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
X EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended
------ June 30, 1997
OR
------
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
------ THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-24212
PRODUCTIVITY TECHNOLOGIES CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3764753
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
509 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 843-1480
Securities registered pursuant to Section 12(b) of the
Exchange Act: None Securities registered pursuant to
Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
Redeemable Common Stock Purchase Warrants Units, each consisting of one share
(Title of class) of Common Stock and two Redeemable
Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 24, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $7,115,000.
As of September 24, 1997, there were 2,125,000 shares of the
Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PAGE 1 OF 53 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 85% to 90% of its
sales revenues. It also sells, on a turnkey basis, fully integrated metal
stamping systems comprised of components provided by Atlas and other
manufacturers and is beginning a material handling product line.
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' 1995, 1996 and 1997 fiscal years, the automotive segment
accounted for approximately 79%, 86% and 90% of sales, respectively, and
appliance manufacturers accounted for approximately 8%, 8% and 3%, respectively.
For such fiscal years, sales by Atlas to General Motors Corporation represented
15%, 10% and 12%, respectively, sales to Chrysler Corporation represented 35%,
13% and 3%, respectively, and sales to The Ford
- --------
* "Specified Purpose Acquisition Company" and "SPAC" are registered service
marks of GKN Securities Corp.
Page 2
<PAGE>
Motor Company represented 4%, 11% and 9%, respectively, of total sales. Sales
are predominantly in the United States and Canada but, in recent years, Atlas
has targeted sales efforts in Mexico, Europe and Asia. International sales for
the 1995, 1996 and 1997 fiscal years represented approximately 10%, 13% and 20%
of total sales in such years.
Atlas uses three marketing channels: direct sales, 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
$16,500,000, $18,200,000 and $19,000,000 at June 30, 1995, 1996 and 1997,
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.
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 cut 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.
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<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 manufactures 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, 1996 and 1997, Atlas expensed approximately $320,000 and $270,000,
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 recently completed building a fourth facility on a new 10.9 acre
site adjacent to its existing Fenton location. The new facility initially
provides approximately 51,000 square feet of manufacturing space and 8,000
square feet of office space, but is capable of expanding at a later date to
approximately 130,000 square feet of manufacturing and 25,000 square feet of
office space. The new facility has higher roofs and heavier cranes to facilitate
manufacturing of larger equipment. Project costs through June 30, 1997 were
funded through Industrial Revenue Bonds.
The Company recently sold the Linden plant facility for approximately
$1,100,000. Atlas will lease back a portion of the facility to support
production operations during at least the next twelve months.
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 filed an answer denying
the material allegations of the complaint and asserting a counterclaim
requesting that the patents be declared invalid.
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 believes that it is not responsible for the alleged
defects and has denied the allegations of the complaint. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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 Common Stock and Warrants, as reported by the OTC Bulletin Board
through August 1, 1996, and thereafter as reported by the Nasdaq SmallCap
Market, and for the Units, as reported by the OTC Bulletin Board. There has been
no material trading in the Units since the quarter ended June 30, 1996. 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, 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
Year ended June 30, 1997:
First Quarter 9 9 6 3/8 4 5/8 1 7/8 13/16
Second Quarter 8 3/4 7 1/4 5 3 1/4 1 1/2 1/2
Third Quarter 6 7/8 6 5/8 4 3/8 2 1/2 1 1/4 1/2
Fourth Quarter -- -- 3 1/4 1 3/4 1 3/8
</TABLE>
As of September 26, 1997, the Company had 10 holders of record of its
Common Stock. The Company believes that there are in excess of 500 beneficial
holders of the Company's Common Stock.
The Company has not declared or paid any dividends on its Common Stock
since its inception.
Recent Sales of Unregistered Securities
The following securities were issued by the Company during the fiscal
year ended June 30, 1997 and were not registered under the Securities Act of
1933, as amended (the "Act"). Each of the transactions is claimed to be exempt
from a registration under the Act pursuant to Section 4(2) of the Act as a
transaction by an issuer not involving a public offering.
(a) On July 30, 1996, the Company granted options to
purchase of an aggregate of 255,000 shares of its Common Stock
to five of its directors pursuant to the Company's 1996
Performance Equity Plan. Such options are exercisable at $5.00
per share until July 30, 2001.
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<PAGE>
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, 1997 and 1996 and for the periods July 1, 1995 to May 23, 1996, May
24, 1996 to June 30, 1996 and for the year ended June 30, 1997 and Dupuis &
Ryden, independent certified public accountants, who audited the years ended
June 30, 1995, 1994 and 1993. 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 Company Predecessor
July 1
Year May 24, 1995 Year Year Year
Ended to to Ended Ended Ended
June 30, June 30, May 23, June 30, June 30, June 30,
1997 1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net sales $34,438 $ 4,404 $ 31,598 $ 29,077 $ 21,186 $ 22,830
Cost of sales 24,825 3,029 21,773 21,034 16,320 16.774
Gross profit 9,613 1,375 9,825 8,043 4,866 6,056
Selling, general and
administrative expenses 7,081 729 6,007 5,119 4,872 4,663
Officers' bonuses 711 197 2,1l7 --- --- ---
Income (loss) From operations 1,821 448 1,701 2,924 (6) 1,393
Net income (loss) 593 204 762 2,219 (297) 884
Net income per share of
common stock $.28 $ .10
Weighted average common
shares 2,125 2,125
</TABLE>
Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
The Company Predecessor
June 30, June 30, June 30, June 30, June 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Current assets $22,627 $ 18,690 $ 11,423 $ 8,850 $ 10,500
Current liabilities 7,284 13,642 8,321 7,246 8,287
Working capital 15,343 5,048 3,102 1,604 2,213
Property, plant and equipment,
net 7,667 4,240 2,517 2,595 2,580
Total assets 33,410 26,023 14,550 11,774 13,417
Long-term debt, less current
maturities 15,327 2,228 2,717 1,666 1,855
Total liabilities 23,444 16,650 11,037 8,912 10,143
Stockholders' equity 9,966 9,373 3,513 2,862 3,274
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company
The fiscal year ended June 30, 1997 is the first full year of consolidated
activities for Productivity Technologies Corp. and its wholly-owned subsidiary,
Atlas Technologies, Inc.
In June, 1997, Atlas commenced its move into a new 59,000 square foot
facility located on approximately 11 acres of land adjacent to its Fenton,
Michigan, facility. The additional acreage is sufficient to expand the new plant
by an additional 130,000 square feet. Production bays in the new plant have been
designed to accommodate larger projects, while allowing for improved throughput
and better efficiency in constructing newly designed and standardized automation
equipment. Atlas operates out of three locations and, as of July 1, 1997,
conducts final assembly in the new facility.
The Company believes its present customers continue seeking to pre-qualify
and reduce the number of their suppliers. To increase efficiency and customer
service, Atlas plans to finalize the purchase and installation of a new computer
information system early in fiscal 1998. Atlas management expects the new
computer system will improve internal project tracking, project scheduling and
forecasting, decision making and project control processes.
Atlas' product line has been enhanced with the addition of the first
automated destacker designed to feed an extra large transfer press capable of
unloading pallets of steel blanks with varying shapes and sizes. Development and
production of several automated destackers has assisted Atlas in establishing
further design and build capabilities for its customers. In turn, quoting
opportunities have increased. Atlas also has applied for patents in connection
with newly designed accumulating conveyors used in mass production material
handling requirements and has received a patent for a new concept for between
press automation transferring of stamped parts and die changes.
Atlas' marketing efforts also have been expanded. The metal stamping
industry is capital intensive and many major world stamping facilities can be
identified and targeted on a country by country basis. Many U.S. stamping
manufacturers already are international or are planning to increase
manufacturing presence in foreign countries by building plants overseas or
through establishing joint ventures. During fiscal 1997, Atlas established
direct sales presence in Europe and China and closed more than $14 million in
orders for new foreign installations, over 40% of total new orders.
Currently, automotive and auto related suppliers account for approximately
85% of new order closings and receive most of Atlas' recent marketing efforts.
At the same time, Atlas remains familiar and maintains quoting activity with
non-automotive customers, including producers of home appliances, heating and
air conditioning sys tems, off-road vehicles and equipment, and other
manufacturers which use significant amounts of sheet metal in their products.
Production capacity afforded by Atlas' three plants, including the new
factory opened in July, 1997, is sufficient for current volume levels. Continued
foreign market penetration and the possibility of increased future sales to
non-automotive customers could lead to the need for additional manufacturing
space. Management believes, however, that project lead times of six months to
two years for delivery will provide sufficient time to bring new capacity on
line if required.
Results of Operations
Results of operations for the year ending June 30, 1997 are not fully
comparable to results for fiscal 1996. PTC acquired Atlas on May 23, 1996.
Fiscal 1996 figures include approximately eleven months of unconsolidated Atlas
operations. Consequently, fiscal 1996 data includes only 38 days of consolidated
PTC and
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Atlas activities. Fiscal 1997 is the first full year of consolidated PTC and
Atlas operations.
Sales (Revenue and Cost Recognition)
Sales are recognized using the percentage-of-completion method, which
measures the percentage of contract costs incurred to date and compares these
costs to the total estimated costs for each contract. The Company estimates the
status of individual contracts when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
condition, estimated profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the period the revisions
are determined.
Fiscal Year 1997 (Consolidated) Compared to Fiscal Year 1996
Net sales for the fiscal year ending June 30, 1997 were $34,437,625, a
decrease of 4% over net sales of $36,002,861 for fiscal year 1996. The decrease
resulted primarily from two factors. The first relates to shipments which were
delayed by a customer of Atlas' newly designed destacker. Atlas also experienced
reduced production flow caused by the move to and start-up of the new facility.
Customer demand for automation solutions that enhance production speeds,
quality, safety and provide piece part cost savings remains strong. Atlas'
backlog at June 30, 1997 approximated $19.0 million, a 4% increase over June 30,
1996 backlog of $18.2 million.
Cost of products sold for the fiscal year ending June 30, 1997 were
$24,824,582, representing 72% of revenues, compared to $24,802,193 or 69% of
revenues, for fiscal year 1996. The increase in cost of sales relative to
revenues was primarily due to Atlas' expensing, during the first two quarters of
fiscal 1997, costs associated with the development of its new destacking
equipment, and additional expenses from increases in foreign sales, including
redesign requirements for foreign orders, project management, foreign travel,
and overseas shipping expenses.
Gross profits for fiscal year ending June 30, 1997 were $9,613,043,
compared to 1996 gross profits of $11,200,668, a decrease of 14%. The decrease
was primarily due to development expenses related to the introduction of large
destacker equipment, costs associated with increasing foreign market sales, and
lower overall sales levels.
For fiscal 1997, selling, general and administrative (SG&A) expenses were
$7,081,273, as compared to $6,736,106 for 1996, an increase of 5%. Changes in
Atlas' SG&A included a reduction in legal expenses of $148,000, a decrease in
bad debt costs of $160,000 and an increase in goodwill amortization of $92,000
associated with the acquisition of Atlas by the Company. SG&A increases included
the Company's corporate administrative and compensation expenses. The Company's
SG&A expenses for the full 12 months of fiscal 1997 were $679,446 compared to
$54,381 for approximately one month during fiscal 1996. The Company's expenses
increased in fiscal 1997 compared to 1996 due to the Company's acquisition of
Atlas in May, 1996. Corporate salaries for employees of the Company were $18,332
in fiscal year 1996 and $223,221 in fiscal year 1997. Corporate salaries in 1996
commenced subsequent to the Company's purchase of Atlas and covered only 38
days, from May 23, 1996 to June 30, 1996. In contrast, the Company's salaries
were paid for the entirety of fiscal year 1997. Accounting fees increased from
approximately $8,000 in fiscal year 1996 to $68,024 in 1997, legal fees
increased from $19,000 in 1996 to $29,960 in 1997, and travel related costs grew
from $13,237 to $60,057. Professional consulting and stock market related fees
increased from $0 and $3,324, respectively, in 1996 to $60,976 and $64,005,
respectively, in fiscal 1997.
Officer bonuses to Ronald Prime and Michael Austin, executives and former
owners of Atlas, amounted to a total of $711,000 during fiscal 1997. The bonuses
are contingent on the Company achieving certain levels of
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financial profitability each year and are not accrued if the Company misses the
earnings targets. Bonuses during fiscal 1996 were $2,314,000, of which $753,000
was expensed subsequent to January 1, 1996 when the employment agreement between
the Company and Messrs. Prime and Austin commenced.
Interest expense for fiscal year ending June 30, 1997 was $933,632, an
increase of $363,450 relative to interest costs of $570,182 in fiscal 1996. The
significant increase in interest expense for the period was caused by higher
utilization of the line of credit to finance work-in-process, increased accounts
receivable, distribution of officer bonuses and increases in borrowings related
to the issuance of the $4,500,000 Industrial Revenue Bond (IRB) in December
1996. The IRB was issued to pay for Atlas' new plant construction and asset
acquisitions.
Net Income during fiscal year 1997 was $592,730 compared to 1996 net
income of $967,428. The decrease in net income of 39% was primarily due to lower
volume, higher cost of sales, higher interest charges, and increased corporate
overhead absorption for the full 1997 fiscal year.
The Company used net cash of $1,389,788 in operating activities in fiscal
1997 to support an increase in customer receivables of $1,123,172 and work in
process of $417,420. Cash used in investing activities of $4,438,338 was
employed to purchase the land, building and equipment for the Company's new
plant. Company financing activities during fiscal 1997 provided $6,159,656 of
cash, and included a $4,500,000 Industrial Revenue Bond offering issued by Atlas
in December 1996 to finance new plant construction, furnishings and
manufacturing equipment. The balance derived from increased borrowings on the
revolving line of credit and a term note to finance a boring mill. The net
result of financing and usage activity resulted in an increase of cash and
equivalents of $331,530 compared to the balance at the end of fiscal 1996.
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 cost-
saving 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
principal 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.
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
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<PAGE>
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 $3,590,181 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 $3,698,784 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 $67,125 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.
Liquidity and Capital Resources
The Company believes Atlas' future short term capital expenditure
requirements can be met from the available funds remaining from the issuance of
the Industrial Revenue Bond, including payments required for new computer
hardware and software upgrades and minor manufacturing equipment additions.
Atlas' $14 million dollar revolving line of credit and required supporting
collateral are expected to continue supporting its cash needs. Atlas borrowed
from $9,636,000 to $12,700,000 under the revolver during fiscal 1997. Use of the
revolver depends on project invoicing. Delays in converting work in process into
customer invoices typically require increases in revolver borrowings. From time
to time, Atlas' bank allows for temporary increases in the collateral
requirements as stated in the current agreement.
The Company's working capital for June 30, 1997 was $15,343,022, compared
to June 30, 1996 working capital of $5,047,991. The increase was due to
reclassification of a portion of the Company's current line of credit to
long-term debt due in over 12 months. If this had been done during fiscal 1996,
June 30, 1996 working capital would have been restated as $12,236,549. The
improvement in working capital at fiscal year end 1997 versus 1996 of $3,106,473
derived from increases in accounts receivable, work in process and assets held
for sale. The latter item includes a plant facility located in Linden, Michigan.
The Company recently sold the Linden facility for approximately $1,100,000.
Atlas will lease back a portion of the Linden facility to support production
operations during at least the next twelve months.
At June 30, 1997, Atlas had borrowings outstanding of $16,041,393 on
various loans, of which the current portion was $714,140. Details on the
Company's borrowings at June 30, 1997 follow.
(i) The bank consolidated all of Atlas' long and short term bank debts,
bundling the various notes and lines of credit into a new two year committed
line of credit, with increased debt usage based on collateral including Atlas
receivables, work-in-process, and other assets. Interest rates were reduced to
the bank prime rate and a revised amortization of certain asset based debt to
quarterly payments of $62,500 has reduced the overall annual principal payment
requirements. This improved the Company's current ratio and working capital.
Revolving line of credit outstanding on June 30, 1997 was $11,299,615.
(ii) A new note with First Chicago NBD, N.A. was issued for the purchase of
a horizontal boring mill. The note was in the amount of $205,000. The note
balance at fiscal year end 1997 was $187,915. The note bears interest at the
bank's prime rate. The final note payment is due in January, 2002.
(iii) Atlas had borrowings outstanding of $37,424 from Concord Commercial,
a leasing company, secured by certain Atlas equipment. The borrowings bear
interest of 8.7% per annum. Final payment on the borrowings is due in October,
1999.
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<PAGE>
(iv) Atlas had outstanding borrowings of $4,500,000 relating to the
issuance of the Industrial Revenue Bonds payable at the end of fiscal 1997.
Atlas entered into an agreement with First Chicago NBD, N.A. to fund the
construction of the new building and equipment through the sale of tax exempt
Industrial Revenue Bonds. Proceeds were used to construct, furnish and equip the
new manufacturing facility. The bonds are state and federal tax exempt.
Consequently, the floating rate of interest is significantly reduced compared to
conventional construction or real-estate financing. IRB terms are as follows:
Calendar Year
1997 -- Interest only
1998 -- $400,000 annual payment plus quarterly interest payments due
1999 -- $400,000 annual payment plus quarterly interest payments due
2000 -- $400,000 annual payment plus quarterly interest payments due
2001--2011 -- $300,000 annual payments plus quarterly interest payments are due
IRB closing costs of $184,409 were incurred and booked as a long term
asset. These are being amortized over the 15 year life of the Industrial Revenue
Bonds.
The Company believes that, as a result of the new loan facility, its
short-term credit availability is adequate to support its business operations at
current and near-term anticipated sales levels.
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.
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 is
vigorously defending 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 currently be
determined, management believes that the final outcome will not have a material
adverse effect on the Company's results of operations or its financial position.
Atlas is not involved as a defendant in any other substantial litigation.
Atlas is undergoing an Internal Revenue Service audit for the fiscal year
ended June 30, 1995. The main area of review is a research and experimentation
tax credit the Company has calculated and filed for over the past six years. The
Company had applied $383,000 of credit towards Federal taxes due for the fiscal
period
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ended June 1995 and had a carry forward of $481,400 expected to be used as a
reduction in the calculation of 1996 and 1997 alternative minimum tax payments.
Management and Atlas' accountants believe this issue is a matter of
interpretation of the research and experimentation regulations. Management
believes that the IRS may seek a reduction in the amount of credit calculated
which may have an adverse effect to the financial statements of the Company. The
Company is entitled to indemnification (subject to certain exclusions and
limitations) from the former principal stockholders of Atlas for amounts it may
be required to pay as a result of such audit. Also, to the extent any such
amounts have the effect of reducing the net worth of Atlas at December 31, 1995
below a specified amount, the Company is entitled to reimbursement from the
former stockholders of Atlas and has secured such reimbursement obligation
through a $1,000,000 escrow account.
Recent Accounting Standards
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
"Earnings per Share," which modifies the existing standards for computing
earnings per share. The statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. This
statement is not expected to have a material impact on the Company's computation
of earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
stockholders and distributions to stockholders. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
account standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
Forward-Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the following:
competitive pressures in the industry in which the Company is engaged; an
unfavorable outcome of the IRS audit for the fiscal year ending June 30, 1995,
adverse changes in the Company's banking loan requirements; major fluctuations
in the strength of the U.S. dollar versus international currencies; and general
economic conditions. The Company has no obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company as set forth on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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:
<TABLE>
<CAPTION>
Director
Nominee Age Since Position
<S> <C> <C> <C>
Ray J. Friant, Jr......................... 66 1993 Chairman of the Board
Samuel N. Seidman......................... 63 1993 President and Director
Joseph K. Linman.......................... 58 1993 Director and Vice President
John S. Strance........................... 72 1993 Director and Vice President
Jesse A. Levine........................... 30 1993 Director, Chief Financial Officer,
Vice President, Secretary and
Treasurer
Alan H. Foster............................ 71 1993 Director
Alan I. Goldman........................... 60 1993 Director
</TABLE>
Ray J. Friant, Jr. has been Chairman of the Board of the Company since its
inception. Between 1988 and 1996, Mr. Friant was Managing Director of Seidman,
Friant, Levine Ltd., a crisis management company, where he specialized in
corporate restructuring and reorganization. In this capacity, he had management
control, and successfully restructured and/or stabilized the operations, of
three public companies, CMI Corp., Mr. Gasket Co. and Advanced Semiconductor
Materials International N.V. ("ASM"), which companies have manufacturing
operations in road building equipment, automotive aftermarket products and
semiconductor production equipment, respectively. Since 1982, Mr. Friant has
also been President and Director of Friant Associates, Inc., specializing in
corporate turnarounds. Mr. Friant was Group Vice President and General Manager
of Gulf+Western Industrial Products Group (IPG) from 1978 to 1982. IPG was a
group of ten companies involved in electronic systems, electronic connectors,
electronic components, electro-mechanical components, wire and cable, cutting
tools and hardware manufacturing. From 1973 to 1978, as an employee of ITT
Corp., Mr. Friant successfully reorganized several multi-million dollar
subsidiaries. In addition, he had a number of special worldwide assignments
involving ITT Corp. headquarters organization, resource allocation for product
development, and management succession. At Western Union Corp. from 1969 to
1972, Mr. Friant developed and implemented the business of teleprocessing at a
non-regulated subsidiary. From 1953 to 1969, Mr. Friant was employed by General
Electric Co. ("GE"), where he was responsible for initiating GE's phased array
radar business, for designing and implementing GE's Program Management System
for managing large, complex military contracts and for the business turnaround
of several unsuccessful organizations. Mr. Friant earned B.S. degrees in both
Mechanical Engineering and Electrical Engineering from West Virginia University.
He also graduated from General Electric's three-year graduate level Advanced
Engineering program and General Electric Management School.
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking and economic consulting firm, and serves as its President. In this
capacity, he has provided a broad range of investment banking services,
including financial analysis and valuations, private financings, and corporate
recapitalizations and debt restructurings. Mr. Seidman also serves as a director
of AMREP Corp., a real estate development corporation listed on the New York
Stock Exchange. He has acted as financial advisor to manufacturers of various
kinds of production systems and components for a number of industries, including
ASM, a multi-national producer of automated equipment and systems for the
production of semiconductors, traded on the Nasdaq National Market. Mr. Seidman
advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national
manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman
was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of
Sharon Steel Corp., an integrated manufacturer of finished steel products, and
served as financial advisor in Chapter 11 to Chyron Corp., a specialized
production systems company for video productions listed on the New York Stock
Exchange, and Mr. Gasket Co., a manufacturer of automobile aftermarket products.
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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 acquisi tions, private
placements and business and organization consulting. From 1975 to 1985, Mr.
Goldman was Senior Vice President, Finance and Chief Financial Officer of
Management Assistance, Inc., a multi-national computer manufacturing, marketing
and maintenance company and a purchaser and user of productions systems and
components. From 1970 to 1974, Mr. Goldman was Vice President, Finance,
Treasurer and Chief Financial Officer of Interway Corporation, an international
company engaged in trailer and container leasing and fleet management. Mr.
Goldman is presently a director of Substance Abuse Technologies, Inc. Mr.
Goldman earned a B.A. degree from Cornell University and an M.B.A. degree from
New York University.
The Company's Board of Directors is divided into three classes, each of
which serves for a term of 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 fiscal year ended June 30, 1997, each of its officers,
directors and 10% stockholders complied with the Section 16(a) reporting
requirements except that Mr. Friant filed in August 1997 a Report on Form 4 for
four transactions that occurred in June 1997 and Messrs. Friant, Seidman,
Linman, Strance and Levine each filed late Reports on Form 4 with respect to the
stock options granted to them in July 1996.
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
Messrs. Friant and Seidman will be paid at the rate of $1,000 to $2,000 per day,
Page 17
<PAGE>
as determined by the Chairman and the President, for actual days spent by them
in consulting or other special assignments for the benefit of the Company or its
subsidiaries. Officers and directors are also eligible for other compensation
and benefits as may be approved by the Board from time to time, including
benefits under the Company's 1996 Performance Equity Plan which was adopted by
the stockholders of the Company on May 21, 1996. On July 30, 1996, the Board of
Directors awarded options under such plan to the Company's officers as follows:
- - Messrs. Friant and Seidman - 70,833.33 shares each; Messrs. Linman and Strance
- - 42,500 shares each; Mr. Levine - 28,333.33 shares. Such options are
exercisable until July 30, 2001, at an exercise price of $5.00 per share.
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 fiscal year
ended June 30, 1997, the Company has accrued $208,333 for each of Messrs. Prime
and Austin under this arrangement for such fiscal year.
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. Based on the Adjusted Earnings of the Company for
the fiscal year ended June 30, 1997, the Company has accrued $419,088 for each
of Messrs. Prime and Austin under this arrangement for the period January 1,
1996 through June 30, 1997.
Both bonus arrangements are subject to liquidation of amount and
acceleration of payment in the event of a sale by the Company of the capital
stock of Atlas or a sale by Atlas of all or a substantial part of its assets or
issuance of capital stock of Atlas such that a person or group of related
persons becomes the owner of 51% or more of the outstanding stock of Atlas. The
bonuses are also subject to reduction to the extent of life insurance benefits
paid to an executive's estate pursuant to life insurance maintained on the life
of the executive pursuant to the employment agreements.
Each employment agreement also contains provisions restricting the
disclosure of confidential information and non-competition covenants.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Name and Principal Position Period Salary ($) Options (#)
<S> <C> <C> <C>
Samuel N. Seidman, President & CEO 7/1/96-6/30/97 75,000 70,833
4/1/96-6/30/96 6,250
4/1/95-3/31/96 --
6/24/94-3/31/95 --
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options/
Underlying SARs Granted Exercise or
Options/SARs to Employees Base Price
Name Granted in Fiscal Year ($/Sh) Expiration Date
<S> <C> <C> <C> <C>
Samuel N. Seidman 70,833 27.8 5.00 7/30/2001
</TABLE>
AGGREGATE YEAR-END OPTION VALUES
(June 30, 1997)
<TABLE>
<CAPTION>
Number of unexercised options at Value of unexercised in-the-money
fiscal year-end(#) options at fiscal year-end($)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Samuel N. Seidman 70,833 --- 0 ---
</TABLE>
Page 19
<PAGE>
Stock Price Performance Comparison
The following graph compares cumulative total return of the Company's
Common Stock (symbol PRAC) with the cumulative total return of (i) the Standard
& Poor's Midcap 400 index ("S&P Index") and (ii) an industry peer group index
("Peer Index") consisting of eight other publicly held SPAC(R)s. The graph
assumes $100 was invested on July 6, 1994 (the date the Common began trading on
the OTC Bulletin Board) in shares of Common Stock, stocks comprising the S&P
Index and stocks comprising the Peer Index and the reinvestment of dividends.
The Company has used an index of other SPAC(R) stocks for an industry peer
group due to the unique business purpose of SPAC(R)s, and the features of their
securities and rights of their security holders. The SPAC(R) index includes HDS
Corporation, Concord Health Group, Inc. (through March 1996), Source Media,
Inc., International Metals SPAC(R), Bogen Communications, Inc., Zydeco Energy,
Inc., Kellstrom Industries and Restructuring SPAC(R) equally weighted.
<TABLE>
<CAPTION>
PRAC S&P Midcap 400 SPAC Index
<S> <C> <C> <C>
7/6/94 $100.00 $100.00 $100.00
6/30/95 108.82 119.90 107.16
6/30/96 150.00 143.37 137.10
6/30/97 61.76 174.14 152.37
</TABLE>
Page 20
<PAGE>
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.
<TABLE>
<CAPTION>
Number Percentage
Name of Beneficial Owner of Shares Beneficially Owned
- ------------------------ --------- ------------------
<S> <C> <C>
Ray J. Friant, Jr.......................................
30 Boxwood Drive
Convent Station, New Jersey 07960 218,083(1) 9.8%
Samuel N. Seidman.......................................
520 Madison Avenue
New York, New York 10022 217,083(1) 9.8%
Joseph K. Linman........................................ 114,250(1) 5.3%
John S. Strance......................................... 113,250(1) 5.2%
Jesse A. Levine......................................... 71,583(1) 3.3%
Alan H. Foster.......................................... 21,250 1%
Alan I. Goldman......................................... 21,250 1%
All Officers and Directors 776,749(1) 32.0%
as a group (7 persons)................................
- -----------------------
<FN>
(1) Includes shares of Common Stock issuable upon immediately exercisable
Warrants and options as follows: Mr. Friant--91,833 shares; Mr.
Seidman--90,833 shares; Mr. Linman--46,500 shares; Mr. Strance--44,500
shares; Mr. Levine--28,333 shares.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company office space, as well as certain office, administrative and secretarial
services as may be required by the Company. The Company paid Seidman & Co., Inc.
$5,000 per month for such services until May 22, 1996, including $8,000 during
the three months ended June 30, 1996. During the fiscal year ended June 30,
1997, the Company paid Seidman & Co., Inc. approximately $40,000 for such
services. Samuel N. Seidman, a director and President of the Company, is
President of Seidman & Co., Inc., and Jesse A. Levine, a director, Chief
Financial Officer, Vice President, Secretary and Treasurer of the Company, is
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:
I. 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
Schedule II -- Valuation and Qualifying Accounts
2. Exhibits as required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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>
<FN>
- -----------------------------
* 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.
</FN>
</TABLE>
(b) During the period covered by this Report, the Company did not file any
reports on Form 8-K.
Page 23
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Index
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-5
Consolidated Statements of Operations of The Company
and Statements of Operations of the Predecessor F-7
Consolidated Statements of Stockholders' Equity of The
Company and Statements of Stockholders' Equity of
the Predecessor F-8
Consolidated Statements 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-29
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Productivity Technologies Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiary ("The Company"), as of June 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended June 30, 1997 and for the period May 24, 1996 to
June 30, 1996 (collectively, the "Successor period"). We have also audited the
statements of operations, stockholders' equity and cash flows of the Predecessor
(see Note 1) for the period July 1, 1995 to May 23, 1996 ("Predecessor period").
We have also audited the 1997 and 1996 information in Schedule II. These
financial statements and Schedule II are the responsibility of the Companies'
managements. Our responsibility is to express an opinion on these financial
statements and Schedule II based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
the schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, all of the outstanding stock
of the Predecessor was sold in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the 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, 1997 and 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 1997 and 1996 information in Schedule II presents
fairly, in all material respects, the information set forth therein.
Troy, Michigan
August 29, 1997
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 statements of operations, stockholders' equity,
and cash flows of Atlas Technologies, Inc. for the year ended June 30, 1995. We
have also audited the 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 Schedule II based on our audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Atlas
Technologies, Inc. for the year ended June 30, 1995, in conformity with
generally accepted accounting principles.
Also, in our opinion, the 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
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Notes 7 and 8)
Current Assets
Cash and cash equivalents $ 843,709 $ 512,179
Short-term investments, including accrued interest 929,204 965,255
Contract receivables (Note 3) 9,199,302 7,958,159
Notes receivable 160,631 240,606
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 4) 8,640,731 7,593,003
Inventories 619,242 720,947
Prepaid expenses and other 675,070 220,494
Deferred income taxes (Note 11) 622,000 480,000
Assets held for sale (Note 5) 937,549 -
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 22,627,438 18,690,643
- -------------------------------------------------------------------------------------------------------------------
Property and Equipment
Land 591,514 216,000
Buildings and improvements 1,329,113 2,132,388
Machinery and equipment 1,909,879 1,888,479
Construction in progress (Note 13) 4,142,725 -
Transportation equipment 31,500 31,500
- -------------------------------------------------------------------------------------------------------------------
8,004,731 4,268,367
Less accumulated depreciation 337,350 27,928
- -------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 7,667,381 4,240,439
- -------------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization
of $113,884 and $10,923 (Note 2) 2,490,842 2,593,803
Noncompetition agreement, net of accumulated
amortization (Note 6) 211,083 228,083
Other assets 412,988 270,803
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets 3,114,913 3,092,689
- -------------------------------------------------------------------------------------------------------------------
$ 33,409,732 $ 26,023,771
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
Operating $ 2,472,828 $ 2,444,411
Capital expenditures 157,000 -
Line-of-credit (Note 7) - 7,188,558
Accrued Expenses
Executive bonus agreement (Note 13) 1,254,842 753,778
Commissions payable 437,185 544,248
Payroll and related withholdings 271,930 438,274
Other 811,220 1,274,027
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 4) 1,165,271 534,963
Current maturities of long-term debt (Note 8) 714,140 464,393
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 7,284,416 13,642,652
Deferred Income Taxes (Note 11) 832,000 779,000
Long-Term Debt, less current maturities (Note 8) 15,327,253 2,228,786
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 23,443,669 16,650,438
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 13 and 14)
Stockholders' Equity (Notes 9 and 10)
Common stock; $.001 par value, 20,000,000 shares
authorized and 2,125,000 outstanding 2,125 2,125
Additional paid-in capital 9,177,488 9,177,488
Retained earnings 786,450 193,720
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 9,966,063 9,373,333
- -------------------------------------------------------------------------------------------------------------------
$ 33,409,732 $ 26,023,771
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Operations of The Company
and Statements of Operations of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
Year Ended May 24, to July 1, 1995 Year Ended
June 30, 1997 June 30, 1996 to May 23, 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 34,437,625 $ 4,404,192 $ 31,598,669 $ 29,077,684
- -------------------------------------------------------------------------------------------------------------------------------
Cost of Sales 24,824,582 3,029,113 21,773,080 21,034,282
- -------------------------------------------------------------------------------------------------------------------------------
Gross Profit 9,613,043 1,375,079 9,825,589 8,043,402
Selling, General and
Administrative Expenses 7,081,273 729,141 6,006,965 5,118,720
Officers' Bonuses (Notes 2 and 13) 710,946 197,290 2,117,251 -
- -------------------------------------------------------------------------------------------------------------------------------
Income From Operations 1,820,824 448,648 1,701,373 2,924,682
- -------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (933,632) (57,331) (512,851) (644,853)
Interest income 134,312 20,274 33,837 32,971
Gain (loss) on disposal of assets - - (2,976) 308,565
Miscellaneous 21,226 (41,744) 151,198 63,609
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Expense (778,094) (78,801) (330,792) (239,708)
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,042,730 369,847 1,370,581 2,684,974
Income Tax Expense (Note 11) 450,000 165,000 608,000 465,000
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 592,730 $ 204,847 $ 762,581 $ 2,219,974
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share of
Common Stock $ .28 $ .10
- --------------------------------------------------------------------------------
Weighted Average Common
Shares 2,125,000 2,125,000
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Stockholders' Equity of The Company
and Statements of Stockholders' Equity of the Predecessor
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1994 (Predecessor) 34,901 $ 34,901 $ 73,465 $ 2,753,684 $ 2,862,050
Stock repurchase from former
stockholder (Note 9) (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 9) - - - (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 9) 339,999 340 1,825,747 - 1,826,087
Net income - - - 204,847 204,847
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Company) 2,125,000 2,125 9,177,488 193,720 9,373,333
Net income - - - 592,730 592,730
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Company) 2,125,000 $ 2,125 $ 9,177,488 $ 786,450 $ 9,966,063
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Cash Flows of The Company
and Statements of Cash Flows of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
Year Ended May 24, to July 1, 1995 Year Ended
June 30, 1997 June 30, 1996 to May 23, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 592,730 $ 204,847 $ 762,581 $ 2,219,974
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation 346,873 27,931 360,726 355,088
Amortization 119,961 12,688 15,235 9,917
Provisions for losses on contract receivables (117,971) - (68,649) 104,587
Inventory net realizable value reserve (80,000) - 200,000 -
Deferred income taxes (89,000) 46,000 164,000 (202,000)
(Gain) loss on disposal of assets - - 2,976 (28,565)
Changes in operating assets and liabilities
Contract receivables (1,123,172) (3,565,732) (133,052) (1,900,292)
Inventories, prepaid expenses and other (415,056) (488,818) 95,028 1,428,519
Costs and estimated earnings in excess of
billings on uncompleted contracts-net effect (417,420) 1,365,906 (4,037,969) (905,063)
Accounts payable, accrued expenses
and other (206,733) 1,271,862 174,259 1,111,639
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Operating Activities (1,389,788) (1,125,316) (2,464,865) 2,193,804
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Expenditures for property and equipment
(including capitalized interest of
$75,699 in fiscal 1997) (4,554,364) (49,549) (466,828) (381,211)
Collections on notes receivable 79,975 6,312 219,540 175,144
Proceeds from sale of short-term
investments - net 36,051 - - -
Maturity of U.S. Government securities
deposited in trust fund - 7,120,000 - -
Purchase of Atlas - (6,900,000) - -
Proceeds from sale of property
and equipment - - 3,400 132,142
Issuance of notes receivable - - - (533,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Investing Activities (4,438,338) 176,763 (243,888) (606,925)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Consolidated Statements of Cash Flows of The Company
and Statements of Cash Flows of the Predecessor
<TABLE>
<CAPTION>
The Company Predecessor
Year Ended May 24, to July 1, 1995 Year Ended
June 30, 1997 June 30, 1996 to May 23, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from additions of long-term debt 5,255,000 - 1,500,000 110,000
Net borrowings (payments) - line-of-credit 863,911 589,300 3,990,320 (1,019,562)
Net borrowings - revolving credit agreement 262,751 - - -
Payments on long-term debt, capital
leases and notes payable (222,006) (43,161) (2,072,398) (557,148)
Distribution to former stockholder - - (700,000) -
Purchase of company stock - - - (196,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Financing Activities 6,159,656 546,139 2,717,922 (1,662,710)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash
and Cash Equivalents 331,530 (402,414) 9,169 (75,831)
Cash and Cash Equivalents,
at beginning of period 512,179 914,593 17,253 93,084
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents,
at end of period $ 843,709 $ 512,179 $ 26,422 $ 17,253
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Period For
Interest $ 878,207 $ 57,331 $ 522,637 $ 628,689
Income taxes 827,451 - 570,175 777,458
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and
Financing Activities
Retirement of debt with proceeds from the
revolving credit agreement $ 11,036,864 $ - $ - $ -
Construction in progress financed
with accounts payable 157,000 - - -
Purchase of stock with loan
obligations - - - 1,373,143
Consummation of a noncompetition
agreement with loan obligation - - - 255,000
Purchase of equipment with
loan obligation - - - 97,941
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
Productivity Technologies Corp. and Subsidiary
and the Predecessor
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Formation of the Company and Basis of Presentation
Production Systems Acquisition Corporation ("PSAC") was incorporated in June
1993 with the objective of acquiring an operating business engaged in the
production systems industry. PSAC originally selected March 31 as its fiscal
year-end. PSAC completed an initial public offering ("Offering") of common stock
in July 1994 and raised net proceeds of approximately $9.0 million.
In December 1995, PSAC entered into a Merger Agreement with Atlas Technologies,
Inc. ("Atlas") whereby Atlas would become a wholly-owned subsidiary of PSAC.
(The acquisition was consummated May 23, 1996 - see Note 2). Subsequently, PSAC
changed its corporate name to Productivity Technologies Corp. ("PTC"). PTC's
operating results from inception through May 23, 1996 are summarized below (in
thousands):
<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 year ended June 30,
1997 and the period May 24 to June 30, 1996 include the accounts of PTC and its
wholly-owned subsidiary, Atlas (collectively, "the Company"). All significant
intercompany accounts and transactions have been eliminated upon consolidation.
F-11
<PAGE>
The accompanying financial statements presented for the period July 1, 1995 to
May 23, 1996, and for the year ended June 30, 1995 represent the financial
statements of Atlas (the "Predecessor").
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery,
equipment, components and engineering services. It operates with two
manufacturing plants 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 automotive- related customers have
accounted for the majority of total annual sales. Sales are predominantly in the
United States but, in recent years, the Company has targeted sales efforts in
Mexico, Europe and Asia. Export sales during the twelve months ended June 30,
1997, 1996 and 1995 amounted to approximately 20%, 13% and 10%, respectively, of
annual sales.
Cash Equivalents
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, representing U.S. Treasury Bills with maturities of
twelve months or less, 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 $45,500 and $163,000 were deemed necessary at June 30, 1997 and
1996, 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 estimated
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 Share
Net income per share of common stock has been computed based on the weighted
average number of common and any dilutive common equivalent shares outstanding.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
"Earnings per Share," which modifies the existing standards for computing
earnings per share. The statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. This
statement is not expected to have a material impact on the Company's computation
of earnings per share.
F-15
<PAGE>
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 of
the Company's long-lived assets has occurred through June 30, 1997.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Recent Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
stockholders and distributions to stockholders. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
F-16
<PAGE>
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 13).
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.
F-17
<PAGE>
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.
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, 1997 1996
- --------------------------------------------------------------------------------
Billed
Completed contracts $ 1,458,721 $ 1,315,374
Uncompleted contracts 7,680,830 6,757,622
Unbilled 105,251 48,634
- --------------------------------------------------------------------------------
Total Contracts Receivable 9,244,802 8,121,630
Less allowance for doubtful accounts (45,500) (163,471)
- --------------------------------------------------------------------------------
Total $ 9,199,302 $ 7,958,159
- --------------------------------------------------------------------------------
F-18
<PAGE>
4. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the
following:
June 30, 1997 1996
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 28,753,361 $ 25,617,770
Estimated earnings 10,512,171 10,217,972
- --------------------------------------------------------------------------------
39,265,532 35,835,742
Less billings to date 31,790,072 28,777,702
- --------------------------------------------------------------------------------
Total $ 7,475,460 $ 7,058,040
- --------------------------------------------------------------------------------
The above totals are included in the accompanying balance sheets under the
following captions:
June 30, 1997 1996
- --------------------------------------------------------------------------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 8,640,731 $ 7,593,003
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,165,271) (534,963)
- --------------------------------------------------------------------------------
Total $ 7,475,460 $ 7,058,040
- --------------------------------------------------------------------------------
5. Assets Held For Sale
The Linden land and building are being offered for sale at a price of
approximately $1,100,000. The carrying value of these assets was $937,549 at
June 30, 1997. Accordingly, no loss on the sale of these assets is expected by
management. Since an offer to purchase for $1,100,000 has been received during
fiscal 1998, these assets have been classified as a current asset at June 30,
1997.
F-19
<PAGE>
6. 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.
7. Line-of-Credit
At June 30, 1996, Atlas had an $8,000,000 working capital line-of-credit
agreement with a bank, which was secured by substantially all assets. Interest
was 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 line-of-credit balance outstanding was $7,188,558 at
June 30, 1996.
During 1997, the line-of-credit balance was repaid with proceeds from the
revolving credit agreement (see Note 8).
8. Long-Term Debt
Long-term debt consisted of:
<TABLE>
<CAPTION>
June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$14,000,000 revolving credit agreement with a bank. The amount that may be
borrowed under this agreement is limited to specified percentages of
contract receivables, work in process and property and equipment of Atlas.
The revolving credit agreement provides for outstanding borrowings to bear
interest at a rate equal to the bank's prime rate (which was 8.5% at June
30, 1997). In addition, there is a commitment fee of 1/4 % per annum on
the unused portion of the revolving credit which is payable quarterly.
Principal payments on this agreement are due quarterly in the amount of
$62,500 until December 10, 1998, at which time the entire balance is due.
Borrowings under this agreement are collateralized by substantially all
assets of Atlas. The revolving credit agreement
also contains various financial covenants. $ 11,299,615 $ -
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage note payable (see (1) below
for details) 4,500,000 -
Other (approximately $2.4 million of the June 30, 1996 balance was repaid during
fiscal 1997 with
proceeds of the revolving credit agreement) 241,778 2,693,179
- -------------------------------------------------------------------------------------------------------------------------------
Total 16,041,393 2,693,179
Less current maturities 714,140 464,393
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 15,327,253 $ 2,228,786
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) In January 1997, the Company borrowed $4,500,000 in connection with
variable rate industrial revenue bonds issued by The Economic
Development Corporation of the County of Genesee. The note is payable
in amounts of $400,000 per year for fiscal years 1998-2000 and then
$300,000 per year through 2011. Interest is payable quarterly and is set
weekly by the remarketing agent at a level which allows the bonds to be
sold at par. The interest rate at June 30, 1997 was approximately 4.0%.
To enhance the marketability of the bonds and guarantee payment of the
bonds on the Company's behalf, a bank has issued its letter of credit
through December 2001. The commission on the letter of credit is 1%
annually, and is payable quarterly. Also, the bonds are secured by a first
mortgage note collateralized by substantially all assets of the Company.
</FN>
</TABLE>
Scheduled maturities of long-term debt for future years ending June 30 are as
follows: 1998 - $714,140; 1999 - $11,515,853; 2000 - $449,915; 2001 -
$341,004; 2002 - $320,482 and $2,699,999 thereafter.
F-21
<PAGE>
9. Stockholders' Equity
On July 5, 1994, PTC consummated its Offering of 1,700,000 units ("Units").
(425,000 shares had been previously issued for $25,000.) Each Unit consisted of
one share of PTC's common stock, $.001 par value, and two Redeemable Common
Stock Purchase Warrants ("Warrants"). Each Warrant entitles the holder to
purchase from PTC one share of common stock at an exercise price of $5.00 during
the period commencing May 24, 1996, and ending June 24, 2001. The Warrants will
be redeemable at a price of $.01 per Warrant upon 30 days notice at any time,
only in the event that the last sale price of the common stock is at least $8.50
per share for 20 consecutive trading days ending on the third day prior to date
on which notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which are identical to
the Warrants discussed above.
At June 30, 1997, 4,210,000 shares of common stock were reserved for (1)
issuance upon exercise of the warrants described above, and (2) for the
securities underlying a purchase option granted the underwriter of the Offering.
This option, which allows the underwriter the right to purchase up to 170,000
Units, is exercisable initially at $7.50 per Unit until June 23, 1999. Each Unit
consists of one share of PTC common stock and two Warrants. The Units issuable
upon exercise of the purchase option are identical to those described above
except that the Warrants contained therein expire June 23, 1999.
No Warrants have been exercised or granted subsequent to May 23, 1996.
The Company is authorized to issue 1,000,000 shares of preferred stock ($.001
par value) with such designations, voting and other rights and preferences as
may be determined from time to time by the Board of Directors. No preferred
stock has been issued by the Company.
In connection with the May 23, 1996 acquisition of Atlas, a total of 339,999
shares of common stock that were previously subject to possible redemption were
reclassified to permanent equity by the Company.
F-22
<PAGE>
Atlas had 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 accordance with the December 18, 1995 Merger Agreement, a $700,000
distribution was paid to a former shareholder in May 1996.
10. 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 and $150,000 to
the ESOT during the periods ended May 23, 1996 and June 30, 1995, respectively.
At May 23, 1996, the Company's stock owned by the ESOT was acquired as part of
the purchase transaction. The Company liquidated the ESOT during fiscal year
1997.
The Company has a 401(k) plan covering substantially all the Company's
employees. The plan allows for eligible employees to defer a portion of their
salary. In addition, discretionary contributions may be made by the Company. The
Company contributed $148,700 for the year ended June 30, 1997. The Company made
no contributions for the period ended May 23, 1996 or for the Predecessor
periods.
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. On
July 30, 1996, the Board of Directors awarded 255,000 options to certain
employees under such plan. Such options are exercisable until July 30, 2001, at
an exercise price of $5.00 per share. None of these options were exercised
during fiscal 1997.
F-23
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the Plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income and income per share amounts for the
year ended June 30, 1997 would have been the pro forma amounts indicated below:
Net income - as reported $ 592,730
Net income - pro forma 259,445
Net income per share - as reported .28
Net income per share - pro forma .12
The fair value of each option grant is established on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%; expected volatility of 23%; risk-free interest rate of
5.4%; and expected lives of 2 years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not necessarily indicative of future amounts.
11. 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-24
<PAGE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
June 30, 1997 1996
- --------------------------------------------------------------------------------
Depreciation and basis of assets $ 715,000 $ 693,000
Other 117,000 86,000
- --------------------------------------------------------------------------------
Deferred Tax Liability $ 832,000 $ 779,000
- --------------------------------------------------------------------------------
Accrual for executive bonus agreement $ 285,000 $ 185,000
Research credit carryforward 218,000 178,000
Other 119,000 117,000
- --------------------------------------------------------------------------------
Deferred Tax Asset $ 622,000 $ 480,000
- --------------------------------------------------------------------------------
Significant components of taxes on income are as follows:
<TABLE>
<CAPTION>
The Company Predecessor
May 24, 1996 July 1, 1995
Year Ended to to Year Ended
June 30, 1997 June 30, 1996 May 23, 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal
Current $ 481,000 $ 108,000 $ 401,000 $ 561,000
Deferred (89,000) 46,000 164,000 (202,000)
Other - - - 10,000
State
Current 58,000 11,000 43,000 96,000
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 450,000 $ 165,000 $ 608,000 $ 465,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
The reconciliation of income tax computed at the federal statutory rate (34%) to
income tax expense is as follows:
<TABLE>
<CAPTION>
The Company Predecessor
May 24, 1996 July 1, 1995
Year Ended to to Year Ended
June 30, 1997 June 30, 1996 May 23, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $ 355,000 $ 126,000 $ 466,000 $ 913,000
Goodwill amortization and
other non-deductible
items 55,000 6,000 70,000 -
Research credit (40,000) - - (208,000)
State income taxes, net
of federal income tax
benefit 38,000 7,000 28,000 96,000
Change in valuation
allowance - - - (319,000)
Other - net 42,000 26,000 44,000 (17,000)
- ------------------------------------------------------------------------------------------------------------------------------
Income Tax Expense $ 450,000 $ 165,000 $ 608,000 $ 465,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Atlas has tax research credit carryforwards totalling $218,000 that will begin
to expire in 2008.
12. Major Customers
For the twelve months ended June 30, 1997, 1996 and 1995, the Company's sales to
its major customers (each representing more than 10% of total net sales)
amounted to approximately 44%, 64% and 60% of total annual sales. During 1997,
there were three major customers representing 20%, 12% and 12% of total net
sales; during 1996, there were four major customers representing 30%, 13%, 11%
and 10% of total net sales; and during 1995, there were three customers
representing 35%, 15% and 10% of total net sales.
F-26
<PAGE>
13. 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.
(2) During fiscal 1997, the Company began constructing a new facility. At June
30, 1997, the estimated costs to complete the facility are approximately
$130,000.
F-27
<PAGE>
14. 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 is vigorously
defending 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 currently be
determined, management believes that the final outcome will not have a material
adverse effect on the Company's results of operations or its financial position.
Atlas is undergoing an Internal Revenue Service audit for the fiscal year ended
June 30, 1995. The main area of review is a research and experimentation tax
credit the Company has calculated and filed for over the past six years. The
Company has applied $383,000 of credit toward Federal taxes due for the fiscal
period ended June 1995 and had a carry forward of $481,400 expected to be used
as a reduction in the calculation of 1996 and 1997 alternative minimum tax
payments. Management believes this issue is a matter of interpretation of the
research and experimentation regulations. Management believes that the IRS may
seek a reduction in the amount of credit calculated which may have an adverse
effect to the financial statements of the Company. The Company is entitled to
indemnification (subject to certain exclusions and limitations) from the former
principal stockholders of Atlas for amounts it may be required to pay as a
result of such audit. Also, to the extent any such amounts have the effect of
reducing the net worth of Atlas at December 31, 1995 below a specified amount,
the Company is entitled to reimbursement from the former stockholders of Atlas
and has secured such reimbursement obligation through a $1,000,000 escrow
account.
F-28
<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>
Year Ended June 30, 1997 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 $ (78,753) (1) $ (39,218) $ 45,500
Inventory net realizable value reserve 200,000 - (2) (80,000) 120,000
- ------------------------------------------------------------------------------------------------------------------------------------
Period May 24, 1996 to June 30, 1996 (Company)
Allowance for doubtful accounts
(deducted from contract receivables) $ 163,471 $ - $ - $ 163,471
Inventory net realizable value reserve 200,000 - - 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Period July 1, 1995 to May 23, 1996 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 232,120 $ 180,337 (1) $ (248,986) $ 163,471
Inventory net realizable value reserve - 200,000 - 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1995 (Predecessor)
Allowance for doubtful accounts
(deducted from contract receivables) $ 127,533 $ 108,000 (1) $ (3,413) $ 232,120
Inventory net realizable value reserve - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Accounts deemed to be uncollectible (net of accounts collected that were
previously deducted). (2) Inventory disposed of, charged to reserve.
</FN>
</TABLE>
F-29
<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 3, 1997 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Ray J. Friant, Jr. Chairman of the Board October 3, 1997
- -----------------------------------------
Ray J. Friant, Jr.
/s/ Samuel N. Seidman Chief Executive Officer, October 3, 1997
- ----------------------------------------- President and Director
Samuel N. Seidman
/s/ Joseph K. Linman Vice President and Director October 3, 1997
- -----------------------------------------
Joseph K. Linman
/s/ John S. Strance Vice President and Director October 3, 1997
- -----------------------------------------
John S. Strance
/s/ Jesse A. Levine Vice President, Secretary, October 3, 1997
- ----------------------------------------- Treasurer and Director and
Jesse A. Levine Chief Financial Officer
- ----------------------------------------- Director
Alan H. Foster
- ----------------------------------------- Director
Alan I. Goldman
</TABLE>
Page 53
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Jun-30-1997
<CASH> 843,709
<SECURITIES> 929,204
<RECEIVABLES> 18,046,164
<ALLOWANCES> (45,500)
<INVENTORY> 619,242
<CURRENT-ASSETS> 22,627,438
<PP&E> 8,004,731
<DEPRECIATION> (337,350)
<TOTAL-ASSETS> 33,409,732
<CURRENT-LIABILITIES> 7,284,416
<BONDS> 0
<COMMON> 2,125
0
0
<OTHER-SE> 9,963,938
<TOTAL-LIABILITY-AND-EQUITY> 33,409,732
<SALES> 34,437,625
<TOTAL-REVENUES> 34,437,625
<CGS> 24,824,582
<TOTAL-COSTS> 32,616,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 933,632
<INCOME-PRETAX> 1,042,730
<INCOME-TAX> 450,000
<INCOME-CONTINUING> 592,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592,730
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
