ITEM 1. DESCRIPTION OF BUSINESS
Productivity Technologies Corp. (formerly named Production Systems Acquisition Corporation), a Delaware corporation ("Company"), was organized in June 1993 as a Specified Purpose Acquisition Company(R) ("SPAC(R)"), with the objective of acquiring an operating business ("Target Business") in the production systems industry ("Production Systems Industry"). The Production Systems Industry consists of companies which produce the machinery, components and systems for manufacturing.
On May 23, 1996, the Company acquired Atlas Technologies, Inc. ("Atlas"), a Michigan-based corporation incorporated in 1974 and engaged in the manufacture and sale of equipment to automate metal stamping press operations. The acquisition was accomplished through the merger of a wholly-owned subsidiary of the Company into Atlas, with Atlas being the surviving company and becoming a wholly-owned subsidiary of the Company. The Company has no other subsidiaries or operations.
Business of Atlas
Metal stamping presses are used to form a wide variety of sheet metal components used in automobiles, appliances and other consumer and industrial products. Atlas offers a complete range of products within three categories critical to the operation of metal stamping presses: quick die changing equipment, press automation equipment, and stacking and destacking equipment, which, together, have historically accounted for approximately 85% to 90% of its sales revenues. It also sells material handling product lines and, on a turnkey basis, fully integrated metal stamping systems comprised of components provided by Atlas and other manufacturers. During fiscal 1998, Atlas also began producing and selling finger tooling for use with its and third party transfer press automation equipment.
Metal stamping involves setting pieces of flat sheet metal over a shaped die which is set in a press and then lowering a matching die onto the sheet metal to form it into the desired shape. The sheet metal pieces typically pass through several stamping press operations, each performing a different shaping function. Atlas's automation provides the material handling needs of the cut sheets of steel converted from rolled coils of steel into what the industry calls blanks. The blanks require stacking so they can be palletized and moved into the next operation. These blanks are then stationed into a destacker to be cycled one at a time through cleaning and washing stations and then loaded into the first forming press onto a die. The part moves from one die station to another within a multi-station transfer press or between presses within a tandem line of presses until it reaches its desired shape. To change the production of a different desired part the dies within the press must be changed over. These dies can weigh 5 to 50 tons. To assist in storage and retrieval of these dies or other heavy loads, Atlas automated storage and retrieval equipment facilitates the staging of the die for the moving and change-over of the press line by use of the Atlas automatic die change carts.
In recent years, the increasing complexity and precision required in stamped metal components, such as automobile body and appliance parts, coupled with the large variety of such components necessary to meet consumer preferences, has required the manufacturers of such products to increase the flexibility and efficiency of the machinery used in their manufacture. The presses must accommodate rapid changes in production schedules and produce profitable batch runs of varying sizes. Equipment such as that made by Atlas is important to meet the needs of the manufacturers.
Sales of Atlas products have principally been to two customer segments - automobile and automotive parts manufacturers, and appliance manufacturers. Other customers include steel service centers and manufacturers of garden and lawn equipment, construction earth moving equipment, office furniture, heating, air conditioning and ventilation (HVAC) equipment and aircraft. In Atlas's 1996, 1997 and 1998 fiscal years, the automotive segment accounted for approximately 86%, 90% and 90% of sales, respectively, and appliance manufacturers accounted
for approximately 8%, 3%, and 0.5% respectively. In fiscal 1998, sales to the construction equipment industry accounted for approximately 8% of total sales. For such fiscal years, sales by Atlas to General Motors Corporation represented 10%, 12%, and 27% respectively, sales to Chrysler Corporation represented 13%, 3%, and 10%, respectively, and sales to The Ford Motor Company represented 11%, 9%, and 14% respectively, of total sales. Sales are predominantly in the United States and Canada but, in recent years, Atlas has targeted sales efforts in Mexico, Europe and Asia. International sales for the 1996, 1997 and 1998 fiscal years represented approximately 13%, 20%, and 30% of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices in Atlanta, Illinois and at its headquarters in Fenton, Michigan; commissioned sales representatives; and original equipment manufacturers (OEMs) specializing in metal presses and related equipment. Order backlogs were approximately $18,200,000, $19,000,000, and $17,000,000 at June 30, 1996, 1997 and 1998, respectively.
Products
Atlas offers critical, high technology products based on proven designs and engineering, which it believes offer superior technology, engineering and features to those offered by its competitors. Atlas products are modular and may be used with existing systems as well as with completely new systems. As a result of their modular design, a variety of pieces of equipment can be combined to form an appropriate solution for a customer's metal stamping needs. Virtually all of its products are on a made-to-order basis. Because of their many desirable features, Atlas products are positioned at an above-average price comparative to its competitors. Generally, there is a large number of suppliers that are capable of providing the materials and components used by Atlas.
Atlas personnel perform applications engineering, product design or customization, research and development, procurement, fabrication, machining, assembly, testing, shipping and installation of the products and systems it sells. In 1993, Atlas began implementing a continuing program to achieve greater standardization in the engineering and design of its products. To date, the program has resulted in faster order fulfillment and production, and improved fabrication. Atlas believes that significant cost-reducing improvements can still be made in the manufacturing process, particularly from further standardization and reduction of custom engineering.
Quick die change equipment made by Atlas includes automated die carts, die tables and high rise automated storage-retrieval systems which are used to maneuver stamping press dies and molds weighing up to 100 tons. The Atlas-developed products allow die swapping to be accomplished in minutes as compared to hours if conventional equipment is used. Atlas storage-retrieval systems permit dies not in use to be stored in multiple level racks and readily accessible to die carts for die swapping. Atlas's equipment can be configured for use with either manually controlled or fully automated presses. Atlas believes that its equipment is instrumental in increasing the "up-time" of presses while also facilitating short run capability, gentle die handling, safer and improved ergonomics and easier and more efficient die maintenance.
Atlas's transfer press automation equipment is sold by it under the names FLEX 2000 and FLEX 5000(R). Transfer presses use as many as ten dies within a single press to progressively form the component (typically including tasks such as drawing or forming, trimming, piercing and flanging). Unlike tandem press lines, which use multiple presses arranged in a line and require multiple devices to move a component, transfer presses move the component being processed from one die station to another using a single automation device. Compared to tandem presses, transfer presses generally operate at significantly higher production rates, require less floor space, consume less energy and allow more component processes per press. Because of this, and because they have fewer parts and require less expensive quick die change equipment than tandem presses, transfer presses have become the preferred type of press for new purchases although many tandem presses will remain in use for many years and can be retrofitted with automation and die change equipment. Transfer presses require devices to hold the part during transfer. This is accomplished by lifting the sheet metal part with suction or vacuum cups or by lifting from its supporting corners. Transfer tooling, known as "fingers," are the extension arms and support devices used to reach into the die and lift the part so it can be transferred into the next die and nested with precision and speed. Atlas has provided its own patented tooling, along with customer specified tooling in many of its transfer applications, since the inception of the FLEX 5000(R). Atlas has also designed special automated methods to accomplish complete line tooling change-over when used in conjunction with the Atlas FLEX 5000(R). This method of change-over increases part transfer accuracy and change-over uptime. Atlas has also made improvements to its transfer tooling fingers and accessories, increasing its overall market and sales capabilities.
Stacking and destacking automation equipment is used to handle the sheet metal in the initial stages of the stamping process. Stackers stack flat blanks cut from the coiled rolls which are delivered to the manufacturer or steel service centers. Destacking equipment feeds the flat blanks into the press and includes functions to scrub or roll-coat the metal blanks and to queue them to assure a steady flow.
Competition
Atlas products are sold in specialized markets that have limited customers and few competitors. In many instances, Atlas products are procured through competitive bidding. Because of the capital cost and the need for skilled personnel, such as engineers, designers, mechanics and sales persons, entry into this industry is expensive and difficult to achieve and Atlas does not expect competition to increase significantly over present levels. Primary competitors of Atlas include ABB Flexible Automation, Herwo Die Changing, Orchid, Hirotec (Japan), Verson All Steel Press, a division of Allied Products Corp., HMS Products Co., Automatic Feed Co. and Aisaku (Japan). Each of these companies offers components which compete with certain components manufactured or sold by Atlas. A number of the competitors are well established with substantial financial resources, recognized brand names, customer loyalty and established market positions, strong engineering and distribution networks and comprehensive manufacturing capabilities.
Trademarks and Patents
Atlas has an agreement to use components in the FLEX 5000(R) transfer press automation that it manufactures and sells that are based on patents owned by the estate of Mr. John Maher. The agreement grants Atlas an exclusive worldwide license to use the patents for a term equal to the life of the patents, including any extensions as a result of modifications to the patents. Currently, the patents registered with the United States Patent and Trademark Office expire on various dates between June 23, 2005 and June 21, 2007. Atlas is obligated to pay the estate of Mr. Maher a royalty based on a portion of the sales price of the FLEX 5000(R) transfer press automation as it relates to the value of the patented components. For Atlas's fiscal years ended June 30, 1996, 1997, and 1998 Atlas expensed approximately $320,000, $270,000, $202,000, respectively, in license fees under this agreement. The agreement also provides that the estate of Mr. Maher is responsible for defending Atlas for any patent infringements. Atlas believes that the terms of the agreement with the estate of Mr. Maher are industry competitive. A patent infringement suit has been brought by Atlas and the estate of Mr. Maher against Orchid International Group, Inc. See Item 3 -- Legal Proceedings, below.
Atlas has registered with the United States Patent and Trademark Office a trademark on "FLEX 5000(R)."
Atlas owns and has registered with the United States Patent and Trademark Office four patents, of which one is for a power and free roller conveyer, one is for certain apparatus and methods for forming workpieces, one is for magnetic sheet separator constructions and one is for the transfer arm for supporting workpieces. Atlas also has registered patents for the first of these in Canada and Great Britain. Atlas has applied for three United States patents for over-under conveyor, finger tooling for transfer press automation equipment and laser blank pallet carriers.
Management and Employees
Ronald M. Prime is currently the Chief Executive Officer emeritus of Atlas. Mr. Prime will retire from Atlas on December 31, 1998. Mr. Prime has been responsible for the overall operations of Atlas, managing the project management, engineering, manufacturing, controls, service, purchasing, and finance departments. Mr. Prime has also been active in product development, as well as the establishment and improvement of Atlas's project management, engineering, manufacturing, and financial processes. From 1972 to 1984, Mr. Prime was President of Fluid & Electric Control Co., founding that business and growing it from one person to 150, one of the largest industrial controls contractors in Michigan. That company was merged with a predecessor of Atlas in 1984. From 1970 to 1972, Mr. Prime held various technical and controls engineering positions.
Michael D. Austin is currently the President and Chief Executive Officer of Atlas and has been the principal officer of Atlas, chiefly responsible for directing the sales of the company, for determining the overall product directions, managing product research and development, and managing the application engineering departments. From 1977 to 1996, Mr. Austin held various other management positions at Atlas, including Vice President of Operations, Sales Manager, and Controls Manager. From 1973 to 1977, Mr. Austin held various controls engineering and management positions at Fluid & Electric Control Co., including Chief Engineer.
Neither Mr. Prime nor Mr. Austin currently performs any policy-making functions for the Company.
Atlas employs approximately 200 persons. None of these persons is a member of a union. Atlas believes that its employee relations are good. Atlas believes that its location in Michigan is beneficial in its access and ability to hire qualified personnel because of the highly industrialized nature of the area.
ITEM 2.
ITEM 2. PROPERTIES
Atlas operates from manufacturing facilities in Fenton and Linden, Michigan. It has approximately 94,200 square feet of space in two facilities which it owns in Fenton. One of the Fenton facilities, newly built in 1997, has higher roofs and heavier cranes to facilitate manufacturing of larger equipment and provides approximately 51,000 square feet of manufacturing space and 8,000 square feet of office space. This facility also is capable of expanding at a later date to approximately 130,000 square feet of manufacturing and 25,000 square feet of office space. Both Fenton facilities are used for assembly operations and light and medium machining operations and electrical panel construction. Project management, engineering and sales offices are also located in Fenton.
In Linden, Michigan, at a leased location, Atlas has a welding and fabrication and warehouse facility located in approximately 16,300 square feet.
During the fiscal year, Atlas reduced staffing and office space leased in Atlanta, Georgia.
The principal executive office of Atlas is located at 201 South Alloy Drive, Fenton, Michigan 48430, and its telephone number is (810) 629-6663.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and the estate of John Maher, the owner of the patent for the FLEX 5000(R) licensed to Atlas, initiated an action against Orchid International Group Inc. and Orchid Automation ("Orchid") in the Federal Court of Canada, Trial Division, claiming infringement and wrongful sale, manufacture and use by Orchid of the inventions protected by such patent and seeking, among other relief, a declaration that the patents are valid and have been infringed by Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). The defendant has filed an answer denying the material allegations of the complaint and asserting a counterclaim requesting that the patents be declared invalid. Discovery activities are presently being undertaken by the parties.
During the third quarter of fiscal 1998, Atlas and the SWVA, Inc. ("SWVA") reached a settlement in connection with an outstanding legal dispute. SWVA's initial claim under the dispute was for $15,300,000. The settlement provided for a payment of $700,000 to SWVA, of which $210,000 was paid from insurance proceeds.
Except for the action against Orchid, neither the Company nor Atlas is currently involved in any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (Symbol: PRAC) and Warrants (Symbol: PRACW) are listed for trading on the Nasdaq SmallCap Market. The Company's Units (Symbol: PRACU), each consisting of one share of Common Stock and two Warrants, are quoted on the OTC Bulletin Board.
The following table sets forth the range of high and low closing bid prices for the Common Stock and Warrants, as reported by the Nasdaq SmallCap Market, and for the Units, as reported by the OTC Bulletin Board. There was no material trading in the Units during the periods reported. The OTC Bulletin Board is an inter-dealer automated quotation system sponsored and operated by the NASD for equity securities not included in the Nasdaq System. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
As of September 30, 1998, the Company had 12 holders of record of its Common Stock. The Company believes that there are in excess of 500 beneficial holders of the Company's Common Stock.
The Company has not declared or paid any dividends on its Common Stock since its inception.
Recent Sales of Unregistered Securities
No securities were issued by the Company during the fiscal year ended June 30, 1998. In September 1998, 150,000 shares of Common Stock were issued to each of Messrs. Prime and Austin pursuant to agreement reached during the year ended June 30, 1998. Such shares were not registered under the Securities Act of 1933, as amended (the "Act"), pursuant to the exemption provided by Section 4(2) of the Act as transactions by an issuer not involving a public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's and its predecessor's consolidated financial statements which have been audited by BDO Seidman, LLP, independent certified public accountants, at June 30, 1998, 1997 and 1996, for the periods July 1, 1995 to May 23, 1996, May 24, 1996 to June 30, 1996, and for the years ended June 30, 1997 and 1998, and by Dupuis & Ryden, independent certified public accountants, at June 30, 1995 and 1994 and for the years then ended. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data
Consolidated Balance Sheet Data
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fiscal year ended June 30, 1998 is the second full year of consolidated activities for Productivity Technologies Corp. and its wholly-owned subsidiary, Atlas Technologies, Inc.
Currently, automotive and auto-related suppliers and steel service centers account for approximately 90% of new orders and receive most of Atlas's recent marketing efforts. At the same time, Atlas remains familiar and maintains quoting activity with non-automotive customers, including producers of home appliances, heating and air conditioning systems, off-road vehicles and equipment, and other manufacturers which use significant amounts of sheet metal in their products.
Results of Operations
The Company, on a consolidated basis, incurred a loss of $2,012,350 or $0.95 per share for the fiscal year ending June 30, 1998 due, in part, to legal settlements, a bonus restructuring with senior executives of Atlas, and other charges due to changes in estimates. Significant expenses included the bonus restructuring plan charge of $2,131,903 in one lump sum rather than over a period from the present through December 31, 2001, legal settlement and defense costs approximating $750,000 during the fiscal year, and changes in estimates resulting in the write down of work-in-process and an increase in allowance for bad debts approximating $446,800. These charges represented a combined pre-tax charge of $3,328,741. After imputing a 34% federal tax benefit, the net after-tax effect of these charges approximated $2,196,969.
Atlas's operating performance before unusual charges was lower in revenues and earnings margins than expected at the beginning of the year by Atlas management. Orders which were received, and the delivery dates of the orders, tended to be concentrated over a shorter period of time, hindering the ability of Atlas management to schedule production and use labor optimally. This increased Atlas's costs and reduced profit margins on shipments. Atlas also experienced a reduction in new orders during the General Motors workers strike in the summer of 1998. Atlas began to produce orders for GM in the third and fourth quarters of fiscal 1998, but had to suspend production when GM canceled orders due to a delay in certain plant expansion plans.
Results of operations for the year ending June 30, 1997 are not fully comparable to results for fiscal 1996. PTC acquired Atlas on May 23, 1996. Fiscal 1996 figures include approximately eleven months of unconsolidated Atlas operations. Consequently, fiscal 1996 data includes only 38 days of consolidated PTC and Atlas activities.
Sales (Revenue and Cost Recognition)
Sales are recognized using the percentage-of-completion method, which measures the percentage of contract costs incurred to date and compares these costs to the total estimated costs for each contract. The Company estimates the status of individual contracts when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job condition, estimated profitability, and final contract settlement may result in revisions to costs and income, and are recognized in the period the revisions are determined.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for the fiscal year ending June 30, 1998 were $36,040,278, an increase of 5% over net sales of $34,437,625 for the fiscal year ending June 30, 1997. Atlas management believes the worldwide customer demand is still strong for automation to enhance stamping press line production speeds, quality, safety and unit cost savings. Despite this, Atlas's backlog as of June 30, 1998 approximated $17,000,000, a 10% decline versus the $19,000,000 backlog at June 30, 1997. Atlas management believes the decline in backlog as of June 30, 1998 was temporary, and caused in part by postponements in order placement due to the GM strike and the delay in capital spending leading up to the completion of the merger of DaimlerBenz and Chrysler Corp.
Cost of products sold for the fiscal year ending June 30, 1998 were $27,562,608, a level approximating 76% of net sales, compared to $24,824,582, or 72% of net sales, for the 1997 fiscal year. Cost of sales relative to revenues increased due to a less favorable product mix during fiscal 1998, foreign sales at lower margins, and to a less efficient use of production and labor resources necessitated by the higher concentration in required product delivery dates relative to fiscal 1997. Included in cost of sales during fiscal 1998 were expenses related to ISO 9000 certification efforts, employee computer and other training, a change in estimate that resulted in a write down of work-in-process and finished inventories approximating $447,000, and research and development costs in connection with the final design phase of new automation and material handling products.
Gross profits for the year ending June 30, 1998 were $8,477,670 compared to $9,613,043 in fiscal 1997, a decrease of 12% due to the reasons cited in the immediately preceding paragraph on cost of sales. Approximately 30% of Atlas's sales in fiscal 1998 were foreign. In general, Atlas foreign sales during fiscal 1998 were at lower gross margins due to higher costs associated with foreign marketing efforts, foreign redesign requirements, travel and shipping expenses.
Selling, general and administrative (SG&A) expenses were $8,538,166 in fiscal 1998 compared to $7,081,273 for fiscal 1997, an increase of 21%. The increase was primarily due to expenses of approximately $750,000 in connection with the legal defense and settlement of the SWVA lawsuit, higher commission expenses related to Atlas's increased volume, and travel and sales related costs associated with the first full year of Atlas's sales and marketing efforts in the United Kingdom and China.
The bonus restructuring plan agreed to between Atlas and Messrs. Prime and Austin, senior executives and former owners of Atlas, during fiscal 1998 resulted in a charge of $2,131,903. Under the bonus restructuring plan, Atlas agreed to pay to the senior executives the following: (1) 300,000 shares of common stock restricted from transfer or resale for a period of three years, and (2) deferred compensation of $1,660,564 which is to be paid in four equal annual installments in arrears. In addition, $810,000 accrued in previous years under their employment agreements was agreed to be paid in cash, of which $560,000 is to be placed in an escrow account. It is expected that part or all of the balance in the escrow account will be distributed at a later date to the senior executives, depending upon the future resolution of a dispute between Atlas and the Internal Revenue Service related to research and experimentation credits claimed by Atlas for the fiscal years ended June 30, 1991 through 1995. See "Contingencies" below.
Interest expense during fiscal 1998 was $1,057,725, an increase of 13% compared to $933,632 for 1997. The increase in interest expense for the period was due to the first full year of interest payments on the $4,500,000 Industrial Revenue Bond issued by Atlas in December 1996 for building construction and the purchase of equipment and other assets.
The net loss during fiscal year 1998 was $2,012,350 compared to 1997 net income of $592,730. The reasons for the net loss are provided in the above paragraphs of this section.
The Company's consolidated statement of cash flows indicates net cash generated in operating activities of $5,503,400 for the fiscal year ending June 30, 1998 which resulted primarily from a reduction in work-in-process and accounts receivable. Net cash used in investing activities included proceeds from the sale of a facility in Linden, Michigan which was offset by new purchases of computers, furniture and equipment in connection with the newer plant in Fenton, Michigan. The net proceeds generated by operating activities were used to pay down the bank line of credit and the net effect of cash financing and usage activity resulted in an increase of cash and equivalents of $1,328,748 as of June 30, 1998 compared to June 30, 1997.
Fiscal Year 1997 (Consolidated) Compared to Fiscal Year 1996
Net sales for the fiscal year ending June 30, 1997 were $34,437,625, a decrease of 4% over net sales of $36,002,861 for fiscal year 1996. The decrease resulted primarily from two factors. The first relates to shipments which were delayed by a customer of Atlas's newly designed destacker. Atlas also experienced reduced production flow caused by the move to and start-up of the new facility. Customer demand for automation solutions that enhance production speeds, quality, safety and provide piece part cost savings remains strong. Atlas's backlog at June 30, 1997 approximated $19.0 million, a 4% increase over June 30, 1996 backlog of $18.2 million.
Cost of products sold for the fiscal year ending June 30, 1997 were $24,824,582, representing 72% of revenues, compared to $24,802,193 or 69% of revenues, for fiscal year 1996. The increase in cost of sales relative to revenues was primarily due to Atlas's expensing, during the first two quarters of fiscal 1997, costs associated with the development of its new destacking equipment, and additional expenses from increases in foreign sales, including redesign requirements for foreign orders, project management, foreign travel, and overseas shipping expenses.
Gross profits for fiscal year ending June 30, 1997 were $9,613,043, compared to 1996 gross profits of $11,200,668, a decrease of 14%. The decrease was primarily due to development expenses related to the introduction of large destacker equipment, costs associated with increasing foreign market sales, and lower overall sales levels.
For fiscal 1997, selling, general and administrative (SG&A) expenses were $7,081,273, as compared to $6,736,106 for 1996, an increase of 5%. Changes in Atlas's SG&A included a reduction in legal expenses of $148,000, a decrease in bad debt costs of $160,000 and an increase in goodwill amortization of $92,000 associated with the acquisition of Atlas by the Company. SG&A increases included the Company's corporate administrative and compensation expenses. The Company's SG&A expenses for the full 12 months of fiscal 1997 were $679,446 compared to $54,381 for approximately one month during fiscal 1996. The Company's expenses increased in fiscal 1997 compared to 1996 due to the Company's acquisition of Atlas in May, 1996. Corporate salaries for employees of the Company were $18,332 in fiscal year 1996 and $223,221 in fiscal year 1997. Corporate salaries in 1996 commenced subsequent to the Company's purchase of Atlas and covered only 38 days, from May 23, 1996 to June 30, 1996. In contrast, the Company's salaries were paid for the entirety of fiscal year 1997. Accounting fees increased from approximately $8,000 in fiscal year 1996 to $68,024 in 1997, legal fees increased from $19,000 in 1996 to $29,960 in 1997, and travel related costs grew from $13,237 to $60,057. Professional consulting and stock market related fees increased from $0 and $3,324, respectively, in 1996 to $60,976 and $64,005, respectively, in fiscal 1997.
Officer bonuses to Ronald Prime and Michael Austin, executives and former owners of Atlas, amounted to a total of $711,000 during fiscal 1997. The bonuses, which are superseded in fiscal 1998, were contingent on the Company achieving certain levels of financial profitability each year and were not accrued if the Company did not meet the earnings targets. Bonuses during fiscal 1996 were $2,314,000, of which $753,000 was expensed subsequent to January 1, 1996 when the employment agreement between the Company and Messrs. Prime and Austin commenced.
Interest expense for fiscal year ending June 30, 1997 was $933,632, an increase of $363,450 relative to interest costs of $570,182 in fiscal 1996. The significant increase in interest expense for the period was caused by higher utilization of the line of credit to finance work-in-process, increased accounts receivable, distribution of officer bonuses and increases in borrowings related to the issuance of the $4,500,000 Industrial Revenue Bond (IRB) in December 1996. The IRB was issued to pay for Atlas's new plant construction and asset acquisitions.
Net Income during fiscal year 1997 was $592,730 compared to 1996 net income of $967,428. The decrease in net income of 39% was primarily due to lower volume, higher cost of sales, higher interest charges, and increased corporate overhead absorption for the full 1997 fiscal year.
The Company used net cash of $1,389,788 in operating activities in fiscal 1997 to support an increase in customer receivables of $1,123,172 and work in process of $417,420. Cash used in investing activities of $4,438,338 was employed to purchase the land, building and equipment for the Company's new plant. Company financing activities during fiscal 1997 provided $6,159,656 of cash, and included a $4,500,000 Industrial Revenue Bond offering issued by Atlas in December 1996 to finance new plant construction, furnishings and manufacturing equipment. The balance derived from increased borrowings on the revolving line of credit and a term note to finance a boring mill. The net result of financing and usage activity resulted in an increase of cash and equivalents of $331,530 compared to the balance at the end of fiscal 1996.
Liquidity and Capital Resources
The Company believes Atlas's future short term capital expenditure requirements can be met from the $14,000,000 asset-based revolving line of credit. Atlas borrowed from $7,200,000 to $12,700,000 under the revolver during fiscal 1998. Use of the revolver depends on project invoicing. Delays in converting work in process into customer invoices typically require increases in revolver borrowings. From time to time, Atlas's bank allows for temporary increases in the collateral requirements as stated in the current agreement. The debt to officers under the bonus restructuring plan is subordinated to bank borrowings and is included in calculating certain debt ratios as required by covenants in the banking agreements.
The Company's working capital at June 30, 1998 was $9,801,888, compared to $15,343,022 as of June 30, 1997. The decrease was due primarily to the $4,100,450 repayment on the revolving credit line and an increase of $1,193,616 in expenditures for property and equipment.
At June 30, 1998, Atlas had borrowings outstanding of $13,306,187 on various loans and the deferred compensation agreement, of which the current portion was $615,677. Atlas's loans and deferred compensation agreement were comprised of the following:
(i) A revolving credit agreement expiring in September 1999, with increased maximum debt usage of $14,000,000 based on collateral including Atlas receivables, work-in-process, and other assets. Interest rates were at the bank prime rate less 1/4% or the 30, 60 or 90 day LIBOR rate plus 230 basis points, at the option of the Company. Atlas amortized certain asset based debt with quarterly payments of $37,360. Atlas's outstanding revolving line of credit at June 30, 1998 was $7,199,165.
(ii) A note with First Chicago NBD, N.A. The note balance at fiscal year end 1998 was $140,077. The note bears interest at the bank's prime rate. The final note payment is due in January, 2002.
(iii)Atlas had borrowings outstanding of $30,562 from Concord Commercial, a leasing company, secured by certain Atlas equipment. The borrowings bear interest of 8.7% per annum. Final payment on the borrowings is due in October, 1999.
(iv) Atlas had outstanding borrowings of $4,500,000 relating to the issuance of the Industrial Revenue Bonds. The bonds are state and federal tax exempt. Consequently, the floating rate of interest is significantly reduced compared to conventional construction or real-estate financing. IRB terms are as follows for each fiscal year:
1999-2001 -- $400,000 annual payments plus quarterly interest payments 2002- 2012 -- $300,000 annual payments plus quarterly interest payments
IRB closing costs of $184,409 were incurred and booked as a long term asset. These are being amortized over the 15 year life of the Industrial Revenue Bonds.
(v) Deferred compensation due to officers of $1,660,564 which is payable over four equal annual installments in arrears, with the final payment due in July 2002.
The Company believes that, as a result of the revolving credit agreement, its short-term credit availability is adequate to support its business operations at current and near-term anticipated sales levels.
Contingencies
Atlas is undergoing an Internal Revenue Service audit for the fiscal year ended June 30, 1995. The main area of review is a research and experimentation tax credit the Company has calculated and filed for over the past six years. The Company had applied approximately $459,000 of credit towards Federal taxes due for the fiscal periods ended June 30, 1997, 1996 and 1995 and had a carry forward of approximately $23,000 expected to be used as a reduction in future tax payments. Management believes this issue is a matter of interpretation of the research and experimentation regulations. Management believes that the IRS may seek a reduction in the amount of credit calculated which may have an adverse effect to the financial statements of the Company. The Company is entitled to indemnification up to $560,000 (subject to certain exclusions and limitations) from the former principal stockholders of Atlas for amounts it may be required to pay as a result of such audit.
Year 2000 Compliance
The Company is installing an "enterprise resource planning" system at Atlas, which includes computer systems for its internal accounting and reporting activities and its manufacturing operations and processes which are "Year 2000 compliant" (which means that such computer systems and other information technology will accurately process date/time data regardless of whether the date is in the twentieth or twenty-first century). The acquisition and installation of the system are expected to cost approximately $340,000, of which $240,000 was expended in fiscal 1998. Because the system is being implemented as an overall upgrade to Atlas's operations and not specifically to address Year 2000 compliance concerns, management has not estimated the portion of the cost which may be allocable to Year 2000 compliance. Management has not yet assessed whether or not the failure of Atlas's internal information technology to be Year 2000 compliant would have a material adverse effect upon the Company's financial position, liquidity or results of operations although it is confident that installation and operation of the new system will be accomplished in advance of December 31, 1999.
The Company is also assessing its vendors, customers, utilities, banks and others with whom it does business to determine if their failure to be Year 2000 compliant would have a material adverse effect upon the Company or its financial position, liquidity or results of operations. To date, nothing has come to the attention of management that leads it to conclude that the likelihood of such adverse effect reasonably exists. The Company's and Atlas's operations utilize relatively little electronic data interchange with vendors, customers and other third parties. However, to the extent that such third parties, particularly utilities and banks, may not be Year 2000 compliant, the Company and Atlas may be adversely effected, although the magnitude of such effect cannot be estimated. The cost to the Company of making its third-party Year 2000 compliance assessment is not expected to be material.
Certain Atlas products contain processors which address and utilize date/time data. Management believes that such processors incorporated in equipment sold within the past five years are virtually all Year 2000 compliant. However, it is not able to determine the compliance status of processors used in equipment sold in earlier periods with any reasonable degree of certainty. Although such equipment is beyond the warranty periods applicable to Atlas's products, it is possible that customers who purchased equipment from Atlas which is not Year 2000 compliant may nevertheless assert claims against Atlas to correct the compliance deficiencies or for resulting damages. While management believes that Atlas would not be legally responsible to such persons, based on the terms of its purchase orders and warranties, there can be no assurance that this position would prevail if challenged. Management is unable to estimate the potential cost that the Company might incur if such claims are made and successfully sustained or whether or not such cost would have a material adverse effect upon its financial position, liquidity or results of operations.
Recent Accounting Standards
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for financial periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management has not determined the impact, if any, these statements may have on future financial statement disclosures.
Statement of Position (SOP) 98-5, "Reporting on the cost of Start-Up Activities," was issued in April 1998 and SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. These statements are effective in fiscal 2000 and are not expected to have a material impact on the consolidated financial statements.
Forward-Looking Statements
When used in this and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result," "plans," "will continue," "is anticipated," "estimated," "project" or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following: competitive pressures in the industry in which the Company is engaged; an unfavorable outcome of the IRS audit for the fiscal year ending June 30, 1995, adverse changes in the Company's banking loan requirements; major fluctuations in the strength of the U.S. dollar versus international currencies; Year 2000 compliance; and general economic conditions. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company as set forth on page
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as follows:
Nominee Age Director Position Since Ray J. Friant, Jr........ 67 1993 Chairman of the Board Samuel N. Seidman........ 64 1993 President and Director Joseph K. Linman......... 59 1993 Director and Vice President John S. Strance.......... 73 1993 Director and Vice President Jesse A. Levine.......... 31 1993 Director, Chief Financial Officer, Vice President, Secretary and Treasurer Alan H. Foster........... 72 1993 Director Alan I. Goldman.......... 61 1993 Director
Ray J. Friant, Jr. has been Chairman of the Board of the Company since its inception. Between 1988 and 1996, Mr. Friant was Managing Director of Seidman, Friant, Levine Ltd., a crisis management company, where he specialized in corporate restructuring and reorganization. In this capacity, he had management control, and successfully restructured and/or stabilized the operations, of three public companies, CMI Corp., Mr. Gasket Co. and Advanced Semiconductor Materials International N.V. ("ASM"), which companies have manufacturing operations in road building equipment, automotive aftermarket products and semiconductor production equipment, respectively. Since 1982, Mr. Friant has also been President and Director of Friant Associates, Inc., specializing in corporate turnarounds. Mr. Friant was Group Vice President and General Manager of Gulf+Western Industrial Products Group (IPG) from 1978 to 1982. IPG was a group of ten companies involved in electronic systems, electronic connectors, electronic components, electro-mechanical components, wire and cable, cutting tools and hardware manufacturing. From 1973 to 1978, as an employee of ITT Corp., Mr. Friant successfully reorganized several multi-million dollar subsidiaries. In addition, he had a number of special worldwide assignments involving ITT Corp. headquarters organization, resource allocation for product development, and management succession. At Western Union Corp. from 1969 to 1972, Mr. Friant developed and implemented the business of teleprocessing at a non-regulated subsidiary. From 1953 to 1969, Mr. Friant was employed by General Electric Co. ("GE"), where he was responsible for initiating GE's phased array radar business, for designing and implementing GE's Program Management System for managing large, complex military contracts and for the business turnaround of several unsuccessful organizations. Mr. Friant earned B.S. degrees in both Mechanical Engineering and Electrical Engineering from West Virginia University. He also graduated from General Electric's three-year graduate level Advanced Engineering program and General Electric Management School.
Samuel N. Seidman has been President and a Director of the Company since its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment banking and economic consulting firm, and serves as its President. In this capacity, he has provided a broad range of investment banking services, including financial analysis and valuations, private financings, and corporate recapitalizations and debt restructurings. Mr. Seidman also serves as a director of AMREP Corp., a real estate development corporation listed on the New York Stock Exchange. He has acted as financial advisor to manufacturers of various kinds of production systems and components for a number of industries, including ASM, a multi-national producer of automated equipment and systems for the production of semiconductors, traded on the Nasdaq National Market. Mr. Seidman advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of Sharon Steel Corp., an integrated manufacturer of finished steel products, and served as financial advisor in Chapter 11 to Chyron Corp., a specialized production systems company for video productions listed on the New York Stock Exchange, and Mr. Gasket Co., a manufacturer of automobile aftermarket products. Prior to founding Seidman & Co., Mr. Seidman worked in corporate finance at
Lehman Brothers. Mr. Seidman has served as director of numerous public and private companies, including Penn Engineering Corporation, a manufacturer of equipment for steel production and metal processing which had been listed on the American Stock Exchange. Mr. Seidman earned a B.A. degree from Brooklyn College and a Ph.D. in economics from New York University. He was a Fulbright Scholar and a member of the graduate faculty of the City University of New York. Mr. Seidman's nephew, Jesse A. Levine, is Vice President, Secretary, Treasurer and a Director of the Company.
Joseph K. Linman has been Vice President and a Director of the Company since its inception. Mr. Linman retired from the Ford Motor Company ("Ford") in 1989 after 25 years with that company, preceded by two years with RCA Defense Electronics. During his career with Ford, Mr. Linman held numerous managerial and executive positions in financial, marketing, technical, governmental relations and external affairs capacities, including Chief Financial Officer of Ford Latin America, S.A. de C.V., a wholly-owned Ford subsidiary responsible for automotive operations in Latin America, South Africa and Egypt. Mr. Linman served as a member of the boards of directors or executive committees of Ford subsidiary companies in nine countries and as a member of the advisory committee of the Council of the Americas and the Mexico-U.S. Business Committee that pioneered the North American Free Trade Agreement. Mr. Linman earned a B.S. degree from Oregon State University and an M.B.A. degree from Indiana University.
John S. Strance has been Vice President and a Director of the Company from its inception. He is currently a private investor. From 1986 to 1992, he was the President of Star Controls Corporation, a provider of sophisticated microprocessor control products for process control and automation systems, which he founded. From 1983 to 1986, Mr. Strance was an independent consultant assessing technology and market trends and identifying and evaluating companies for acquisition. From 1980 to 1983, Mr. Strance performed the same services as Director of Planning and Development for Gulf+Western Manufacturing, responsible for product development using new technology. From 1954 until 1980, Mr. Strance held management positions as president of several subsidiaries of Gulf+Western. Mr. Strance has been granted 13 U.S. letters patent for new products and production systems. Mr. Strance earned B.S. and M.S. degrees in Mechanical Engineering from the University of Oklahoma and the Carnegie Institute of Technology, respectively.
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company since its inception, Chief Financial Officer since June 1995 and a Vice President since May 1996. Since January 1992, Mr. Levine has been Vice President and then Senior Vice President of Seidman & Co., Inc., specializing in financial and business analysis, corporate finance, private placements and corporate advisory services. From January 1991 to December 1991, Mr. Levine was Contracts Administration Manager of The Newman Group Computer Services Corp., Inc., a computer systems supplier. Previously, Mr. Levine served as a commercial credit analyst for Society Bank, Michigan. Mr. Levine earned a B.A. degree in economics from the University of Michigan and has been elected a chartered financial analyst. Samuel N. Seidman, the President of the Company, is Mr. Levine's uncle.
Alan H. Foster has been a Director of the Company since its inception. Since 1986, he has been an Adjunct Professor of Finance and Corporate Strategy at the University of Michigan. In conjunction with the University of Michigan School of Engineering, Mr. Foster is engaged in the study of the future of "agile machines." Since 1978, Mr. Foster has been the principal of A.H. Foster & Company, a consulting firm which serves as a consultant in corporate finance to foreign governments and domestic and international clients. Currently, Mr. Foster is a director of Code-Alarm, Inc., a manufacturer of automobile security systems traded on the Nasdaq National Market. For the last 12 years, Mr. Foster has served numerous times as a court-appointed trustee in bankruptcy for both Chapter 7 and Chapter 11 cases. He was employed by the American Motors Corporation from 1963 to 1978, where he first served as Director, Financial Planning and Analysis and then as Vice President and Treasurer for the last ten of those years. From 1953 to 1963, Mr. Foster worked at Sylvania Electric Products in various capacities, including Manager, Corporate Planning and Control. Mr. Foster is the author of Practical Business Management, published in 1962. Mr. Foster earned a B.S.B.A. degree from Boston College and an M.B.A. degree from Harvard Business School.
Alan I. Goldman has been a Director of the Company since its inception. Since 1985, Mr. Goldman has been self-employed as an investment banker and management consultant, specializing in mergers and acquisitions, private placements and business and organization consulting. From 1975 to 1985, Mr. Goldman was Senior Vice President, Finance and Chief Financial Officer of Management Assistance, Inc., a multi-national computer manufacturing, marketing and maintenance company and a purchaser and user of productions systems and components. From 1970 to 1974, Mr. Goldman was Vice President, Finance, Treasurer and Chief Financial Officer of Interway Corporation, an international company engaged in trailer and container leasing and fleet management. Mr. Goldman is presently a director of Substance Abuse Technologies, Inc. Mr. Goldman earned a B.A. degree from Cornell University and an M.B.A. degree from New York University.
The Company's Board of Directors is divided into three classes, each of which serves for a term of three years, with only one class of directors being elected in each year. The term of office of the first class of directors, consisting of Messrs. Goldman and Levine, will expire at the annual meeting of stockholders to be held during the 2001 fiscal year; the term of office of the second class of directors, consisting of Messrs. Friant and Strance, will expire at the annual meeting of stockholders to be held during the 1999 fiscal year; and the term of office of the third class of directors, consisting of Messrs. Seidman, Linman and Foster, will expire at the annual meeting of stockholders to be held during the 2000 fiscal year.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires officers, directors and persons who beneficially own more than 10% of a registered class of equity securities of the Company ("10% stockholders") to file reports of ownership and changes in ownership with the Commission. Officers, directors and 10% stockholders also are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms furnished to it, and written representations that no other reports were required, the Company believes that during the fiscal year ended June 30, 1998, each of its officers, directors and 10% stockholders complied with the Section 16(a) reporting requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
In November 1997, the Board of Directors of the Company approved the following annual salaries for its executive officers, effective as of December 1997: Chairman (presently Mr. Friant), $40,000; President (presently Mr. Seidman), $65,000; Chief Financial Officer, Secretary and Treasurer (presently Mr. Levine), $40,000; and Vice Presidents (presently Messrs. Linman, Strance and Levine) $15,000. Such salaries are payable in equal monthly installments. An officer holding more than one office will receive only the salary of the highest paying office. All of such officers, in their capacities as directors, participated in the deliberations of the Board of Directors concerning executive officer compensation. The Board also approved fees of $12,000 per year for each director who is not an employee of the Company (presently Messrs. Foster and Goldman), which is payable in equal quarterly installments. In addition, non-employee directors and officers other than Messrs. Friant and Seidman will be paid at the rate of $500 to $1,000 per day, as determined by the Chairman and the President, for actual days spent by them in consulting or other special assignments for the benefit of the Company or its subsidiaries. Officers and directors are also eligible for other compensation and benefits as may be approved by the Board from time to time, including benefits under the Company's 1996 Performance Equity Plan which was adopted by the stockholders of the Company on May 21, 1996. On July 30, 1996, the Board of Directors awarded options under such plan to the Company's officers as follows: - Messrs. Friant and Seidman - 70,833.33 shares each; Messrs. Linman and Strance - 42,500 shares each; Mr. Levine - 28,333.33 shares. Such options are exercisable until July 30, 2001, at an exercise price of $5.00 per share. In November 1997, Messrs. Foster and Goldman each were granted 10,000 options and Mr. Levine was granted 20,000 options, all of which are exercisable until November 2002 at an exercise price of $4.125 per share.
The Company has no employment agreements with its executive officers, each of whom presently serves at the discretion of the Board of Directors.
Atlas Employment Agreements
Under the bonus restructuring plan, Messrs. Ronald M. Prime and Michael D. Austin have entered into employment agreements with Atlas under which they serve as the Chief Executive Officer Emeritus and Chief Executive Officer and President of Atlas, respectively.
The employment agreements with Messrs. Prime and Austin are identical except that the term of Mr. Prime's agreement will terminate on December 31, 1998 and that of Mr. Austin will terminate on December 31, 2001. Each agreement requires the executive to devote substantially all of his business time and attention to the affairs of Atlas. The agreements provide for base salaries of $198,588 per year subject to cost-of-living increases for Mr. Austin after December 31, 1998, for six weeks vacation per year, reimbursement of business expenses, use of an automobile and mobile telephone, medical and life insurance benefits and other benefits generally made available to other employees. The agreements also provide that each executive, regardless of future employment, will receive four annual payments of $207,571 commencing July 30, 1999. The executives each were also issued, during fiscal 1999, 150,000 shares of restricted Common Stock of the Company, which has been valued in the fiscal 1998 financial statements at market value less a 30% discount for lack of marketability.
Each employment agreement also contains provisions restricting the disclosure of confidential information and non-competition covenants.
SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards Name and Principal Position Period Salary ($) Options (#) - ---------------------------------- -------------- ---------- -------------- Samuel N. Seidman, President & CEO 7/1/97-6/30/98 75,000 --- 7/1/96-6/30/97 65,000 70,833 7/1/95-6/30/96 6,250 ---
AGGREGATE YEAR-END OPTION VALUES (June 30, 1998)
Stock Price Performance Comparison
The following table compares cumulative total return of the Company's Common Stock (symbol PRAC) with the cumulative total return of (i) the Standard & Poor's Midcap 400 index ("S&P Index") and (ii) an industry peer group index ("Peer Index") consisting of six other publicly held production tooling manufacturers. The table assumes $100 was invested on July 6, 1994 (the date the Common Stock began trading on the OTC Bulletin Board) in shares of Common Stock, stocks comprising the S&P Index and stocks comprising the Peer Index and the reinvestment of dividends. The Peer Index includes Bethlehem Corp., DeVlieg Bullard, Inc., Farrell Corp., Hurco Companies, Inc., Monarch Machine Tool Co. and Thermwood Corp., equally weighted.
Date Peer Index S&P Index PRAC ------- ------------ ---------- ------- 7/6/94 $100.00* $100.00* $100.00 6/30/95 119.71 119.65 106.25 6/30/96 147.43 143.83 132.81 6/30/97 128.44 180.49 65.63 6/30/98 128.57 229.11 100.00
- --------------------- * 6/30/94.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock, as of October 5, 1998 by (i) each stockholder known by the Company to be beneficial owner of more than 5% of the outstanding Common Stock, (ii) each director of the Company and (iii) all directors and officers as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Number Percentage Name of Beneficial Owner of Shares Beneficially Owned - -------------------------- ----------- ------------------ Ray J. Friant, Jr.................. 218,083(1) 8.7% 30 Boxwood Drive Convent Station, New Jersey 07960
Samuel N. Seidman.................. 217,083(1) 8.7% 520 Madison Avenue New York, New York 10022
Joseph K. Linman.................. 114,250(1) 4.6%
John S. Strance................... 113,250(1) 4.6%
Jesse A. Levine................... 91,583(1) 3.7%
Alan H. Foster.................... 31,250 1.3%
Alan I. Goldman.................... 36,250 1.5%
All Officers and Directors as a group (7 persons).......... 821,749(1) 29.7%
Ronald M. Prime................... 163,000 6.7% 6438 Brewer Flint, Michigan 48507
Michael D. Austin................. 236,900 9.7% 3246 Fieldstone Drive Flushing, Michigan 48433
- ----------------------- (1) Includes shares of Common Stock issuable upon immediately exercisable Warrants and options as follows: Mr. Friant--91,833 shares; Mr. Seidman--90,833 shares; Mr. Linman--46,500 shares; Mr. Strance--44,500 shares; Mr. Levine--48,333 shares; Mr. Foster - 10,000 shares; Mr. Goldman - 10,000 shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the Company office space, as well as certain office, administrative and secretarial services as may be required by the Company. The Company paid Seidman & Co., Inc. $5,000 per month for such services until May 22, 1996, including $8,000 during the three months ended June 30, 1996. During the fiscal years ended June 30, 1998 and 1997, the Company paid Seidman & Co., Inc. approximately $40,000 in each year for such services. Samuel N. Seidman, a director and President of the Company, is President of Seidman & Co., Inc., and Jesse A. Levine, a director, Chief Financial Officer, Vice President, Secretary and Treasurer of the Company,
is Senior Vice President of Seidman & Co., Inc. Seidman & Co., Inc. receives reimbursement for any out-of-pocket expenses incurred in connection with the Company's business. There is no limit on the amount of such out-of-pocket expenses and there has not been nor will there be any review of the reasonableness of such expenses by anyone other than the Company's Board of Directors, which includes persons who have received, and may seek, reimbursement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements of the Company and Atlas listed in Item 8 are submitted as a separate section of this report.
2. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits as required by Item 601 of Regulation S-K:
Exhibit No. Description
3.1 Certificate of Incorporation(1)
3.1.1 Amendment to Certificate of Incorporation filed May 28, 1996(2)
3.2 By-laws(1)
4.1 Form of Common Stock Certificate of the Company(1)
4.2 Form of Warrant Certificate of the Company(1)
4.3 Unit Purchase Option between GKN Securities Corp. and the Company(1)
4.4 Warrant Agreement between Continental Stock Transfer & Trust Company and the Company(1)
10.5 Letter Agreement between Seidman & Co., Inc. and the Company regarding administrative support(1)
10.6 Agreement of Merger dated as of December 18, 1995 (without schedules or exhibits)(3)
10.6.1 Amendment to Agreement of Merger dated December 18, 1995(3)
10.7.1 Employment Agreement dated July 22, 1998 between Atlas Technologies, Inc. ("Atlas") and Ronald M. Prime(5)
10.8.1 Employment Agreement dated July 22, 1998 between Atlas Technologies, Inc. and Michael D. Austin(5)
10.9 1996 Performance Equity Plan of the Company(4)
10.10 Agreement dated July 22, 1998 by and between the Company, Ronald M. Prime, Michael D. Austin and Atlas Technologies, Inc.(5)
10.11 Tax Escrow Agreement dated July 22, 1998 by and among the Company, Atlas Technologies, Inc., Ronald M. Prime, Michael D. Austin and NBD/First of Chicago(5)
22 Subsidiaries of the Company(5)
27 Financial Data Schedule (filed electronically only)(5)
- ----------------------------- (Footnotes on next page)
- -----------------------------
(1) Filed as Exhibit to Registration Statement on Form S-1, No. 33-78188, and incorporated herein by reference.
(2) Filed as Exhibit to Report on Form 8-K (Event dated May 23, 1996) and incorporated herein by reference.
(3) Filed as Exhibit to Report on Form 8-K (Event dated December 18, 1995) and incorporated herein by reference.
(4) Filed as Exhibit to Report on Form 10-K for fiscal year ended June 30, 1997 and incorporated herein by reference
(5) Filed herewith.
(b) During the last quarter of the period covered by this Report, the Company did not file any reports on Form 8-K.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Index
Report of Independent Certified Public Accountants
Financial Statements Consolidated Balance Sheets
Consolidated Statements of Operations of The Company and Statement of Operations of the Predecessor
Consolidated Statements of Stockholders' Equity of The Company and Statement of Stockholders' Equity of the Predecessor
Consolidated Statements of Cash Flows of The Company and Statement of Cash Flows of the Predecessor
Notes to Financial Statements
Schedule II - Valuation and Qualifying Accounts
Report of Independent Certified Public Accountants
Productivity Technologies Corp. New York, New York
We have audited the accompanying consolidated balance sheets of Productivity Technologies Corp. and Subsidiary ("The Company"), as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended and for the period May 24, 1996 to June 30, 1996 (collectively, the "Successor period"). We have also audited the statements of operations, stockholders' equity and cash flows of the Predecessor (see Note 1) for the period July 1, 1995 to May 23, 1996 ("Predecessor period"). We have also audited Schedule II. These financial statements and Schedule II are the responsibility of the Companies' managements. Our responsibility is to express an opinion on these financial statements and Schedule II based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the schedule. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, all of the outstanding stock of the Predecessor was sold in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable.
In our opinion, The Company's consolidated financial statements referred to above present fairly, in all material respects, the financial position of Productivity Technologies Corp. and Subsidiary at June 30, 1998 and 1997, and the results of their operations and their cash flows for the Successor period in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor's financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Predecessor for the Predecessor period, in conformity with generally accepted accounting principles.
Also, in our opinion, Schedule II presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP CERTIFIED PUBLIC ACCOUNTANTS
Troy, Michigan August 21, 1998
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Consolidated Statements of Operations of The Company and Statement of Operations of the Predecessor
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Consolidated Statements of Stockholders' Equity of The Company and Statement of Stockholders' Equity of the Predecessor
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Consolidated Statements of Cash Flows of The Company and Statement of Cash Flows of the Predecessor
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Consolidated Statements of Cash Flows of The Company and Statement of Cash Flows of the Predecessor
See accompanying notes to financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Formation of the Company and Basis of Presentation
Production Systems Acquisition Corporation ("PSAC") was incorporated in June 1993 with the objective of acquiring an operating business engaged in the production systems industry. PSAC originally selected March 31 as its fiscal year-end. PSAC completed an initial public offering ("Offering") of common stock in July 1994 and raised net proceeds of approximately $9.0 million.
In December 1995, PSAC entered into a Merger Agreement with Atlas Technologies, Inc. ("Atlas") whereby Atlas would become a wholly-owned subsidiary of PSAC. (The acquisition was consummated May 23, 1996 - see Note 2). Subsequently, PSAC changed its corporate name to Productivity Technologies Corp. ("PTC"). PTC's operating results from inception through May 23, 1996 are summarized below (in thousands):
June 1993 (Inception) Year Ended Year Ended Through April 1, 1996 March 31, March 31, March 31, to May 23, 1996 1996 1995 1994 - ------------------------------------------------------------------------------
Interest income $ 56 $ 503 $ 343 $ - Operating expenses (54) (266) (250) (2) Income taxes (3) (132) (31) - - -----------------------------------------------------------------------------
Net Income (Loss) $ (1) $ 105 $ 62 $ (2) - -----------------------------------------------------------------------------
The above operating results of PTC are not included in the accompanying financial statements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
The accompanying consolidated financial statements for the years ended June 30, 1998 and 1997 and the period May 24 to June 30, 1996 include the accounts of PTC and its wholly-owned subsidiary, Atlas (collectively, "the Company"). All significant intercompany accounts and transactions have been eliminated upon consolidation.
The accompanying financial statements presented for the period July 1, 1995 to May 23, 1996 represent the financial statements of Atlas (the "Predecessor").
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery, equipment, components and engineering services. It operates with two manufacturing plants, sales and engineering offices. The manufacturing plants are located in Fenton, Michigan.
Sales of products have principally been to automobile and automotive parts manufacturers and appliance manufacturers. Other customers include manufacturers of garden and lawn equipment, office furniture, heating, ventilation and air conditioning equipment and aircraft. Sales to automotive- related customers have accounted for the majority of total annual sales. Sales are predominantly in the United States but, in recent years, the Company has targeted sales efforts in Mexico, Europe and Asia. Export sales during the twelve months ended June 30, 1998, 1997 and 1996 amounted to approximately 30%, 20% and 13%, respectively, of annual sales.
Short-term Investments
Short-term investments, representing U.S. Treasury Bills with maturities of twelve months or less, are carried at cost, which approximates market.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of contract receivables. The Company attempts to minimize its credit risk by reviewing all customers' credit histories before extending credit and by monitoring customers' credit exposure on a continuing basis. The Company establishes an allowance for possible losses on contract receivables, if necessary, based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Fair Values of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, short-term investments, contract receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of these items.
The carrying amounts of the revolving credit agreement and long-term debt pursuant to the Company's bank credit agreements approximate fair value because the interest rates on the majority of the loans outstanding change with market rates.
Revenue and Cost Recognition
Contract revenues from fixed price contracts, and the related contract costs, are recognized using the percentage-of-completion method, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. The Company estimates the status of individual contracts when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability, and final contract settlement may result in revisions to costs and income, and are recognized in the period the revisions are determined.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and include mainly raw materials and spare parts.
Property and Equipment
Property and equipment are stated at cost. Beginning May 24, 1996, depreciation is computed on the straight-line method, generally using the following estimated useful lives:
Building and improvements 20 - 40 years Machinery and equipment 3 - 10 years Transportation equipment 2 - 5 years
Prior to May 24, 1996 depreciation was computed using straight-line and accelerated methods over the estimated useful lives of the assets.
Intangible Assets
Goodwill, representing the excess of cost over the fair value of net assets acquired in the acquisition of Atlas, is being amortized over twenty-five years using the straight-line method.
Warranty
The Company warrants under certain circumstances that its products meet certain agreed-upon manufacturing and material specifications. The Company records a warranty liability based on anticipated future claims.
Income Taxes
Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Earnings Per Share
Earnings per share reflected in the consolidated statements of operations are presented in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". The following table presents the earnings per share calculations:
Period Ended June 30, 1998 1997 1996 - -----------------------------------------------------------------------------
Numerator for Basic and Diluted Earnings Per Share Net income (loss) $ (2,012,350) $ 592,730 $ 204,847
- -----------------------------------------------------------------------------
Denominator for Basic and Diluted Earnings Per Share Weighted average shares 2,125,000 2,125,000 2,125,000 - -----------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Options to purchase shares of common stock were outstanding (see Notes 7 and 8) but were not included in the computation of diluted earnings per share because (1) there was a net loss in fiscal 1998 and therefore any additional shares would be antidilutive, and (2) in fiscal 1997 and 1996 the options' exercise price was greater than the average market price of the common shares.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment of the Company's long-lived assets has occurred through June 30, 1998.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for financial periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management has not determined the impact, if any, these statements may have on future financial statement disclosures.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up Activities", was issued in April 1998 and SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998. These statements are effective in fiscal 2000 and are not expected to have a material impact on the consolidated financial statements.
2. Acquisition
On May 23, 1996, PTC acquired all the outstanding shares of Atlas for cash of $6,900,000, and related acquisition costs of approximately $337,060. During fiscal 1998, a final purchase price adjustment resulted in $220,000 of additional goodwill. The acquisition, which was pursuant to a Merger Agreement dated December 18, 1995, also included certain employment agreements with bonus arrangements involving the principal shareholders of Atlas (see Note 14).
The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the final purchase price over the estimated fair value of net assets acquired of $2,824,726 was recorded as goodwill and is being amortized on a straight-line basis over twenty-five years.
The total purchase price was allocated as follows:
Working capital $ 2,238,011 Property and equipment 4,218,818 Other assets 363,985
Goodwill 2,824,726 Liabilities (2,188,480) - ---------------------------------------------------- Purchase Price $ 7,457,060 - ----------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Since the purchase price assigned to the net assets acquired was based on their estimated fair values at the May 23, 1996 acquisition date, the financial statements for periods subsequent to May 23, 1996 are presented on a different cost basis than those for prior periods and, therefore, are not comparable.
Pro forma results of operations, as if the acquisition had occurred July 1, 1995, are unaudited and are reflected below. Pro forma adjustments primarily include (1) additional depreciation and amortization on the excess purchase price allocated to property and equipment and goodwill, (2) elimination of interest income on the portion of PTC's investment in U.S. government securities deposited in a trust fund and liquidated upon consummation of the acquisition of Atlas, (3) elimination of management bonuses and professional fees incurred by Atlas prior to the merger that would not have been incurred in the normal course of business had it not been stated that the Merger Agreement contemplated the net worth of Atlas at a specific level at the date of the merger, (4) additional salaries for PTC's management and additional bonuses to Atlas' senior management under new employment agreements, and (5) provision for income taxes at an effective rate of 43%. This pro forma financial data is not necessarily indicative of the results that would have occurred had the acquisition occurred July 1, 1995.
Year Ended June 30, 1996 - ----------------------------------------------------------------------------
Net sales $ 36,003,000
Net income 1,409,000
Basic earnings per common share .66 - ----------------------------------------------------------------------------
3. Contract Receivables
The contract receivables consisted of:
June 30, 1998 1997 - ---------------------------------------------------------------------------
Billed Completed contracts $ 2,816,422 $ 1,458,721 Uncompleted contracts 2,276,987 7,680,830 Unbilled 234,012 105,251 - ---------------------------------------------------------------------------
Total Contracts Receivable 5,327,421 9,244,802 Less allowance for doubtful accounts (110,000) (45,500) - ---------------------------------------------------------------------------
Total $ 5,217,421 $ 9,199,302 - ---------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
4. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the following:
June 30, 1998 1997 - --------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 23,105,651 $ 28,753,361 Estimated earnings 7,762,175 10,512,171 - -------------------------------------------------------------------------- 30,867,826 39,265,532 Less billings to date 26,012,131 31,790,072 - --------------------------------------------------------------------------
Total $ 4,855,695 $ 7,475,460 - --------------------------------------------------------------------------
The above totals are included in the accompanying balance sheets under the following captions:
June 30, 1998 1997 - -------------------------------------------------------------------------
Costs and estimated earnings in excess of billings on uncompleted contracts $ 5,435,957 $ 8,640,731
Billings in excess of costs and estimated earnings on uncompleted contracts (580,262) (1,165,271) - -------------------------------------------------------------------------
Total $ 4,855,695 $ 7,475,460 - -------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
5. Assets Held For Sale
The land and building held for sale at June 30, 1997 was sold during fiscal 1998 resulting in a gain of approximately $85,000.
6. Long-Term Debt
Long-term debt consisted of:
Year Ended June 30, 1998 1997 - -----------------------------------------------------------------------------
$14,000,000 revolving credit agreement with a bank. The amount that may be borrowed under this agreement is limited to specified percentages of contract receivables, work in process and property and equipment of Atlas. The revolving credit agreement provides for outstanding borrowings to bear interest at a rate equal to the bank's prime rate (which was 8.5% at June 30, 1998 and 1997) less 1/4% or the 30, 60, or 90 day LIBOR plus 230 basis points, at the option of the Company. In addition, there is a commitment fee of 1/8% per annum on the unused portion of the revolving credit which is payable quarterly. Principal payments on this agreement are due quarterly in the amount of $37,360 until September 30, 1999, at which time the entire balance is due. Borrowings under this agreement are collateralized by substantially all assets of Atlas. The revolving credit agreement also contains various financial covenants. The Company was not in compliance with certain covenants as of June 30, 1998 and the bank waived compliance with such covenants as of June 30, 1998. $ 7,199,165 $ 11,299,615
First mortgage note payable (1) 4,500,000 4,500,000
Other 170,639 241,778 - ------------------------------------------------------------------------------
Total 11,869,804 16,041,393
Less current maturities 615,677 714,140 - -----------------------------------------------------------------------------
Long-Term Debt $ 11,254,127 $ 15,327,253 - -----------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
(1) In January 1997, the Company borrowed $4,500,000 in connection with variable rate industrial revenue bonds issued by The Economic Development Corporation of the County of Genesee. The note is payable in amounts of $400,000 per year for fiscal years 1999-2001 and then $300,000 per year through fiscal 2012. Interest is payable quarterly and is set weekly by the remarketing agent at a level which allows the bonds to be sold at par. The interest rate at June 30, 1998 was approximately 4.0%. To enhance the marketability of the bonds and guarantee payment of the bonds on the Company's behalf, a bank has issued its letter of credit through December 2001. The commission on the letter of credit is 1% annually, and is payable quarterly. Also, the bonds are secured by a first mortgage note collateralized by substantially all assets of the Company.
Scheduled maturities of long-term debt for future years ending June 30 are as follows: 1999 - $615,677; 2000 - $7,496,058; 2001 - $441,004; 2002 - $317,065; 2003 - $300,000 and $2,700,000 thereafter.
7. Stockholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units ("Units"). (425,000 shares had been previously issued for $25,000.) Each Unit consisted of one share of PTC's common stock, $.001 par value, and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase from PTC one share of common stock at an exercise price of $5.00 during the period commencing May 24, 1996, and ending June 24, 2001. The Warrants will be redeemable at a price of $.01 per Warrant upon 30 days notice at any time, only in the event that the last sale price of the common stock is at least $8.50 per share for 20 consecutive trading days ending on the third day prior to date on which notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are identical to the Warrants discussed above.
At June 30, 1998, 4,210,000 shares of common stock were reserved for (1) issuance upon exercise of the warrants described above, and (2) for the securities underlying a purchase option granted the underwriter of the Offering. This option, which allows the underwriter the right to purchase up to 170,000 Units, is exercisable initially at $7.50 per Unit until June 23, 1999. Each Unit consists of one share of PTC common stock and two Warrants. The Units issuable upon exercise of the purchase option are identical to those described above except that the Warrants contained therein expire June 23, 1999.
No Warrants have been exercised or granted subsequent to May 23, 1996.
The Company is authorized to issue 1,000,000 shares of preferred stock ($.001 par value) with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. No preferred stock has been issued by the Company.
In connection with the May 23, 1996 acquisition of Atlas, a total of 339,999 shares of common stock that were previously subject to possible redemption were reclassified to permanent equity by the Company.
In accordance with the December 18, 1995 Merger Agreement, a $700,000 distribution was paid to a former shareholder in May 1996.
8. Employee Benefit Plans
Atlas previously sponsored an Employee Stock Ownership Trust (ESOT) for all of the Company's employees. Atlas elected to contribute $200,000 to the ESOT during the period ended May 23, 1996. At May 23, 1996, the Company's stock owned by the ESOT was acquired as part of the purchase transaction. The Company liquidated the ESOT during fiscal year 1997.
The Company has a 401(k) plan covering substantially all the Company's employees. The plan allows for eligible employees to defer a portion of their salary. In addition, discretionary contributions may be made by the Company. The Company contributed $148,700 for the year ended June 30, 1997. The Company made no contributions for the year ended June 30, 1998, the period ended May 23, 1996 or for the Predecessor period.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
PTC adopted a Performance Equity Plan in 1996 to enable the Company to offer to selected personnel an opportunity to acquire an equity interest in the Company through the award of incentives such as stock options, stock appreciation rights and/or other stock-based awards. The total number of shares of common stock reserved and available for distribution under the Plan is 330,000 shares.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the Plan. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and income per share amounts would have been the pro forma amounts indicated below:
Year Ended June 30, 1998 1997 - ------------------------------------------------------------------------------
Net income (loss) - as reported $ (2,012,350) $ 592,730 Net income (loss) - pro forma (2,081,456) 259,445 Basic earnings per share - as reported (.95) .28 Basic earnings per share - pro forma (.98) .12 - ------------------------------------------------------------------------------
The fair value of each option grant is established on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for 1998 and 1997, respectively: dividend yield of 0% for both years; expected volatility of 68% and 23%; risk-free interest rate of 6.0% and 5.4%; and expected lives of 2 years for both years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are not necessarily indicative of future amounts.
A summary of the status of the Company's stock options is as follows:
Weighted- Average Exercise Shares Price - ----------------------------------------------------------------------------
Outstanding and exercisable at July 1, 1996 - $ - Granted 255,000 5.00 Expired - - Exercised - - - ---------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1997 255,000 $ 5.00 Granted 40,000 4.13 Expired - - Exercised - - - ---------------------------------------------------------------------------
Outstanding And Exercisable at June 30, 1998 295,000 $ 4.88 - ---------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
The weighted-average grant date fair value of options during fiscal 1998 and 1997 was approximately $1.73 and $1.31, respectively.
The following table summarizes information regarding stock options outstanding and exercisable at June 30, 1998:
Weighted Average Options -------------------------- Outstanding Remaining Range of and Contractual Exercisable Exercise Prices Exercisable Life Price - ------------------------------------------------------------------------------ $4.125 - $5.00 295,000 3 years $ 4.88 - ------------------------------------------------------------------------------
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and (liabilities) are as follows:
Year Ended June 30, 1998 1997 - ------------------------------------------------------------------------------
Current Accrual for executive bonus agreement $ 237,000 $ 285,000 Research credit carryforward 137,000 218,000 Other 101,000 119,000 - ------------------------------------------------------------------------------
Net Current Deferred Tax Asset $ 475,000 $ 622,000 - ------------------------------------------------------------------------------
Non-Current Depreciation and basis of assets $ (569,000) $ (715,000) Executive deferred compensation agreement 488,000 - Research credit carryforward 119,000 - Other (38,000) (117,000) - ------------------------------------------------------------------------------
Net Non-Current Deferred Tax Liability $ - $ (832,000) - ------------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Significant components of income tax expense (benefit) are as follows:
The Company Predecessor -------------------------------------------- -------------- Year Ended Year Ended May 24, to July 1, 1995 June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996 - ------------------------------------------------------------------------------- Federal Current $ (315,000) $ 481,000 $ 108,000 $ 401,000 Deferred (685,000) (89,000) 46,000 164,000
State Current 50,000 58,000 11,000 43,000 - ------------------------------------------------------------------------------
Total $ (950,000) $ 450,000 $ 165,000 $ 608,000 - ------------------------------------------------------------------------------
The reconciliation of income tax computed at the federal statutory rate (34%) to income tax expense (benefit) is as follows:
The Company Predecessor -------------------------------------------- -------------- Year Ended Year Ended May 24, to July 1, 1995 June 30, 1998 June 30, 1997 June 30, 1996 to May 23, 1996 - -------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate $ (1,007,000) $ 355,000 $ 126,000 $ 466,000
Goodwill amortization and other non- deductible items 62,000 55,000 6,000 70,000
State income taxes, net of federal income tax benefit 33,000 38,000 7,000 28,000
Research credit - (40,000) - -
Other - net (38,000) 42,000 26,000 44,000 - -----------------------------------------------------------------------------
Income Tax Expense (Benefit) $ (950,000) $ 450,000 $ 165,000 $ 608,000 - -----------------------------------------------------------------------------
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
Atlas has tax research credit carryforwards totalling $256,000 that will begin to expire in 2008.
10. Major Customers
For the twelve months ended June 30, 1998, 1997 and 1996, the Company's sales to its major customers (each representing more than 10% of total net sales) amounted to approximately 50%, 44% and 64% of total annual sales, respectively. During 1998, there were three major customers representing 27%, 14% and 10% of total net sales; during 1997 there were three major customers representing 20%, 12% and 12% of total net sales; and during 1996, there were four major customers representing 30%, 13%, 11% and 10% of total net sales.
11. Contingency
Atlas is undergoing an Internal Revenue Service audit for the fiscal year ended June 30, 1995. The main area of review is a research and experimentation tax credit the Company has calculated and filed for over the past six years. The Company has applied approximately $459,000 of credit toward Federal taxes due for the fiscal periods ended June 1997, 1996 and 1995 and had a carryforward of approximately $23,000 expected to be used as a reduction in future tax payments. Management believes this issue is a matter of interpretation of the research and experimentation regulations. Management believes that the IRS may seek a reduction in the amount of credit calculated which may have an adverse effect to the financial statements of the Company. The Company is entitled to indemnification up to $560,000 (subject to certain exclusions and limitations) from the former principal stockholders of Atlas for amounts it may be required to pay as a result of such audit.
12. Arbitration Settlement
On October 1, 1996, the Company received a "Demand For Arbitration" by a former customer that alleged, among other issues, a $15,400,000 claim for damages resulting from a breach of contract and breach of warranties related to the design and manufacture of certain industrial equipment. During fiscal 1998, a "Settlement Agreement and Release Of All Claims" was executed. The Company settled with the former customer for $700,000, of which $210,000 was recovered from insurance coverage. The net expense of $490,000 has been included in selling, general and administrative expenses during fiscal 1998.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Notes to Financial Statements
13. Material Fourth Quarter Adjustments
During the fourth quarter of fiscal 1998, the Company made adjustments which are material to the fourth quarter results. These adjustments include a $736,000 decrease in the $2,868,000 bonus restructuring expense previously recorded in the third quarter of fiscal 1998 and the following changes in estimates: (1) a $381,000 write-off to reduce a cancelled uncompleted contract to its estimated net realizable value, (2) additional allowances of $145,000 to reduce accounts receivable and inventory to their estimated net realizable value and (3) additional reserves of $126,000 for warranties and health insurance based on anticipated future claims. The third quarter 10-Q will be amended to reflect the bonus restructuring expense as a fourth quarter transaction.
14. Bonus Restructuring
During fiscal 1998, the Company amended the employment agreements of two executive officers of Atlas that were previously entered into in connection with the Merger Agreement (see Note 2). These amended employment agreements are identical except that one agreement expires on December 31, 1998, and the other expires on December 31, 2001. Each agreement requires the executive to devote substantially all of his business time and attention to the affairs of the Company. Annual compensation under each agreement is $198,588, subject to cost of living increases for one of the officers. The amended agreements also provide that each executive, regardless of future employment, will receive four annual payments of $207,571 commencing July 30, 1999. Each executive will also receive 150,000 shares of restricted common stock of the Company to be issued during fiscal 1999. The restricted common stock has been valued at market value less a 30% discount for lack of marketability. Included in the accompanying financial statements as of and for the year ended June 30, 1998 related to these amended agreements are the following.
Balance Sheet Executive Deferred Compensation Agreement $ 1,436,383 Common stock to be issued 696,520 - ------------------------------------------------------------------------------
Statement of Operations Bonus restructuring expense $ 2,131,903 - ------------------------------------------------------------------------------
The superseded employment agreements provided for two bonus calculations based on earnings of the Company. These bonus calculations were to be in effect through December 31, 2000 and December 31, 2001, respectively. As of June 30, 1998, there was $810,000 to be paid under these superseded agreements.
Productivity Technologies Corp. and Subsidiary and the Predecessor
Schedule II - Valuation and Qualifying Accounts
(1) Accounts deemed to be uncollectible (net of accounts collected that were previously deducted).
(2) Inventory disposed of, charged to reserve.
(3) Actual warranty charges incurred, charged to reserve.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 12, 1998 PRODUCTIVITY TECHNOLOGIES CORP.
/s/ Samuel N. Seidman By: _____________________________ Samuel N. Seidman President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Ray J. Friant, Jr. Chairman of the Board October 12, 1998 - ---------------------- Ray J. Friant, Jr.
/s/ Samuel N. Seidman Chief Executive Officer, October 12, 1998 - ---------------------- President and Director Samuel N. Seidman
Vice President and Director - --------------------- Joseph K. Linman
/s/ John S. Strance Vice President and Director October 12, 1998 - --------------------- John S. Strance
/s/ Jesse A. Levine Vice President, Secretary, October 12, 1998 - --------------------- Treasurer and Director and Jesse A. Levine Chief Financial Officer
Director - --------------------- Alan H. Foster
Director - --------------------- Alan I. Goldman