets 15,822,248
Property and Equipment
Land 591,514
Buildings and improvements 4,911,665
Machinery and equipment 4,444,679
Transportation equipment 21,000
------------
9,968,858
Less accumulated depreciation 2,738,043
------------
Net property and equipment 7,230,815
Other Assets
Goodwill, net of accumulated amortization
of $883,459 (note 2) 6,521,888
Patent, net of accumulated amortization of $63,141 (note 2) 686,859
Deferred income taxes (note 8) 1,051,000
Other assets 444,512
------------
Total other assets 8,704,259
------------
Total assets (note 5) $ 31,757,322
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (note 5) $ 9,831,899
Accounts payable 4,973,710
Accrued expenses
Commissions payable 248,000
Warranty reserve 315,000
Royalties payable 265,398
Payroll and related withholdings 173,501
Interest 414,535
Other 251,393
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 4) 251,701
Current maturities of executive deferred compensation
agreements (note 11) 630,282
------------
Total current liabilities 17,355,419
Long-Term Debt, Less Current Maturities (note 5) 7,710,000
Executive Deferred Compensation Agreements, Less Current
Maturities (note 11) 344,651
Shareholders' Equity (notes 6 and 7)
Common stock; $.001 par value, 20,000,000 shares authorized;
2,475,000 shares issued and outstanding 2,475
Additional paid-in capital 9,966,408
Deficit (3,621,631)
------------
Total shareholders' equity 6,347,252
------------
Total liabilities and shareholders' equity $ 31,757,322
============
See accompanying notes to consolidated financial statements
F-2
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2001
Revenues Earned $ 27,992,387
Cost of Revenues Earned 22,154,991
------------
Gross Profit 5,837,396
Selling, General and Administrative
Expenses 8,004,219
------------
Loss From Operations (2,166,823)
Other Income (Expenses)
Interest expense (1,605,164)
Interest income 53,705
Miscellaneous income 32,541
------------
Total other income (expenses) (1,518,918)
------------
Loss Before Income Taxes (Benefit) (3,685,741)
Income Taxes (Benefit) (note 8) (572,000)
------------
Net Loss $ (3,113,741)
============
Basic Loss Per Share (note 1) $ (1.26)
============
Diluted Loss Per Share (note 1) $ (1.26)
============
See accompanying notes to consolidated financial statements
F-3
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001
Common Common Additional
Stock Common Stock to Paid-in
Shares Stock be Issued Capital Deficit Total
------------- ---------- ------------- -------------- ------------- -----------
Balance - June 30, 2000 2,475,000 2,475 -- 9,966,408 (507,890) 9,460,993
Net Loss -- -- -- -- (3,113,741) (3,113,741)
----------- -------- ----------- ----------- ----------- -----------
Balance - June 30, 2001 2,475,000 2,475 -- $ 9,966,408 $(3,621,631) $ 6,347,252
=========== ======== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-4
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2001
Cash Flows From Operating Activities:
Net loss $ (3,113,741)
Adjustments to reconcile net earnings (loss) to net cash provided
from (used in) operating activities:
Depreciation 664,849
Amortization 387,011
Provisions for losses on contract receivables 237,500
Inventory net realizable value reserve 50,000
Deferred income taxes (572,000)
Changes in assets and liabilities:
Decrease in contract receivables 4,159,640
Decrease in inventories, prepaid expenses
and other current assets 317,369
Decrease in costs and estimated earnings in excess of
billings on uncompleted contracts - net 2,776,873
Decrease in accounts payable and accrued expenses (248,435)
-------------
Total adjustments 7,772,807
-------------
Net cash provided from operating activities 4,659,066
Cash Flows From Investing Activities:
Purchase of property and equipment (187,386)
Proceeds from sale of short-term investments 66,949
-------------
Net cash provided used in investing activities (120,437)
Cash Flows From Financing Activities:
Net borrowings (payments) on revolving credit agreement (3,880,148)
Payments on long-term debt (431,004)
-------------
Net cash used in financing activities (4,311,152)
-------------
Net Increase in Cash 227,477
Cash - July 1, 2000 538,575
-------------
Cash - June 30, 2001 $ 766,052
=============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash paid during the year for interest $ 1,624,558
=============
Cash paid during the year for income taxes $ --
=============
See accompanying notes to consolidated financial statements
F-5
PRODUCTIVITY TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business
------------------
The Company is a manufacturer of automated industrial systems, machinery,
equipment, electrical components and engineering services. It operates
with three manufacturing plants, sales and engineering offices. Two of
the manufacturing plants are located in Fenton, Michigan and the third
plant is located in Westland, Michigan.
Sales of products have principally been to automobile and automotive
parts manufacturers and appliance manufacturers. Other customers include
manufacturers of garden and lawn equipment, office furniture, heating,
ventilation and air conditioning equipment and aircraft. Sales to
automotive-related customers have accounted for the majority of total
annual sales. Sales are predominantly in the United States but, in
recent years, the Company has targeted sales efforts in Canada, Mexico,
Europe and Asia. Export sales during the year ended June 30, 2001,
amounted to approximately 33%, of annual sales.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of PTC and its wholly-owned subsidiaries, Atlas and Westland
(collectively, "the Company"). All significant intercompany accounts and
transactions have been eliminated upon consolidation.
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
value.
Estimates
---------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-6
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and contract
receivables. At times, the amount of cash on deposit in banks may be in
excess of the respective financial institutions FDIC insurance limit.
The Company attempts to minimize its credit risk by reviewing all
customers' credit histories before extending credit and by monitoring
customers' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on contract receivables, if
necessary, based upon factors surrounding the credit risk of specific
customers, historical trends and other information. The Company's
inability to collect on its contract receivables could have a material
adverse effect on the Company's operations.
Fair Values of Financial Instruments
------------------------------------
The carrying amounts of the Company's cash, short-term investments,
contract receivables, accounts payable and accrued expenses approximate
fair value because of the short-term maturity of these items. The
carrying amounts of the revolving credit agreement and long-term debt
pursuant to the Company's bank credit agreements approximate fair value
because the interest rates on the majority of the loans outstanding
change with market rates.
Revenue and Cost Recognition
----------------------------
Revenues earned consist primarily of contract revenues from fixed price
contracts, and the related contract costs, are recognized using the
percentage-of-completion method, measured by the percentage of contract
costs incurred to date to total estimated costs for each contract. The
Company estimates the status of individual contracts when progress
reaches a point where experience is sufficient to estimate final results
with reasonable accuracy.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, repairs and depreciation costs. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. 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-7
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Revenue and Cost Recognition - Continued
----------------------------
The amount of earnings which the Company will ultimately realize would
differ in the near term from the amounts estimated in the accompanying
consolidated financial statements if total actual costs upon completion
of a contract are either higher or lower than the amount estimated.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
market and include mainly raw materials and spare parts.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed on
the straight-line and accelerated methods, generally using the following
estimated useful lives:
Building and improvements 20 - 40 years
Machinery and equipment 3 - 10 years
Transportation equipment 2 - 5 years
Intangible Assets
-----------------
Goodwill, representing the excess of cost over the fair value of net
assets acquired in the acquisitions of Atlas and Westland, is being
amortized over twenty-five years and twenty years, respectively, using
the straight-line method. The patent is amortized over its estimated
useful life of approximately seventeen years using the straight-line
method.
Warranty
--------
The Company warrants under certain circumstances that its products meet
certain agreed-upon manufacturing and material specifications. The
Company records a warranty liability based on anticipated future claims.
F-8
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Health Insurance
----------------
The Company was self-insured for certain losses relating to employee
medical benefits. The Company discontinued its self-insured plan for the
majority of health benefits during the year ended June 30, 2001 and now
uses a third party insurer.
Income Taxes
------------
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes".
Loss Per Share
--------------
Loss per share reflected in the consolidated statement of operations are
presented in accordance with SFAS No. 128, "Earnings per Share". The
following presents the loss per share calculations:
Numerator for basic and diluted earnings per share
Net loss $(3,113,741)
Denominator for basic and diluted earnings per share
Weighted average shares outstanding 2,475,000
Options to purchase shares of common stock were outstanding (see Notes 6
and 7), but were not included in the computation of diluted earnings per
share because there was a net loss in fiscal 2001; therefore any
additional shares would be antidilutive.
Long-Lived Assets
-----------------
Long-lived assets, such as goodwill, patent and property and equipment,
are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will
be written down to fair value.
F-9
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Recent Accounting Pronouncements
--------------------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain of the SEC's views
in applying accounting principles generally accepted in the United States
to revenue recognition in financial statements. The adoption of SAB No.
101 did not have a material impact on the Company's results of operations
or its financial position.
In July 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs" ("EITF No. 00-10"). When adopted, EITF No. 00-10 requires that
all amounts billed to customers in sale transactions related to shipping
and handling be classified as revenue. In addition, EITF No. 00-10
requires that shipping and handling fees and costs in financial
statements for prior periods presented for comparative purposes be
reclassified. EITF No. 00-10 must be adopted prior to, or concurrent
with, the adoption of SAB No. 101. The adoption of EITF No. 00-10 did
not have a material impact on the Company's results of operations or its
financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires companies to apply the purchase method of accounting for all
business combinations initiated after June 30, 2001 and prohibits the use
of the pooling-of-interest method. SFAS No. 142 changes the method by
which companies may recognize intangible assets in purchase business
combinations and generally requires identifiable intangible assets to be
recognized separately from goodwill. In addition, it eliminates the
amortization of all existing and newly acquired goodwill on a prospective
basis and requires companies to assess goodwill for impairment, at least
annually, based on the fair value of the reporting unit.
The Company will be required to adopt SFAS Nos. 141 and 142 on June 1,
2002, however, early adoption as of July 1, 2001 is permitted.
Management has not determined the impact the adoption of SFAS Nos. 141
and 142 will have on the Company's consolidated financial statements or
when the Company will elect to adopt these statements.
F-10
Note 1 - Nature of Business and Significant Accounting Policies - Continued
Recent Accounting Pronouncements - Continued
--------------------------------
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143, is effective for fiscal years beginning after June 15,
2002, and establishes an accounting standard requiring the recording of
the fair value of liabilities associated with the retirement of long-
lived assets in the period in which they are incurred. The Company is in
the process of determining the future impact that the adoption of SFAS
No. 143 may have on our earnings and financial position.
Note 2 - Acquisitions
On February 23, 2000, PTC, through a wholly-owned subsidiary formed for
this purpose, purchased substantially all of the assets of Westland
pursuant to an Asset Purchase Agreement entered into on such date for
cash of $3,750,000, notes payable to seller of $2,750,000 (see Note 5),
and related acquisition costs of $140,621. Additional consideration of
up to $2,300,000 may be due the seller dependant upon Westland's average
earnings before interest and taxes during the period of January 1, 2000
through December 31, 2002.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets purchased based on the estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair
value of assets acquired of $4,580,621 was recorded as goodwill and is
being amortized on a straight-line basis over twenty years.
The purchase price was allocated as follows:
Working capital $1,200,000
Equipment 110,000
Patent 750,000
Goodwill 4,580,621
----------
Total purchase price $6,640,621
==========
F-11
Note 3 - Contract Receivables
The contract receivables consist of the following:
Billed
Completed contracts $ 2,502,770
Uncompleted contracts 3,371,003
-----------
Total contract receivables 5,873,773
Less allowance for doubtful accounts (340,000)
-----------
Total $ 5,533,773
===========
Note 4 - Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred on uncompleted contracts $28,888,443
Estimated earnings on uncompleted contracts 10,168,707
-----------
Total costs and estimated earnings incurred
on uncompleted contracts 39,057,150
Less billings to date 32,136,225
-----------
Total $ 6,920,925
===========
Included in the accompanying consolidated balance sheet under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 7,172,626
Billings in excess of costs and estimated
earnings on uncompleted contracts (251,701)
-----------
Total $ 6,920,925
===========
F-12
Note 5 - Notes Payable and Long-Term Debt
$16,000,000 revolving credit agreement with a
bank. The amount that may be borrowed under
this agreement is limited to specified
percentages of contract receivables, work-in
process and property and equipment of Atlas.
The approximate amount available under the
credit agreement at June 30, 2001 is
$2,300,000. The revolving credit agreement
provides for outstanding borrowings to bear
interest at a rate equal to (a) the bank's
prime rate (which was 6.75% at June 30,
2001) less 1/4%, or (b) the 30, 60, or 90
day LIBOR rate plus 230 basis points, at the
Company's option. No principal payments on
outstanding borrowings are due until January
31, 2002, at which time the entire balance
is due. Borrowings under this agreement are
secured by substantially all assets of Atlas $ 7,858,000
First mortgage note payable (1) 3,300,000
-----------
Total - this page 11,158,000
F-13
Note 5 - Notes Payable and Long-Term Debt - Continued
Total - from previous page $11,158,000
$3,600,000 term loan with a bank used for the purchase of
Westland. The agreement provides for outstanding borrowings to
bear interest at a rate equal to the bank's prime rate (which
was 6.75% at June 30, 2001) plus 1 1/4% payable monthly.
Minimum principal payments on the outstanding borrowings are due
as follows: February 2002 - $540,000; February 2003 - $900,000;
February 2004 - $900,000; and February 2005 - $1,260,000.
Borrowings under this agreement are secured by substantially all
assets of the Company 3,600,000
Term loans with the former owner of Westland. The agreements
provide for outstanding borrowings to bear interest at a rate of
9.25%. Principal payments will be made in five equal
installments beginning in February 2001 2,750,000
Other 33,899
-------------
Total 17,541,899
Less current portion of long-term debt 9,831,899
-------------
Total debt reflected as long-term $ 7,710,000
=============
F-14-
Note 5 - Notes Payable and Long-Term Debt - Continued
(1) In January 1997, the Company borrowed $4,500,000 in connection with
variable rate industrial revenue bonds issued by The Economic
Development Corporation of the County of Genesee. The note is payable
in amounts of $400,000 per year for fiscal years 2000-2001 and then
$300,000 per year through fiscal 2012. Interest is payable quarterly
and is set weekly by the remarketing agent at a level which allows the
bonds to be sold at par. The interest rate at June 30, 2001 was
approximately 4%. To enhance the marketability of the bonds and
guarantee payment of the bonds on the Company's behalf, a bank has
issued its Letter of Credit through December 2001, whereby a fee of 1%
is charged annually. Also, the bonds are secured by a first mortgage
note secured by substantially all assets of the Company.
The amounts of long-term debt coming due during the five years ending
June 30, 2006 and thereafter are as follows:
2002 $9,831,899
2003 1,750,000
2004 1,750,000
2005 2,110,000
2006 300,000
Thereafter 1,800,000
The Company's revolving credit agreement and term loan with a bank impose
financial levels of tangible capital funds, specified leverage ratios
(debt to equity), and fixed expense coverage. At June 30, 2001, the
Company was not in compliance with the financial covenants specified in
the agreements. On October 12, 2001, the Company obtained a waiver from
the bank waiving its acceleration rights as a result of the Company's
noncompliance. Accordingly, amounts payable under the revolving credit
agreement and term loan are classified as long-term in the accompanying
consolidated balance sheet.
The Company's revolving credit agreement expires on January 31, 2002.
Should the Company not be able to renew its revolving credit agreement or
find a suitable replacement credit agreement, non-renewal could have a
material adverse affect on the Company's operations.
F-15-
Note 6 - Shareholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units
("Units"). (425,000 shares had been previously issued for $25,000). Each
Unit consisted of one share of PTC's common stock, $.001 par value, and
two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant
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 December 31, 2001. The Warrants will be redeemable at a price of
$.01 per Warrant upon 30 days notice at any time, only in the event that
the last sale price of the common stock is at least $8.50 per share for 20
consecutive trading days ending on the third day prior to date on which
notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are identical
to the Warrants discussed above. No Warrants have been exercised or
granted subsequent to May 23, 1996.
At June 30, 2001, 3,700,000 shares of common stock were reserved for the
issuance upon exercise of the warrants described above.
The Company is authorized to issue 1,000,000 shares of preferred stock
($.001 par value) with such designations, voting and other rights and
preferences as may be determined from time-to-time by the Board of
Directors. No preferred stock has been issued by the Company.
[Effective as of the close of business on May 4, 2001, the Company's
===================================================================
Common Stock was delisted] for trading on the NASDAQ SmallCap Market.
=========================
[Trading in the Company's Common Stock, Warrants and Units is now
=================================================================
conducted in the over-the-counter markets on the NASD Electronic Bulletin
=========================================================================
Board]. The OTC Bulletin Board is an inter-dealer automated quotation
=====
system sponsored and operated by the NASD for equity securities not
included in the NASDAQ Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions. [The
===
delisting could have a material adverse effect upon the Company in a
====================================================================
number of ways, including its ability to raise additional capital. In
======================================================================
addition, the absence of a trading system may adversely affect the
==================================================================
ability of broker-dealers to sell the Company's Common Stock, and
=================================================================
consequently may limit the public market for such Stock and have a
==================================================================
negative effect upon its trading price. There can be no assurance that
=======================================================================
the Company's Common Stock will be relisted on the NASDAQ National Market
=========================================================================
at any future date or that such stock will be listed or traded on any
=====================================================================
market or trading system.]
========================
F-16-
Note 7 - Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. The
plan allows for eligible employees to defer a portion of their salary. In
addition, discretionary contributions may be made by the Company. The
Company made no contributions for the year ended June 30, 2001.
PTC adopted a Performance Equity Plan in 1996 to enable the Company to
offer to selected personnel an opportunity to acquire an equity interest
in the Company through the award of incentives such as stock options,
stock appreciation rights and/or other stock-based awards. The total
number of shares of common stock reserved and available for distribution
under the Plan is 530,000 shares. The Company has adopted the disclosure-
only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for
the Plan.
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, 2000 289,167 $3.00
Granted - -
Expired - -
Exercised - -
----------- -----------
Outstanding and exercisable at June 30, 2001 289,167 $3.00
=========== ===========
The following summarizes information regarding stock options outstanding
and exercisable at June 30, 2001:
Weighted Average
---------------------------------------
Options
Outstanding Remaining
Range of and Contractual Exercisable
Exercise Prices Exercisable Life Price
---------------------------------------------------------------------------------------
$ 1.375 - $ 5.00 289,167 2 years $3.00
F-17-
Note 8 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
(liabilities) are as follows:
Current
Warranty accrual $ 107,100
Inventory net realizable value reserve 51,000
Other 128,900
----------
Net current deferred tax asset $ 287,000
==========
Non-Current
Depreciation and basis of assets $ (700,000)
Research credit carryforward - net 168,400
Net operating loss carryforwards 1,915,000
Executive deferred compensation agreement 302,800
Other 10,800
Valuation allowance (646,000)
----------
Net non-current deferred tax asset $1,051,000
==========
F-18-
Note 8 - Income Taxes - Continued
The significant component of income tax benefit is as follows:
Federal
Deferred $ (572,000)
==========
The reconciliation of income tax computed at the federal statutory rate
(34%) to income tax expense benefit is as follows:
Tax expense benefit at statutory rate $(1,253,00)
Goodwill amortization and other
non-deductible items 699,000
Other - net (18,000)
----------
Total income tax benefit $ (572,000)
==========
The Company has tax research credit carryforwards totaling approximately
$990,000 that will begin to expire in 2012. Based on management's
estimates, these credit carryforwards have been reduced by 50% for
financial statement purposes to reflect their estimated future value.
In addition, the Company has net operating loss carryforwards totaling
approximately $5,600,000 that will begin to expire in 2020.
F-19-
Note 9 - Operating Lease Commitments
The Company entered into a new building leasing agreement in April 2001
with the term beginning July 2001 and ending June 2007 for its Westland
subsidiary. Rent expense for the year ended June 30, 2001, totaled
$215,980. Minimum rental payments under this noncancelable lease, which
contains a five year renewal option, at June 30, 2001, are as follows:
2002 $ 196,961
2003 214,867
2004 214,867
2005 214,867
2006 214,867
Note 10 - Export Sales and Major Customers
A breakdown of export sales, based on shipment location, is as follows:
United States $21,313,623
Mexico 1,371,605
England 2,746,052
Germany 1,073,016
China 1,109,200
Canada 290,023
Other foreign countries 88,868
-----------
Total $27,992,387
===========
For the year ended June 30, 2001, the Company's sales to its major
customers (each representing more than 10% of total net sales) amounted
to approximately 47% of total annual sales. During 2001, there were two
major customers representing 24% of total net sales.
F-20-
Note 11 - Bonus Restructuring
During fiscal 1998, the Company amended the employment agreements of two
executive officers of Atlas that were previously entered into in
connection with the acquisition of Atlas. These amended employment
agreements are identical except that one agreement expired on December
31, 1998, and the other expires on December 31, 2001. Each agreement
requires the executive to devote substantially all of his business time
and attention to the affairs of the Company. Annual compensation under
each agreement is $198,588, subject to cost of living increases for one
of the officers. The amended agreements also provide that each
executive, regardless of future employment, will receive four annual
payments of $207,571 commencing July 30, 1999.
Each executive also received 150,000 shares of restricted common stock of
the Company issued during fiscal 1999. The restricted common stock has
been valued at market value less a 30% discount for lack of
marketability. Included in the accompanying consolidated financial
statements as of and for the year ended June 30, 2001 related to these
amended agreements are the following:
Consolidated Balance Sheet
Current maturities of executive
deferred compensation agreements $ 630,282
Executive deferred compensation
agreements, less current maturities 344,651
Note 12 - Legal Proceedings
On March 9, 2001, the Company filed suit as plaintiff in the State of
Michigan Sixth Judicial District Court in Oakland County, Michigan
against Thomas G. Lee and WCS Sales, Inc., the former owner and operator
of Westland. The lawsuit contends Mr. Lee made fraudulent
misrepresentations and omitted material facts prior to the purchase of
Westland by the Company. The lawsuit seeks one or more remedies,
including damages. Mr. Lee has filed a response and counterclaim seeking
payment for contractual obligations structured at the time of the
Westland purchase and for related employment compensation.
F-21-