U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended ______________
OR
[ X ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from April 1, 1996 to June 30, 1996
Commission file number 0-24212
PRODUCTIVITY TECHNOLOGIES CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3764753
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 Madison Avenue, New York, New York 10022
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 843-1480
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of class)
Redeemable Common Stock Purchase Warrants Units, each consisting of one share
- ----------------------------------------- of Common Stock and two Redeemable
(Title of class) Common Stock Purchase Warrants
-----------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 9, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $8,140,000.
As of October 9, 1996, there were 2,125,000 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PAGE 1 OF 50 PAGES
EXHIBIT INDEX -- PAGE 22
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Productivity Technologies Corp. (formerly named Production Systems
Acquisition Corporation), a Delaware corporation ("Company"), was organized in
June 1993 as a Specified Purpose Acquisition Company(R) ("SPAC(R)"),* with the
objective of acquiring an operating business ("Target Business") in the
production systems industry ("Production Systems Industry"). The Production
Systems Industry consists of companies which produce the machinery, components
and systems for manufacturing.
On May 23, 1996, the Company achieved its objective of acquiring a
Target Business with the acquisition of 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 90% of its sales
revenues. It also sells, on a turnkey basis, fully integrated metal stamping
systems comprised of components provided by Atlas and other manufacturers.
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' products stack cut sheet metal blanks for feeding into
the presses, move components from one press station to another within a
multistation transfer press or between presses within a tandem line of presses
and facilitate the changing of dies on a press.
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 manufacturers of garden and lawn equipment, office
furniture, heating, air conditioning and ventilation (HVAC) equipment and
aircraft. In Atlas' 1994, 1995 and 1996 fiscal years, the automotive segment
accounted for approximately 82%, 79% and 86% of sales, respectively, and
appliance manufacturers accounted for approximately 4%, 8% and 8%, respectively.
For such fiscal years, sales by Atlas to General Motors Corporation represented
14%, 15% and 10%, respectively, sales to Chrysler Corporation represented 5%,
35% and 13%, respectively, and sales to The Ford Motor Company represented 25%,
4% and 11%, respectively, of total sales. Sales are predominantly in the United
States and
- --------
* "Specified Purpose Acquisition Company" and "SPAC" are registered
service marks of GKN Securities Corp.
Page 2
<PAGE>
Canada but, in recent years, Atlas has targeted sales efforts in Mexico, Europe
and Asia, which, for the 1994, 1995 and 1996 fiscal years, represented 10%, 10%
and 12% of total sales in such years.
Atlas uses three marketing channels: direct sales, accounting for the
largest portion, with offices at its headquarters in Fenton, Michigan, Atlanta
and Chicago; commissioned sales representatives; and original equipment
manufacturers (OEMs) specializing in metal presses and related equipment. Order
backlogs were approximately $13,300,000, $16,500,000 and $18,200,000 at June 30,
1994, 1995 and 1996, 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, 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, improved fabrication and, management
believes, increased sales. Atlas believes that significant cost-reducing
improvements can still be made in the manufacturing process, particularly from
further standardization. No assurance can be given, however, that such cost
reduction will be attained because Atlas may not be able to perform the
engineering required or make the necessary capital investment.
Quick die change equipment made by Atlas includes automated die carts,
die tables and high rise automated storage-retrieval systems which are used to
maneuver stamping press dies and molds weighing up to 100 tons. The
Atlas-developed products allow die swapping to be accomplished in minutes as
compared to hours if conventional equipment is used. Atlas storage-retrieval
systems permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured for
use with either manually controlled or fully automated presses. Atlas believes
that its equipment is instrumental in increasing the "up-time" of presses while
also facilitating short run capability, gentle die handling, safer and improved
ergonomics and easier and more efficient die maintenance.
Atlas' 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 higher
production rates, require less floor space, consume less energy and allow more
component processes per press. Because of this, and because they have fewer
parts and require less expensive quick die change equipment than tandem presses,
transfer presses have become the preferred type of press for new purchases
although many tandem presses will remain in use for many years and can be
refitted with automation equipment.
Stacking and destacking automation equipment is used to handle the
sheet metal in the initial stages of the stamping process. Stackers stack flat
blanks from the coiled rolls which are delivered to the manufacturer. Destacking
equipment feeds the flat blanks into the press and includes functions to scrub
or roll-coat the metal blanks and to que them to assure a steady flow.
Page 3
<PAGE>
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 Volvo AB, Herwo Die Changing, AB, Hirotec (Japan),
Verson All Steel Press, a division of Allied Products Corp., HMS Products Co.
and Aisaku (Japan). Each of these companies offers components which compete with
certain components manufactured or sold by Atlas, but the Company believes that
none offers as comprehensive a line as 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 that it manufacturers and sells that are based on patents owned by Mr.
John Maher, an individual. 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 Mr. Maher a royalty based on a portion of the sales price of the Flex
5000(R) as it relates to the value of the patented components. For Atlas' fiscal
years ended June 30, 1995 and 1996, Atlas expensed approximately $100,000 and
$320,000, respectively, in license fees under this agreement. The agreement also
provides that Mr. Maher is responsible for defending Atlas for any patent
infringements. Atlas believes that the terms of the agreement are industry
competitive.
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 two patents, one for a power and free roller conveyer and one
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 two United States patents for certain apparatus and methods for forming
workpieces and for magnetic sheet separator constructions.
Management and Employees
Ronald M. Prime is currently the Chief Executive Officer of Atlas and
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' 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 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.
Page 4
<PAGE>
Neither Mr. Prime nor Mr. Austin performs any policy-making functions
for the Company.
Atlas employs approximately 200 persons. None of these persons is a
member of a union. Atlas believes that its employee relations are good. Atlas
believes that its location in Michigan is beneficial in its access and ability
to hire qualified personnel because of the highly industrialized nature of the
area.
ITEM 2. PROPERTIES
Atlas operates its manufacturing facilities in Fenton and Linden,
Michigan. It has approximately 43,200 square feet of space in Fenton which is
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, at one location, Atlas has a welding and
fabrication facility located in approximately 16,300 square feet and a heavy
machining and light and medium assembly facility located in approximately 21,000
square feet. Atlas also maintains office space at its site in Linden. Atlas
rents approximately 1,200 square feet of space in Atlanta, Georgia for a sales
office.
Atlas is in the process of building a fourth facility on a new 10.9
acre site adjacent to its existing Fenton location. The new facility will
initially provide approximately 51,000 square feet of manufacturing space and
8,000 square feet of office space, but will be capable of expanding at a later
date to approximately 140,000 square feet of manufacturing and 25,000 square
feet of office space. The new facility will have higher roofs and heavier cranes
to facilitate manufacturing of larger equipment.
The initial phase of the project is planned to be completed in
February, 1997 and is expected to cost approximately $3,500,000, funded through
Industrial Revenue Bonds. The consolidation and additional space are anticipated
to increase overall office and manufacturing floor efficiencies.
The principal executive office of Atlas is located at 201 South Alloy
Drive, Fenton, Michigan 48430, and its telephone number is (810) 629-6663.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and John Maher, the owner of the patent for the Flex
5000(R) licensed to Atlas, initiated an action against Orchid International
Group Inc. ("Orchid") in the Federal Court of Canada, Trial Division, claiming
infringement and wrongful sale, manufacture and use by Orchid of the inventions
protected by such patent and seeking, among other relief, a declaration that the
patents are valid and have been infringed by Orchid, injunctive relief and
damages of at least $5,000,000 (Cdn). The defendant has not yet filed an answer
to the complaint.
In October 1996, a demand for arbitration was filed against Atlas by
SWVA, Inc. for $15,400,000 damages alleged to result from a breach of contract
and breach of warranty by Atlas with respect to certain equipment supplied by
Atlas to the claimant. Atlas has not yet responded to the demand but believes
that it is not responsible for the alleged defects. It also believes that, if
repairs to the equipment (which had a purchase cost of approximately $1,300,000)
are required to be made by it under its contract and warranty, such repairs can
be made for less than $100,000. Prior to the institution of the arbitration, the
parties were negotiating as to responsibility for payment of the repairs.
Except for such matters, neither the Company nor Atlas is currently
involved in any material legal proceedings.
Page 5
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) On May 21, 1996, a Special Meeting of the
Stockholders of the Company was held.
(b) At the Special Meeting, the following persons were elected as
directors of the Company to serve for the periods indicated:
(i) Class I Directors - to serve for terms expiring at the
annual meeting of stockholders to be held during the 1997 fiscal year:
Messrs. Jesse A. Levine and Alan I. Goldman.
(ii) Class II Directors - to serve for terms expiring at the
annual meeting of stockholders to be held during the 1998 fiscal year:
Messrs. Ray J. Friant, Jr. and John S. Strance.
(iii) Class III Directors - to serve for terms expiring at the
annual meeting of stockholders to be held during the 1999 fiscal year:
Messrs. Samuel N. Seidman, Joseph K. Linman and Alan H. Foster.
(c) At the Special Meeting, the following matters were acted
upon:
Proposal 1 - to approve a Merger Agreement, dated December 18, 1995,
providing for the merger of a wholly owned subsidiary of the Company with and
into Atlas, with Atlas becoming a wholly owned subsidiary of the Company.
Proposal 2 - to approve an amendment to the Certificate of
Incorporation of the Company to change its name to Productivity Technologies
Corp.
Proposal 3 - to approve an amendment to the Certificate of
Incorporation of the Company to provide for classification of its Board of
Directors into three classes serving staggered terms as described above.
Proposal 4 - to elect seven directors.
Proposal 5 - to adopt the 1996 Performance Equity Plan.
All of the matters presented to the meeting were adopted, with
the number of votes for, votes against, abstentions and broker non-votes being
as follows:
Votes Votes Broker
For Against Abstentions Non-Votes
Proposal 1 1,408,936 221,608 0 490,860
Proposal 2 1,929,796 181,608 10,000 --
Proposal 3 1,381,436 238,600 11,000 490,368
Proposal 5 1,807,796 281,108 32,500 --
Page 6
<PAGE>
The nominees for election as directors (Proposal 4) received the
following votes:
For Withheld
Jesse A. Levine 1,973,459 147,945
Alan I. Goldman 1,973,459 147,945
Ray J. Friant, Jr. 1,973,459 147,945
John S. Strance 1,973,459 147,945
Samuel N. Seidman 1,973,459 147,945
Joseph K. Linman 1,973,459 147,945
Alan H. Foster 1,973,459 147,945
Page 7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
Effective August 2, 1996, the Common Stock (Symbol: PRAC) and Warrants
(Symbol: PRACW) were listed for trading on the Nasdaq SmallCap Market. Prior to
that date, the Common Stock and Warrants were traded in the over-the-counter
market and quoted on the OTC Bulletin Board. The Company's Units (Symbol: PRACU)
are quoted on the OTC Bulletin Board.
The following table sets forth the range of high and low closing bid
prices for Units, Common Stock and Warrants, as reported by the OTC Bulletin
Board. The OTC Bulletin Board is an inter-dealer automated quotation system
sponsored and operated by the NASD for equity securities not included in the
Nasdaq 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.
<TABLE>
<CAPTION>
Units Common Stock Warrants
----------------- ----------------- -------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Year ended March 31, 1995:
Second Quarter (beginning June 24,
1994)............................. 5 3/4 5 1/2 N/A N/A N/A N/A
Third Quarter....................... 5 3/4 5 1/8 4 1/4 4 7/8 3/4
Fourth Quarter...................... 5 1/2 5 1/2 4 1/4 4 1/4 7/8 5/8
Year ended March 31, 1996:
First Quarter....................... 5 1/2 5 1/4 4 3/8 4 1/8 5/8 3/8
Second Quarter ..................... 5 1/4 5 1/4 4 11/16 4 3/8 9/16 3/8
Third Quarter....................... 5 1/4 5 1/4 4 3/4 4 11/16 1/2 7/16
Fourth Quarter...................... 5 3/4 5 1/4 5 4 3/4 15/16 5/16
Quarter ended June 30, 1996............ 9 5 3/4 6 4 5/8 1 5/8 1 3/16
</TABLE>
As of October 9, 1996, the Company had 9 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.
Page 8
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
Company's and its predecessor's consolidated financial statements which have
been audited by BDO Seidman, LLP, independent certified public accountants, as
of June 30, 1996 and for the periods July 1, 1995 to May 23, 1996 and May 24,
1996 to June 30, 1996 and Dupuis & Ryden, independent certified public
accountants, who audited the years ended June 30, 1995, 1994, 1993, and 1992.
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
<TABLE>
<CAPTION>
The Predecessor
Company ---------------------------------------------------------------
----------- July 1
May 24, 1995 Year Year Year Year
to to Ended Ended Ended Ended
June 30, May 23, June 30, June 30, June 30, June 30,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 4,404 $31,598 $29,077 $21,186 $22,830 $18,949
Cost of sales 3,029 21,773 21,034 16,320 16.774 13,910
Gross profit 1,375 9,825 8,043 4,866 6,056 5,039
Selling, general and
administrative expenses 729 6,007 5,119 4,872 4,663 4,293
Officers' bonuses 197 2,1l7 -- --- --- ---
Income (loss) From operations 448 1,701 2,924 (6) 1,393 746
Net income (loss) 204 762 2,219 (297) 884 493
Net income per share of
common stock $ .10
Weighted average common shares 2,125
</TABLE>
Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
The Predecessor
Company
----------- --------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets $18,690 $11,423 $8,850 $10,500 $10,210
Current liabilities 13,642 8,321 7,246 8,287 8,475
Working capital 5,048 3,102 1,604 2,213 1.735
Property, plant and equipment, net 4,240 2,517 2,595 2,580 2,063
Total assets 26,023 14,550 11,774 13,417 12,916
Long-term debt, less current
maturities 2,228 2,717 1,666 1,855 1,808
Total liabilities 16,650 11,037 8,912 10,143 10,284
Stockholders' equity 9,373 3,513 2,862 3,274 2,632
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company
In March 1994, the Company raised $150,000 in bridge financing ("Bridge
Financing") in order to pay certain organizational expenses, the costs of the
Bridge Financing and certain costs of its initial public offering ("IPO"). Nine
investors in the Bridge Financing loaned $150,000 to the Company and were issued
promissory notes in that amount, bearing interest at 10% per annum and payable
upon consummation of the IPO, and Warrants to purchase 300,000 shares of the
Common Stock ("Bridge Warrants").
The IPO was completed on July 5, 1994, and the Company received net
proceeds of $8,980,100 after payment of offering expenses. A substantial portion
of such net proceeds ($8,262,000) was placed in the Trust Fund until the earlier
of the Company's consummation of a business combination with a Target Business
or liquidation. The trust agreement limited investments to U.S. Government
securities with a maturity of 180 days or less. At March 31, 1996, there was
approximately $9,071,000 in the Trust Fund. Cumulative interest earned on the
funds in the Trust Fund and on other funds of the Company was $845,000 as of
March 31, 1996. The remaining proceeds of the IPO, and the interest thereon,
have been used to pay for business, legal and accounting due diligence on
prospective acquisitions, and continuing general and administrative expenses, as
well as other expenses.
On May 23, 1996, the Company consummated its acquisition of Atlas and
terminated the Trust Fund, utilizing its proceeds to pay the purchase price.
Substantially all of the Company's working capital needs prior to that date were
attributable to the identification, evaluation and selection of a suitable
Target Business and the structuring, negotiation and consummation of a business
combination with Atlas. During the year ended March 31, 1996, the Company
incurred general, administrative and other expenses and taxes of approximately
$398,000, which were associated primarily with its evaluation of Target
Businesses. Since May 23, 1996, the Company has been a holding company with
Atlas being its sole subsidiary and operating business.
On May 17, 1996, the Company's Board of Directors approved a change of the
Company's fiscal year to one ending on June 30, effective July 1, 1996, to
coincide with Atlas' fiscal year.
Atlas
During the last several years, the business focus of Atlas has been on
manufacturing and selling quick die change, transfer press and stacking and
destacking equipment. During the same period, Atlas has standardized its
products, changed certain of its manufacturing methods and sold off an older
product line in an effort to improve productivity and margins and concentrate
its efforts on its current principal products.
Historically, about 90% of the sales of Atlas have been to automotive,
appliance and HVAC manufacturers. Recently automotive orders have substantially
increased due to several large stamping operation upgrade programs being
undertaken by, and resultant order increases from, several international
automobile manufacturers. For Atlas' fiscal years 1994, 1995 and 1996, sales to
customers in the automotive industry accounted for approximately 82%, 79% and
86%, respectively, of total sales. Consequently, the sales and profitability of
Atlas will depend to a large extent on the economic conditions that affect the
automotive industry, and to a lesser extent, the appliance industry, as well as
general economic conditions in the United States, Mexico, Europe and Asia where
the majority of its customers are located. Although Atlas is dependent on the
automotive industry, Atlas believes that product standardization and design, and
manufacture and sale of certain of its products such as quick die change
machinery and flexible transfer presses should reduce the effect on Atlas of
cyclicality within the automotive industry. Atlas further believes that because
its equipment generally increases productivity and reduced per-unit production
costs, there will be continuing demand for its products in down-turns in the
economy and in industry groups to which it sells.
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A significant percentage of Atlas' sales are to a small number of
customers. While these customers are concentrated in primarily two industries,
the automotive and appliance industries, Atlas believes that its customers
in these industries are undertaking long-term productivity improvement programs
and that they will continue to place orders with Atlas. Atlas is undertaking
marketing efforts to diversify its customer base; however, no assurance can be
given that it will be successful. Atlas also is standardizing many of its
products in an attempt to attract new and different customers and to be more
efficient in the design, manufacture and delivery of the products it sells. Such
efficiency may result in improved operating margins, although no assurance can
be given that margins will increase or if increased remain at such percentages.
Nonetheless, Atlas believes that in the foreseeable future, its sales will
continue to be primarily within those industries to which it currently is
selling at the current proportionate percentages.
Recently the sales of Atlas to customers in Mexico, Europe and Asia have
increased and for the Atlas fiscal year ended June 30, 1995 and 1996 represented
10%, 10% and 12% of the sales of Atlas in such years. Foreign sales are subject
to a number of risks, including transportation delays and interruptions,
political and economic disruptions, the imposition of tariff and non-tariff
barriers and changes in governmental policies including statutory and regulatory
changes. Although there is little Atlas can do to protect itself against such
risks, to the extent possible, Atlas' foreign sales are denominated in United
States dollars to eliminate the risk of currency fluctuation, foreign sales may
be guaranteed in part by the Foreign Credit Insurance Corporation, shipments are
normally made FOB Michigan to reduce the risk of loss borne by Atlas during
shipment and Atlas obtains foreign risk and credit insurance through the
Export-Import Bank of the United States.
Results of Operations
Effective May 23, 1996, the Company entered into a Merger Agreement with
Atlas whereby Atlas became a wholly-owned subsidiary of the Company. The
financial statements after that date are those of the new reporting entity and
are not comparable to the pre-merger periods. However, for purposes of this
discussion, fiscal year 1996 represents the period May 24 to June 30, 1996 (post
merger) combined with the period July 1, 1995 to May 23, 1996 (pre-merger) and
then compared to fiscal year 1995.
Fiscal Year 1996 compared to Fiscal Year 1995
Net sales for the fiscal year ending June 30, 1996 were $36,002,861, an
increase of 24% over net sales of $29,077,684 for fiscal year 1995. Sales
increased in fiscal 1996 due largely to increased customer needs for costsaving
and quality-enhancing tooling, as well as general growth in the auto industry.
Gross profit for 1996 was $11,200,668, compared to 1995 gross profit of
$8,043,402. Gross profit increased $3,157,266, or 39%, mainly due to higher
volumes and improved product mix. Order backlogs at June 30, 1996 and 1995 were
$18,200,000 and $16,078,000 respectively, an increase of 13% over the previous
year.
Cost of products sold for fiscal year 1996 was $24,802,193 compared to
$21,034,282 for fiscal year 1995. The 18% increase in costs was lower than the
related 24% increase in sales, resulting in an improved cost of sales of 68.9%
in 1996, compared to 72.3% in 1995.
For fiscal 1996, selling, general and administrative expenses (SG&A) were
$6,736,106, compared to $5,118,720 for 1995, mainly due to the costs of
administering increases in volume. Other material SG&A increases were due to an
increase of $398,730 in legal and professional services, ESOP plan proposed
termination, and increased tax and audit work. Selling expenses and commissions
increased by $448,000 due to the higher volume of business and expenses related
to increased business activity in Europe and Asia. In addition, royalties for
the Flex 5000 product increased $221,050 due to increased sales in this product
line.
Officer bonuses to Ronald Prime and Michael Austin, executives and former
owners of Atlas, amounted to $2,314,000 in fiscal 1996. Of this total, $753,000
was expensed subsequent to January 1, 1996, when the employment agreement
between the Company and Messrs. Prime and Austin commenced. No bonuses were paid
to Messrs. Prime and Austin in earlier years.
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Interest expense decreased to $570,182 in fiscal 1996 from $644,853 in
1995. The decrease was caused by reduced long-term debt and a reduction in the
line of credit interest rate.
Net income for fiscal 1996 was $967,428, compared to a 1995 net income of
$2,219,974 (results for 1995 included a non-recurring gain of $308,565 from
disposal of assets, and a $319,000 one time adjustment in tax credit valuation
allowance), representing a net reduction of 56%. The reduction in net income was
largely caused by $1,715,600 in non-recurring management bonuses and expenses,
which were related to the merger of Atlas and PTC. Bonuses paid to management
during the 1996 year reflect amounts retained by Atlas which were not paid in
1994 or 1995.
A total of $3,370,818 of cash was used in operating activities during the
fiscal year ended June 30, 1996, as compared to $2,193,804 of cash provided from
operations during fiscal 1995. Major changes in cash flows from operating
activities from the fiscal year ending June 30, 1995 to fiscal year ending June
30, 1996 include net income, which decreased from $2,219,974 in fiscal 1995 to
$967,428 in fiscal 1996 due primarily to officers bonuses, growth in contract
receivables of $3,565,732 during fiscal 1996, and an increase in costs and
estimated earnings in excess of billings on uncompleted contracts, which grew
$2,672,063 during fiscal 1996 to accommodate increases in order volumes. Net
cash used in investing activities totaled $287,125 during fiscal 1996 as
compared to $606,925 in fiscal 1995. Cash investing was higher in fiscal 1995
primarily due to advances by the Company to certain shareholders. Net cash
provided by financing activities totaled $3,264,061 during fiscal 1996, largely
comprising additional line of credit borrowings and proceeds from additional
long-term debt borrowings. Net cash during fiscal 1996 increased $494,926 as
cash provided by financing activities offset cash used by operations and
investing activities.
Fiscal Year 1995 compared to Fiscal Year 1994
Net sales for the fiscal year 1995 were $29,077,684, an increase of 37%
over net sales of $21,186,245 for fiscal year 1994. Net income was $2,219,974,
compared to a net loss of $297,887 in fiscal year 1994. The amount of order
backlog at June 30, 1995 and 1994, was $16,078,000 and $13,298,000,
respectively, which represents an increase of 21%. The increase in net sales was
the result of increased orders from major automobile manufacturers which are
implementing programs of sheet metal press room automation. Overall,
profitability for fiscal year 1995 was largely the result of Atlas being able to
use previous engineering standards, and a reduction in engineering time to
design and release orders and an improvement in the mix of principal products
sold which encompassed an increase in multiple unit orders. The margin for
fiscal year 1995 was approximately 28% compared to 23% in fiscal year 1994. The
change in the engineering of certain of its products has resulted in Atlas being
able to improve the quality, delivery time and manufacturing costs related to
these products. During fiscal year 1995, Atlas established itself as the sole
preferred supplier for quick die change products by the three major United
States domestic automobile manufacturers. Atlas believes that this designation
will result in an increase in the amount of orders from the automobile industry
in the foreseeable future.
In fiscal year 1995, Atlas recognized a gain of $308,000 on the sale of
one of its older product lines and corporate airplane. The product line was sold
to enable Atlas to concentrate its resources on certain of its core products
that it believes have future growth potential. The inventory and engineering
drawings related to this line were sold for an aggregate of $410,000, resulting
in a profit of $280,000 and is reflected as a gain on disposal of an asset.
Cost of products sold for fiscal year 1995 was $21,034,282 compared to
$16,320,825 for fiscal year 1994. The 29% increase was the result of the
increase in the overall amount of sales.
Selling, general and administrative expenses for fiscal year 1995 were
$5,118,720 compared to $4,871,820 for fiscal year 1994. The 5% increase was the
result of an increase in sales during the period which caused an increase of
$142,000 in sales representative commissions and an increase of $104,900 for
other expenses and bad debt provision.
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Interest expense increased to $644,853 in fiscal year 1995 from $439,601
in fiscal year 1994. The increase was the result of an increase in the amount
borrowed under the revolving line of credit from the NBD Bank, N.A. and the
interest paid on a ten year note issued in connection with the redemption of
stock of Atlas at the time of the retirement of a previous officer commencing
November 1994. For the year ending June 30, 1995, the stock redemption by Atlas
in November 1994 of shares owned by a former officer and director increased
long-term debt and, therefore, reduced total stockholder's equity.
A total of $1,099,529 of cash was provided by operating activities during
the fiscal year ended 1994, which was approximately 50% of the level of cash
provided by operations during fiscal 1995. Major changes in cash flows provided
by operating activities from the fiscal year ending June 30, 1994 to fiscal year
ending June 30, 1995 include net income, which increased from negative $297,887
in fiscal 1994 to $2,219,974 in fiscal 1995 and a decrease in contract
receivables of $1,795,705 during fiscal 1995 compared to an increase of
$1,411,635 in such receivables during fiscal 1994. In addition, costs and
estimated earnings in excess of billings on uncompleted contracts decreased
further in 1995 as compared to 1994, providing an additional $905,063 in cash.
Accounts payable and accrued expenses increased by $1,111,639 during fiscal
1995, largely to accommodate Company growth, while the Company used $467,753 of
cash to pay down accounts payable and accrued expenses during fiscal 1994. Net
cash used in investing activities during fiscal 1995 and 1994 were similar,
totaling $606,925 and $462,125, respectively. However, net cash used in
financing activities increased in fiscal 1995 due largely to the Company's
reduction of its line of credit during fiscal 1995. Company net decreases in
cash in fiscal 1995 and 1994 were similar, at $75,831 and $103,139,
respectively.
Liquidity and Capital Resources
Atlas believes that its principal long-term capital requirement has been
and is expected to continue to be the funding of capital expenditures to
modernize, improve and expand its facilities and marketing efforts and financing
day-to-day operations. In connection with the Company's acquisition of Atlas,
Atlas paid an aggregate of $2,201,848.88 in connection with certain long term
debt, covenants not to compete and contingent liabilities for former
stockholders. This was partially funded out of a six-year term loan obtained in
May 1996 from NBD Bank, N.A. in the amount of $1,500,000 which loan bears
interest at the bank's prime rate plus one percent. The loan is secured by
assets of Atlas and guaranteed by the Company in the amount of $500,000 until
December 31, 1996 and $150,000 until May 31, 1997, when the guaranty terminates.
The Company's working capital at June 30, 1996 was $5,047,991, versus
working capital of $3,102,511 at June 30, 1995. The increase in working capital
resulted primarily from an increase in consolidated post-transaction cash on
hand, which resulted from the Company's escrowed funds in excess of the purchase
price for Atlas.
At June 30, 1996, Atlas had borrowings outstanding of $2,693,179 under
various term loans, of which the current portion was $464,393, comprised of the
following loans: (i) borrowings of $955,050 from NBD Bank, N.A. secured by the
plant of Atlas with a payment due on February 2, 1998 of $805,560, which bears
interest at the rate of 1.25% over the bank's prime rate; (ii) borrowings of
$180,470 from NBD Bank, N.A. secured by the equipment of Atlas with a final
payment due July 1998, which bears interest at the rate of 7.75%; and (iii)
borrowings of $78,492 from Concord Commercial secured by the equipment of Atlas
with a final payment due October, 1999, which bears interest at the rate of
8.7%. In May 1996, as part of the credit facility which Atlas entered into with
NBD Bank, N.A., Atlas can borrow up to $550,000 to finance future acquisitions
of equipment and facilities.
In addition to the term loans, Atlas has entered into a revolving credit
loan with NBD Bank, N.A. in the amount of $8,000,000. The amount that may be
borrowed under this facility is limited to certain percentages of the domestic
accounts receivable, raw materials and work in process of Atlas. At June 30,
1996, borrowings under this facility were $7,188,558. Borrowings under this
credit facility bear interest at the adjustable rate of 3/4% over the bank's
prime rate and are due on May 31, 1997. Atlas is reviewing with NBD Bank, N.A.
the potential for utilizing the ExportImport Bank of the United States for the
financing of foreign receivables and work in process. Atlas believes that, as a
result of its revolving facility, its short term credit facilities are adequate
to support its business operation at its current levels of sales.
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Until it reaches capacity at its present manufacturing facilities (which
management believes is approaching), Atlas believes that its capital
expenditures and operating costs will grow at rates proportional to increases in
sales volume. Currently, for capital expenditures not related to facility
expansion, Atlas has budgeted approximately $300,000 per year for machinery and
equipment, which it believes sufficient to accommodate growth in orders to be
processed at its existing two production facilities. Such capital expenditures
will be met using current credit facilities and working capital.
As discussed in Item 2--Properties, Atlas is presently constructing a new
production facility with approximately 60,000 square feet of production and
office space adjacent to its existing Fenton location, at an estimated cost of
$3,500,000.
Contingencies
The Company has received a demand for arbitration ("Demand") dated October
1, 1996 from a former customer who alleges, 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. The
Company believes the Demand is without merit and will vigorously defend its
position. Further, with respect to the alleged damages, the total purchase
amount on this contract was $1,360,000. The former customer has acknowledged
receiving the Company's standard terms and conditions. These terms and
conditions provide in pertinent part that the Company will not, in any event, be
liable for any incidental or consequential damages, including loss of profits.
Further, the Company warranty policy states that the buyer's sole remedy is
limited to either repair or replacement of the equipment or defective parts, or,
after negotiated settlement, return of the goods to seller. While the final
outcome of the Demand cannot be determined at this early date in the
proceedings, management believes that the final outcome will not have a material
adverse effect on the Company's results of operations or its financial position.
Recent Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121").
SFAS No. 121 requires, among other things, impairment loss of assets to be held
and gains or losses from assets that are expected to be disposed of be included
as a component of income from continuing operations before taxes on income. The
Company has adopted SFAS No. 121 and its implementation did not have a material
effect on the financial statements of Atlas or the Company.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principals Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB No. 25"), for
all arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the stock. The Company intends to adopt the
employee stock-based compensation provisions of SFAS No. 123 by disclosing the
pro forma net income and pro forma net income per share amounts assuming the
fair value method was adopted. The Company will adopt this standard effective
for its fiscal year ending June 30, 1997, as provided for under SFAS No. 123.
The Company does not expect adoption of this standard will have a material
effect on the financial statements of Atlas or the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company as set forth on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as
follows:
Director
Nominee Age Since Position
Ray J. Friant, Jr...... 65 1993 Chairman of the Board
Samuel N. Seidman...... 62 1993 President and Director
Joseph K. Linman....... 57 1993 Director and Vice President
John S. Strance........ 71 1993 Director and Vice President
Jesse A. Levine........ 29 1993 Director, Chief Financial
Officer, Vice President,
Secretary and Treasurer
Alan H. Foster......... 70 1993 Director
Alan I. Goldman........ 59 1993 Director
Ray J. Friant, Jr. has been Chairman of the Board of the Company since its
inception. Since 1988, Mr. Friant has been Managing Director of Seidman, Friant,
Levine Ltd., a crisis management company, where he currently specializes in
corporate restructuring and reorganization. In this capacity, he has had
management control, and has 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. In connection
with his activities with Seidman, Friant, Levine Ltd., Mr. Friant presently
serves as Chief Operating Officer of ASM's chemical vapor deposition businesses.
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 is Managing Director
of Seidman, Friant, Levine Ltd., and 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
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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 Regional Vice
President-Midwest 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.
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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 U.S. Alcohol Testing of America, 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 two 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 next annual meeting
of stockholders, the term of office of the second class of directors, consisting
of Messrs. Friant and Strance, will expire at the second succeeding annual
meeting of stockholders, and the term of office of the third class of directors,
consisting of Messrs. Seidman, Linman and Foster, will expire at the third
succeeding annual meeting of stockholders. In each case, a director will hold
office until the next annual meeting of stockholders at which his class of
directors is to be elected.
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 three month period ended June 30, 1996, each of its
officers, directors and 10% stockholders complied with the Section 16(a)
reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
No executive officer of the Company received any cash or other
compensation for services rendered from the Company since its inception through
May 22, 1996. Until May 22, 1996, Seidman & Co., Inc., a corporation of which
Samuel N. Seidman is President and Jesse A. Levine is Regional Vice President -
Midwest, was paid $5,000 per month as an administrative fee. It also received
and will continue to receive 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.
On February 8, 1996, the Board of Directors of the Company approved the
following annual salaries for its executive officers, effective May 23, 1996,
upon consummation of the acquisition of Atlas: Chairman (presently Mr. Friant),
$70,000; President (presently Mr. Seidman), $75,000; Chief Financial Officer,
Secretary and Treasurer (presently Mr. Levine), $25,000; and Vice Presidents
(presently Messrs. Linman, Strance and Levine) $25,000. 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 $16,000 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 the
Chairman and President will be paid at the rate of $1,000 to $2,000 per day, as
determined by the Chairman and the President, for actual days spent by them in
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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.
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
Messrs. Ronald M. Prime and Michael D. Austin have entered into employment
agreements with Atlas under which they serve as the 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
$190,000 per year subject to cost-of-living increases after December 31, 1996,
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 for two bonuses based on the earnings of Atlas
before interest and taxes, adjusted in the manner set forth in the agreements
("Adjusted Earnings"). Under one bonus arrangement, Messrs. Prime and Austin
will each be paid $208,333 for each of the six years beginning January 1, 1996,
in which Atlas' Adjusted Earnings exceed $2,000,000 and, if the Adjusted
Earnings average at least $2,000,000 during such six-year period, they will each
be paid, at the end of the six-year period, the sum of $1,250,000 less the
aggregate of the amounts paid to them under such bonus arrangement for the prior
five years. Based on the Adjusted Earnings of the Company for the period January
1 through June 30, 1996, the Company has accrued $104,167 for each of Messrs.
Prime and Austin under this arrangement.
Under the second bonus arrangement, if during the five years beginning
January 1, 1996, the Adjusted Earnings average at least $2,626,000, they will
each be paid an amount equal to the amount by which such average Adjusted
Earnings exceed $2,626,000. Both bonus arrangements are subject to liquidation
of amount and acceleration of payment in the event of a sale by the Company of
the capital stock of Atlas or a sale by Atlas of all or a substantial part of
its assets or issuance of capital stock of Atlas such that a person or group of
related persons becomes the owner of 51% or more of the outstanding stock of
Atlas. The bonuses are also subject to reduction to the extent of life insurance
benefits paid to an executive's estate pursuant to life insurance maintained on
the life of the executive pursuant to the employment agreements. Based on the
Adjusted Earnings of the Company for the period January 1 through June 30, 1996,
the Company has accrued $272,722 for each of Messrs. Prime and Austin under this
arrangement.
Each employment agreement also contains provisions restricting the
disclosure of confidential information and non-competition covenants.
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===============================================================================
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------
Salary
Name and Principal Position Period ($)
- -------------------------------------------------------------------------------
Samuel N. Seidman, President & CEO 4/1/96-6/30/96 6,250
4/1/95-3/31/96 --
6/24/94-3/31/95 --
===============================================================================
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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 9, 1996 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....................
30 Boxwood Drive
Convent Station, New Jersey 07960 193,083(1) 8.7%
Samuel N. Seidman....................
520 Madison Avenue
New York, New York 10022 207,083(1) 9.3%
Joseph K. Linman..................... 112,250(1) 5.2%
John S. Strance...................... 108,250(1) 5.0%
Jesse A. Levine...................... 70,833(1) 3.3%
Alan H. Foster....................... 21,250 1%
Alan I. Goldman...................... 21,250 1%
All Officers and Directors
as a group (7 persons)............. 733,999(1) 30.3%
- -----------------------
(1) Includes shares of Common Stock issuable upon immediately exercisable
Warrants and options as follows: Mr. Friant--86,833 shares; Mr. Seidman
--90,833 shares; Mr. Linman--46,500 shares; Mr. Strance--44,500 shares;
Mr. Levine--28,333 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTIES
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company a small amount of office space, as well as certain office,
administrative and secretarial services as may be required by the Company from
time to time. 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. 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
Regional Vice President--Midwest of Seidman & Co., Inc.
Page 21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
The financial statements of the Company and Atlas listed in Item 8 are
submitted as a separate section of this report.
1. Financial Statement Schedules
Not Applicable.
2. Exhibits as required by Item 601 of Regulation S-K:
Exhibit No. Description
3.1 Certificate of Incorporation*
3.1.1 Amendment to Certificate of Incorporation filed May 28, 1996**
3.2 By-laws*
4.1 Form of Common Stock Certificate of the Company*
4.2 Form of Warrant Certificate of the Company*
4.3 Unit Purchase Option between GKN Securities Corp. and the Company*
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company*
10.1 Form of Underwriting Agreement between the Company and GKN
Securities Corp.*
10.3 Form of Share Escrow Agreement between the Company and Continental
Stock Transfer &
Trust Company*
10.4 Letter Agreement among each of the Stockholders of the Company, the
Company and GKN
Securities Corp.*
10.5 Letter Agreement between Seidman & Co., Inc. and the Company
regarding administrative support*
10.6 Agreement of Merger dated as of December 18, 1995 (without
schedules or exhibits)***
10.6.1 Amendment to Agreement of Merger dated December 18, 1995***
10.7 Employment Agreement dated May 23, 1996 between Atlas
Technologies, Inc. ("Atlas") and Ronald M. Prime****
10.8 Employment Agreement dated May 23, 1996 between Atlas Technologies,
Inc. and Michael D. Austin****
10.9 1996 Performance Equity Plan of the Company****
27 Financial Data Schedule (filed electronically only)*****
- -----------------------------
(Footnotes on next page)
Page 22
<PAGE>
- -----------------------------
* Filed as Exhibits to Registration Statement on Form S-1, No. 33-78188,
and incorporated herein by reference.
** Filed as Exhibit to Report on Form 8-K (Event dated May 23, 1996) and
incorporated herein by reference.
*** Filed as Exhibits to Report on Form 8-K (Event dated December 18, 1995)
and incorporated herein by reference.
**** Filed as Exhibits to Report on Form 10-K for fiscal year ended March 31,
1996 and incorporated herein by reference
***** Filed herewith.
(b) During the period covered by this report the Company filed a report on
Form 8-K (Event dated May 23, 1996) which reported information under Items 2, 5,
7 and 8 and included the following financial statements:
(A) Atlas Technologies, Inc.
Balance sheet as of March 31, 1996 (unaudited)
Statements of Income for nine months ended March 31, 1996
(unaudited) and March 31, 1995 (unaudited)
Statement of Stockholders' Equity for period ended March 31, 1996
(unaudited)
Statements of Cash Flows for nine months ended March 31, 1996
(unaudited) and March 31, 1995 (unaudited)
Selected Information
(B) Production Systems Acquisition Corporation and
Atlas Technologies, Inc.
Unaudited Pro Forma Consolidated Statement of Operations for nine
months ended March 31, 1996
Unaudited Pro Forma Consolidated Statement of Operations for year
ended June 30, 1995
Notes to Unaudited Pro Forma Consolidated Statements of Operations
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1996
Notes to Unaudited Pro Forma Consolidated Balance Sheet
Page 23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned herewith duly authorized.
October 11, 1996 PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
----------------------------------
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 Company and in the capacities and on the dates indicated.
/s/ Ray J. Friant, Jr. Chairman of the Board October 11, 1996
- ----------------------------
Ray J. Friant, Jr.
/s/ Samuel N. Seidman Chief Executive Officer, October 11, 1996
- ---------------------------- President and Director
Samuel N. Seidman
/s/ Joseph K. Linman Vice President and October 11, 1996
- ---------------------------- Director
Joseph K. Linman
/s/ John S. Strance Vice President and October 11, 1996
- ---------------------------- Director
John S. Strance
/s/ Jesse A. Levine Vice President, October 11, 1996
- ---------------------------- Secretary, Treasurer
Jesse A. Levine and Director and
Chief Financial Officer
/s/ Alan H. Foster Director October 11, 1996
- ----------------------------
Alan H. Foster
/s/ Alan I. Goldman Director October 11, 1996
- ----------------------------
Alan I. Goldman
Page 24
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Index
Reports of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheet of The Company and Balance
Sheet of the Predecessor F-5
Consolidated Statement of Operations of The Company
and Statements of Operations of the Predecessor F-7
Consolidated Statement of Stockholders' Equity of The
Company and Statements of Stockholders' Equity of
the Predecessor F-8
Consolidated Statement of Cash Flows of The Company
and Statements of Cash Flows of the Predecessor F-9
Notes to Financial Statements F-11
Schedule II - Valuation and Qualifying Accounts F-26
F-1
<PAGE>
Report of Independent Certified Public Accountants
Productivity Technologies Corp.
New York, New York
We have audited the accompanying consolidated balance sheet of Productivity
Technologies Corp. and Subsidiary ("The Company"), as of June 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period May 24, 1996 to June 30, 1996 ("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 the 1996 information in Schedule
II. These financial statements and the Schedule II are the responsibility of the
Companies' managements. Our responsibility is to express an opinion on these
financial statements and the 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 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 period after the acquisition is presented on a different cost basis than
that for the period before the acquisition and, therefore, is not comparable.
F-2
<PAGE>
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, 1996, 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, the 1996 information in Schedule II presents fairly, in
all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
October 2, 1996, except for Note 13
which is as of October 14, 1996
F-3
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Atlas Technologies, Inc.
Fenton, Michigan
We have audited the accompanying balance sheet of Atlas Technologies, Inc. ("the
Predecessor"), as of June 30, 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended June 30, 1995. We have also audited the 1994 and 1995 information in
Schedule II. These financial statements and the Schedule II are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlas Technologies, Inc. as of
June 30, 1995, and the results of its operations and its cash flows for each of
the two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
Also, in our opinion, the 1994 and 1995 information in Schedule II presents
fairly, in all material respects, the information set forth therein.
DUPUIS & RYDEN
Flint, Michigan
August 11, 1995
F-4
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Balance Sheet of The Company and
Balance Sheet of the Predecessor
The Company Predecessor
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------
Assets (Notes 6 and 7)
Current Assets
Cash and cash equivalents $ 512,179 $ 17,253
Short-term investments, including accrued interest 965,255 -
Contract receivables (Note 3) 7,958,159 4,190,726
Notes receivable 240,606 466,458
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 4) 7,593,003 5,692,367
Inventories 720,947 775,320
Prepaid expenses and other 220,494 11,994
Deferred income taxes (Note 10) 480,000 269,000
- -------------------------------------------------------------------------------
Total Current Assets 18,690,643 11,423,118
- -------------------------------------------------------------------------------
Property and Equipment
Land 216,000 77,200
Buildings and improvements 2,132,388 1,935,595
Machinery and equipment 1,888,479 4,626,860
Transportation equipment 31,500 97,760
- -------------------------------------------------------------------------------
4,268,367 6,737,415
Less accumulated depreciation 27,928 4,220,195
- -------------------------------------------------------------------------------
Net Property and Equipment 4,240,439 2,517,220
- -------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization of $10,923
(Note 2) 2,593,803 -
Noncompetition agreement, net of accumulated
amortization (Note 5) 228,083 245,083
Deferred income taxes (Note 10) - 187,000
Other assets 270,803 177,880
- -------------------------------------------------------------------------------
Total Other Assets 3,092,689 609,963
- -------------------------------------------------------------------------------
$26,023,771 $14,550,301
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Balance Sheet of The Company and
Balance Sheet of the Predecessor
The Company Predecessor
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,444,411 $ 2,384,530
Line-of-credit (Note 6) 7,188,558 2,608,938
Accrued expenses
Executive bonus agreement (Note 12) 753,778 -
Commissions payable 544,248 413,214
Payroll and related withholdings 438,274 224,924
Federal and state income taxes 221,790 262,950
Other 1,052,237 527,736
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 4) 534,963 1,306,390
Current maturities of long-term debt (Note 7) 464,393 591,925
- ------------------------------------------------------------------------------
Total Current Liabilities 13,642,652 8,320,607
Deferred Income Taxes (Note 10) 779,000 -
Long-Term Debt, less current maturities (Note 7) 2,228,786 2,716,813
- -------------------------------------------------------------------------------
Total Liabilities 16,650,438 11,037,420
- -------------------------------------------------------------------------------
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Equity (Notes 8 and 9)
Preferred stock, $.001 par value, 1,000,000
authorized and none outstanding - -
Common stock; 1996 - $.001 par value, 20,000,000
shares authorized and 2,125,000 outstanding;
1995 - $1 par value, 50,000 shares authorized,
25,683 outstanding 2,125 25,683
Additional paid-in capital 9,177,488 73,465
Retained earnings 193,720 3,413,733
- -------------------------------------------------------------------------------
Total Stockholders' Equity 9,373,333 3,512,881
- -------------------------------------------------------------------------------
$ 26,023,771 $ 14,550,301
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statement of Operations of The Company
and Statements of Operations of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
--------------- ------------------------------------------------------------
May 24, to July 1, 1995 Year Ended Year Ended
June 30, 1996 to May 23, 1996 June 30, 1995 June 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,404,192 $31,598,669 $29,077,684 $21,186,245
- -------------------------------------------------------------------------------------------------------------------------
Cost of Sales 3,029,113 21,773,080 21,034,282 16,320,825
- -------------------------------------------------------------------------------------------------------------------------
Gross Profit 1,375,079 9,825,589 8,043,402 4,865,420
Selling, General and
Administrative Expenses 729,141 6,006,965 5,118,720 4,871,820
Officers' Bonuses (Notes 2 and 12) 197,290 2,117,251 - -
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations 448,648 1,701,373 2,924,682 (6,400)
- ------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 20,274 33,837 32,971 19,450
Interest expense (57,331) (512,851) (644,853) (439,601)
Gain (loss) on disposal of assets - (2,976) 308,565 31,866
Miscellaneous (41,744) 151,198 63,609 59,798
- -----------------------------------------------------------------------------------------------------------------------
Total Other Expenses (78,801) (330,792) (239,708) (328,487)
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 369,847 1,370,581 2,684,974 (334,887)
Income Tax Benefit (Provision)
(Note 10) (165,000) (608,000) (465,000) 37,000
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 204,847 762,581 2,219,974 (297,887)
- -----------------------------------------------------------------------------------------------------------------------
Net Income Per Share of
Common Stock $.10
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares 2,125,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statement of Stockholders' Equity of The Company
and Statements of Stockholders' Equity of the Predecessor
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
--------------------- Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1993 (Predecessor) 35,579 $ 35,579 $186,691 $ 3,051,571 $ 3,273,841
Stock repurchase from ESOP
participants (Note 8) (678) (678) (113,226) - (113,904)
Net loss - - - (297,887) (297,887)
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 (Predecessor) 34,901 34,901 73,465 2,753,684 2,862,050
Stock repurchase from former
stockholder (Note 8) (9,218) (9,218) - (1,559,925) (1,569,143)
Net income - - - 2,219,974 2,219,974
- ----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (Predecessor) 25,683 25,683 73,465 3,413,733 3,512,881
Distribution to former stockholder
(Note 8) - - - (700,000) (700,000)
Net income - - - 762,581 762,581
- ----------------------------------------------------------------------------------------------------------------
Balance, May 23, 1996 (Predecessor) 25,683 $ 25,683 $ 73,465 $3,476,314 $ 3,575,462
- ----------------------------------------------------------------------------------------------------------------
Balance, May 24, 1996 (Company) 1,785,001 $ 1,785 $ 7,351,741 $ (11,127) $7,342,399
Reclassification of common stock
subject to possible redemption
(Note 8) 339,999 340 1,825,747 - 1,826,087
Net income - - - 204,847 204,847
- ---------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Company) 2,125,000 $ 2,125 $ 9,177,488 $ 193,720 9,373,333
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statement of Cash Flows of The Company
and Statements of Cash Flows of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
-------------- ---------------------------------------------------
May 24, to July 1, 1995 Year Ended Year Ended
June 30, 1996 to May 23, 1996 June 30, 1995 June 30, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 204,847 $ 762,581 $ 2,219,974 $ (297,887)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Depreciation 27,931 360,726 355,088 386,985
Amortization 12,688 15,235 9,917 -
Deferred income taxes 46,000 164,000 (202,000) 30,000
(Gain) loss on sale of property and
equipment - 2,976 (28,565) (31,866)
Changes in operating assets and liabilities
Contract receivables (3,565,732) (201,701) (1,795,705) 1,411,635
Inventories, prepaid expenses and other (488,818) 295,028 1,428,519 185,709
Costs and estimated earnings in excess of
billings on uncompleted contracts - net
effect 1,365,906 (4,037,969) (905,063) (117,294)
Accounts payable, accrued expenses and other 1,271,862 174,259 1,111,639 (467,753)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating
Activities (1,125,316) (2,464,865) 2,193,804 1,099,529
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Maturity of U.S. Government securities deposited
in trust fund 7,120,000 - - -
Purchase of Atlas (6,900,000) - - -
Expenditures for property and equipment (49,549) (466,828) (381,211) (404,459)
Collections on notes receivable 6,312 219,540 175,144 15,900
Proceeds from sale of property and equipment - 3,400 132,142 34,725
Issuance of notes receivable - - (533,000) (108,291)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities 176,763 (243,888) (606,925) (462,125)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statement of Cash Flows of The Company
and Statements of Cash Flows of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
------------- --------------------------------------------------
May 24, to July 1, 1995 Year Ended Year Ended
June 30, 1996 to May 23, 1996 June 30, 1995 June 30, 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities
Net borrowings (payments) - line-of-credit 589,300 3,990,320 (1,019,562) (517,700)
Payments on long-term debt, capital
leases and notes payable 43,161) (2,072,398) (557,148) (426,853)
Proceeds from additions of long-term debt - 1,500,000 110,000 317,914
Distribution to former stockholders - (700,000) - -
Purchase of company stock - - (196,000) (113,904)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing
Activities 546,139 2,717,922 (1,662,710) (740,543)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash
Equivalents (402,414) 9,169 (75,831) (103,139)
Cash and Cash Equivalents, at beginning
of period 914,593 17,253 93,084 196,223
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $512,179 $ 26,422 $ 17,253 $ 93,084
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Period For
Interest $ 57,331 $ 522,637 $ 628,689 $ 430,145
Income taxes - 570,175 777,458 203,000
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and
Financing Activities
Purchase of equipment with
loan obligation $ - $ - $ 97,941 $ -
Purchase of stock with loan
obligations - - 1,373,143 -
Consummation of a noncompetition
agreement with loan obligation - - 255,000 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
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 since inception are
summarized below (in thousands):
<TABLE>
<CAPTION>
June 1993
(Inception)
Year Ended Year Ended Through
April 1, 1996 March 31, March 31, March 31,
to May 23, 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 56 $ 503 $ 343 $ -
Operating expenses (54) (266) (250) (2)
Income taxes (3) (132) (31) -
- --------------------------------------------------------------------------------------------
Net Income (Loss) $ (1) $ 105 $ 62 $ (2)
- --------------------------------------------------------------------------------------------
</TABLE>
The above operating results of PTC are not included in the accompanying
financial statements.
The accompanying consolidated financial statements for 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.
F-11
<PAGE>
The accompanying financial statements presented for the period July 1, 1995 to
May 23, 1996, and for the years ended June 30, 1995 and 1994 represent the
financial statements of Atlas (the "Predecessor").
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery,
equipment, components, industrial hydrostatic drives and engineering services.
It operates with two manufacturing plants and three sales and engineering
offices. The main plant is located in Fenton, Michigan with an additional plant
operating in nearby Linden, 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 automotiverelated 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,
1996, 1995 and 1994 amounted to approximately 13%, 10% and 10%, respectively, of
annual sales.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Short-term Investments
Short-term investments represent U.S. Treasury Bills with maturities of twelve
months or less and are carried at cost, which approximates market.
F-12
<PAGE>
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. Allowances of
approximately $163,000 and $232,000 were deemed necessary at June 30, 1996 and
1995, respectively.
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 line-of-credit 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.
F-13
<PAGE>
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.
Revenues from time-and-material contracts are recognized currently as the work
is performed.
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 useful
lives:
Building and improvements 20 - 40 years
Machinery and equipment 3 - 10 years
Transportation equipment 2 - 5 years
F-14
<PAGE>
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.
The noncompetition agreement is amortized 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".
Net Income Per Common Share
Net income per common share for the period May 24-June 30, 1996 has been
computed based on the weighted average number of common and dilutive common
equivalent shares outstanding.
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. This
policy is in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which is
effective for fiscal years beginning after December 15, 1995. No impairment
losses have been necessary through June 30, 1996.
F-15
<PAGE>
Stock-Based Compensation
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued. SFAS No. 123 encourages entities to adopt the fair value method in
replacement of the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", for all arrangements under which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the stock. The Company intends to adopt the employee stock-based compensation
provisions of SFAS No. 123 by disclosing the pro forma net income and pro forma
net income per share amounts assuming the fair value method was adopted. The
Company, which will adopt this standard beginning in its 1997 fiscal year, does
not expect SFAS No. 123 will have a material effect on its financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
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. 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 12).
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 purchase price over the estimated fair value of
net assets acquired of $2,604,726 was recorded as goodwill and is being
amortized on a straight-line basis over twenty-five years. The purchase price
was allocated as follows:
Working capital $ 2,238,011
Property and equipment 4,218,818
Other assets 363,985
Goodwill 2,604,726
Liabilities (2,188,480)
- -----------------------------------------------------------------------------
Purchase Price $ 7,237,060
- -----------------------------------------------------------------------------
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,
1994, 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, 1994.
F-16
<PAGE>
Year Ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Net sales $ 36,003,000 $ 29,078,000
Net income 1,409,000 764,000
Net income per common share .66 .36
- -------------------------------------------------------------------------------
3. Contract Receivables
The contract receivables consisted of:
June 30, 1996 1995
- -------------------------------------------------------------------------------
Billed
Completed contracts $ 1,315,374 $ 2,714,436
Uncompleted contracts 6,757,622 1,259,168
Unbilled 48,634 449,242
- -------------------------------------------------------------------------------
Total Contracts Receivable 8,121,630 4,422,846
Less allowance for doubtful accounts (163,471) (232,120)
- -------------------------------------------------------------------------------
Total $ 7,958,159 $ 4,190,726
- -------------------------------------------------------------------------------
4. Costs and Estimated Earnings on
Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the
following:
June 30, 1996 1995
- -------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $25,617,770 $11,089,156
Estimated earnings 10,217,972 3,915,526
- -------------------------------------------------------------------------------
35,835,742 15,004,682
Less billings to date 28,777,702 10,618,705
- -------------------------------------------------------------------------------
Total $ 7,058,040 $ 4,385,977
- -------------------------------------------------------------------------------
F-17
<PAGE>
The above totals are included in the accompanying balance sheets under the
following captions:
June 30, 1996 1995
- -------------------------------------------------------------------------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 7,593,003 $ 5,692,367
Billings in excess of costs and
estimated earnings on uncompleted
contracts (534,963) (1,306,390)
- -------------------------------------------------------------------------------
Total $ 7,058,040 $ 4,385,977
- -------------------------------------------------------------------------------
5. Noncompetition Agreement
Atlas has paid $255,000 to a former stockholder in connection with the
repurchase of Atlas stock under a ten-year noncompetition agreement. In
connection therewith, Atlas recorded an asset for $255,000, which is being
amortized on a straight-line basis starting in December 1994.
6. Line-of-Credit
At June 30, 1996, Atlas has an $8,000,000 working capital line-of-credit
agreement with a bank, which is secured by substantially all assets. The amount
that may be borrowed under this agreement is limited to specified percentages of
contract receivables, work in process and inventories of Atlas. Interest is
charged at a rate between prime and 3/4% over prime, depending on the Company's
liabilities to tangible capital funds ratio, as defined in the borrowing
agreement. (The prime rate was 8.25% at June 30, 1996 and 9.0% at June 30,
1995.) The loan agreement contains certain restrictions on the payment of
dividends or management fees to PTC; such payments from Atlas are restricted to
$350,000 per year. The loan agreement also contains various other financial
covenants. The line-of-credit balances outstanding were $7,188,558 and
$2,608,938 at June 30, 1996 and 1995, respectively.
F-18
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
7. Long-Term Debt
Long-term debt consisted of:
June 30, 1996 1995
- -------------------------------------------------------------------------------
Loans payable to bank, due in monthly
principal installments totaling $36,455 at
June 30, 1996, plus interest (primarily at
prime plus .5% - 1.25%), secured by
substantially all assets $ 2,608,466 $ 1,365,414
Note payable to former stockholder of
Atlas for purchase of stock and
noncompetition agreement, repaid
during fiscal 1996 - 1,554,839
Other 84,713 388,485
- -------------------------------------------------------------------------------
Total Long-Term Debt 2,693,179 3,308,738
Less current maturities 464,393 591,925
- -------------------------------------------------------------------------------
Total $ 2,228,786 $ 2,716,813
- -------------------------------------------------------------------------------
Scheduled maturities of long-term debt for future years ending June 30 are as
follows: 1997 - $464,393; 1998 - $406,948; 1999 - $1,083,785; 2000 - $258,919;
2001 - $250,008; and $229,126 thereafter.
The prime interest rate was 8.25% and 9.0% at June 30, 1996 and 1995,
respectively.
8. 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 on the later of one year from the effective date of the
Offering or the consummation of a Business Combination, and ending seven years
from the effective date of the Offering. 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.
F-19
<PAGE>
PTC also issued 300,000 warrants to certain investors, which are identical to
the Warrants discussed above, except that they are not redeemable until 90 days
after the consummation of a Business Combination.
At June 30, 1996, 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 $7.50 per Unit for a period of four years
commencing one year from the Offering date. Each Unit consists of one share of
PTC common stock and two Warrants. The Units issuable upon exercise of the
purchase option are identical to those described above except that the Warrants
contained therein expire five years from the effective date of the Offering.
The Company is authorized to issue 1,000,000 shares of preferred stock ($.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.
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.
Atlas has periodically repurchased its stock in prior years, and in order to
comply with the Michigan Business Act, all such treasury stock was combined with
common stock, paid-in capital, and retained earnings and was considered to be
retired, but available for reissue. During 1995, Atlas purchased 9,218 shares of
its own stock from a former stockholder for $1,569,143. In 1994, the Company
purchased 678 shares of its own stock from ESOT participants for $113,904.
In accordance with the December 18, 1995 Merger Agreement, a $700,000
distribution was paid to a former shareholder in May 1996.
F-20
<PAGE>
9. 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, $150,000 and
$120,000 to the ESOT during the periods ended May 23, 1996, June 30, 1995 and
June 30, 1994, respectively. At May 23, 1996, the Company's stock owned by the
ESOT was acquired as part of the purchase transaction. The Company anticipates
liquidating the ESOT during fiscal year 1997.
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. As of
June 30, 1996, no shares have been issued pursuant to this Plan.
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. The plan does not provide for Company contributions.
10. 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.
F-21
<PAGE>
Significant components of the Company's deferred tax liabilities and assets at
June 30, 1996 are as follows:
Depreciation and basis of assets $ 693,000
Other 86,000
- -------------------------------------------------------------------------------
Deferred Tax Liability $ 779,000
- -------------------------------------------------------------------------------
Accrual for executive bonus agreement $ 185,000
Research credit carryforward 178,000
Other 117,000
- -------------------------------------------------------------------------------
Deferred Tax Asset $ 480,000
- -------------------------------------------------------------------------------
Significant components of the Atlas' net deferred tax asset at June 30, 1995 are
as follows:
Research credit carryforward $ 494,000
Depreciation and basis of assets (134,800)
Other - net 96,800
- -------------------------------------------------------------------------------
Net Deferred Tax Asset $ 456,000
- -------------------------------------------------------------------------------
F-22
<PAGE>
Significant components of the Company's income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
May 24, 1996
to July 1, 1995 Year Ended Year Ended
June 30, 1996 May 23, 1996 June 30, 1995 June 30, 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal
Current $ 108,000 $ 401,000 $ 561,000 $ -
Deferred 46,000 164,000 (202,000) 30,000
Other - - 10,000 (70,000)
State
Current 11,000 43,000 96,000 3,000
- -------------------------------------------------------------------------------------------------
Total $ 165,000 $ 608,000 $ 465,000 $ (37,000)
- -------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of income tax computed at the federal statutory rate (34%) to
income tax expense is as follows:
<TABLE>
<CAPTION>
May 24, 1996
to July 1, 1995 Year Ended Year Ended
June 30, 1996 May 23, 1996 June 30, 1995 June 30, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $ 126,000 $ 466,000 $ 913,000 $ (114,000)
State income taxes, net
of federal income tax
benefit 7,000 28,000 96,000 3,000
Goodwill amortization and
other non-deductible
items 6,000 70,000 - -
Change in valuation
allowance - - (319,000) 219,000
Research credit - - (208,000) (143,000)
Other - net 26,000 44,000 (17,000) (2,000)
- -------------------------------------------------------------------------------------------------
Total Income Taxes $ 165,000 $ 608,000 $ 465,000 $ (37,000)
- -------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
Atlas has tax research credit carryforwards totalling $178,000 that will begin
to expire in 2008.
11. Major Customers
For the twelve months ended June 30, 1996, 1995 and 1994, the Company's sales to
its major customers (each representing more than 10% of total net sales)
amounted to approximately 64%, 60% and 39% of total annual sales. During 1996,
there were four major customers representing 30%, 13%, 11% and 10% of total net
sales; during 1995, there were three customers representing 35%, 15% and 10% of
total net sales; and during 1994, there were two customers, representing 25% and
14% of total net sales.
12. Commitments
(1) In connection with the Merger Agreement, the Company has entered
into employment agreements which changed the compensation of two
executive officers of Atlas. These 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 $190,000, subject to cost of living increases after
December 31, 1996.
The employment agreements also provide for two bonus calculations based on
the earnings of the Company before interest and taxes (as defined). Under
one of the bonus arrangements, each of the two executives mentioned in the
above paragraph will be paid $208,333 for each of the six years beginning
January 1, 1996 in which the Company's "Adjusted Earnings" (as defined in
the related agreements) exceed $2,000,000. If the Adjusted Earnings
average at least $2,000,000 during such six-year period, the two
executives will each be paid, at the end of the six year period, the sum
of $1,250,000 less the aggregate of the amounts paid to them under such
bonus arrangement for the prior five years.
Under the second bonus arrangement, if during the five years beginning
January 1, 1996, the "Average Adjusted Earnings" (as defined in the
related agreements) are at least $2,626,000, each executive will be paid
an amount equal to the amount by which such average earnings exceed
$2,626,000. Both bonus arrangements are also subject to various conditions
described in the related agreements. The bonus arrangements do not
terminate in the event of death of the executive, but payments will be
reduced by the amount of insurance benefits paid to the executive's estate
pursuant to life insurance in effect.
F-24
<PAGE>
(2) As of June 30, 1996, the Company had outstanding commitments for the
purchase of real estate and the construction of a new facility totaling
approximately $3,500,000.
13. Contingencies
The Company has received a "Demand For Arbitration" dated October 1, 1996
by a former customer who alleges, 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.
The Company believes the arbitration demand is without merit and will
vigorously defend its position. Further, with respect to the alleged
damages, the total purchase amount on this contract was $1,360,000. The
former customer has acknowledged receiving the Company's standard terms
and conditions. These terms and conditions provide, in pertinent part,
that the Company will not, in any event, be liable for any incidental or
consequential damages, including loss of profits. Further, the Company's
warranty policy states that the buyer's sole remedy is limited to either
repair or replacement of the equipment or defective parts, or, after
negotiated settlement, return of the goods to seller.
While the final outcome of the arbitration demand cannot be determined at
this early date in the proceedings, management believes that the final
outcome will not have a material adverse effect on the Company's
results of operations or its financial position.
F-25
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Period May 24, 1996 to June 30, 1996 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 - - $ 163,471
- ----------------------------------------------------------------------------------------------------------------------------------
Period July 1, 1995 to May 23, 1996 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 232,120 180,337 (1) (248,986) $ 163,471
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1995 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 127,533 108,000 (1) (3,413) $ 232,120
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1994 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 58,770 64,500 (1) 4,263 $ 127,533
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accounts deemed to be uncollectible (net of accounts collected that were
previously deducted).
F-26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Productivity Technologies Corp. and subsidiary
as of June 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> MAY-24-1996
<PERIOD-END> JUN-30-1996
<CASH> 512,179
<SECURITIES> 965,255
<RECEIVABLES> 15,955,239
<ALLOWANCES> (163,471)
<INVENTORY> 720,947
<CURRENT-ASSETS> 18,690,643
<PP&E> 4,268,367
<DEPRECIATION> (27,928)
<TOTAL-ASSETS> 26,023,771
<CURRENT-LIABILITIES> 13,642,652
<BONDS> 0
<COMMON> 2,125
0
0
<OTHER-SE> 9,371,208
<TOTAL-LIABILITY-AND-EQUITY> 26,023,771
<SALES> 4,404,192
<TOTAL-REVENUES> 4,404,192
<CGS> 3,029,113
<TOTAL-COSTS> 3,955,544
<OTHER-EXPENSES> 41,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,331
<INCOME-PRETAX> 369,847
<INCOME-TAX> 165,000
<INCOME-CONTINUING> 204,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,847
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
