10-Q 1 pro10q_0520.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended: March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) 3100 Copper Avenue, Fenton, Michigan 48430 (Address of Principal Offices)(Zip Code) Registrant's Telephone Number, Including Area Code (248) 645-9700 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes________________ No _____X________ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes________________ No _____________ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 19, 2004: 2,475,000 shares, $ .001 par value common stock. 1 Productivity Technologies Corp. INDEX Page Number PART I FINANCIAL INFORMATION..................................................3 Item 1. Financial Statements...................................................3 Consolidated Balance Sheets at March 31, 2004 (unaudited) and June 30, 2003..............................................3 Consolidated Statements of Operations for the three and nine months ended March 31, 2004 and 2003 (unaudited)...............5 Consolidated Statement of Stockholders' Equity for March 31, 2004 (unaudited).................................6 Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003 (unaudited)............................7 Notes to Unaudited Consolidated Financial Statements...................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................10 Item 3. Quantitative and Qualitative Disclosure about Market Risk.............12 Item 4. Controls and Procedures...............................................12 PART II OTHER INFORMATION.....................................................12 Item 1. Legal Proceedings ....................................................12 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities................................12 Item 3. Defaults Upon Senior Securities (not applicable) .....................12 Item 4. Submission of Matters to a Vote of Security Holders (not applicable)..12 Item 5. Other Information.....................................................12 Item 6. Exhibits and Reports on Form 8-K ...................................13 SIGNATURES....................................................................14 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited consolidated financial statements. 3 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited consolidated financial statements. 4 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 5

See accompanying notes to unaudited consolidated financial statements. 6 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 7 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited consolidated financial statements of Productivity Technologies Corp. and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted from the accompanying interim financial statements. The information furnished in the accompanying balance sheets, statements of operations, stockholders' equity and cash flows, reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. Operating results for the nine months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending June 30, 2004. The consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended June 30, 2003 (as amended by amendment no. 1 on Form 10-K/A). Information provided includes the consolidated audited financial statements, including footnotes for the year ended June 30, 2003 and Management's Discussion and Analysis of Financial Condition and Results of Operations. 2. Summary of Significant Accounting Policies History of the Company and Basis of Presentation The Company was incorporated in June 1993 under the name Production Systems Acquisition Corporation with the objective of acquiring an operating business engaged in the production systems industry. The Company completed an initial public offering ("IPO") of common stock in July 1994 and raised net proceeds of approximately $9.0 million. In May 1996, the Company changed its name to Productivity Technologies Corp. and acquired, through a merger, Atlas Technologies, Inc. ("Atlas") as a wholly owned subsidiary. On February 23, 2000, the Company purchased, through a wholly-owned subsidiary formed for this purpose, substantially all of the assets of Westland Control Systems, Inc. ("Westland"). The Company has no other subsidiaries or operations. The Company, which produces industrial machinery, operates in a single segment through its Atlas and Westland subsidiaries. The accompanying financial statements include the consolidated accounts of the Company, Atlas and Westland. All significant inter-company accounts and transactions have been eliminated upon consolidation. Nature of Business The Company operates in a single segment through its Atlas and Westland subsidiaries. Atlas is a leading innovator and supplier of quick die change, flexible transfer, and stacking/destacking equipment used to automate automotive and other metal stamping operations. Atlas operates two manufacturing plants in Fenton, Michigan and has sales and engineering offices in Michigan, Europe and China. Atlas also established locations in late 2003 in Brazil and Germany. Westland designs, manufactures and field installs custom electrical control panels primarily for use in production machinery and machine tools utilized in automotive, adhesive and sealants, food processing and other industrial applications. Westland operates one manufacturing plant in Westland, Michigan, which is located less than one hour from Atlas' plants in Fenton, Michigan. Sales of Atlas products have principally been to automobile and automotive parts manufacturers and appliance manufacturers. Other customers include steel service centers and manufacturers of lawn and garden equipment, office furniture, heating, ventilation and air conditioning equipment, and large construction equipment. Sales to automotive related customer's account for the majority of sales. Westland's customers participate in the automotive, food processing, adhesive and sealants, engine part machining and other industries. Revenue and Cost Recognition 8 At Atlas, revenues from fixed price contracts, and the related contract costs, are recognized using the percentage-of-completion method. The percentage-of-completion method measures the percentage of contract costs incurred to date and compares these costs to the total estimated costs for each contract. Atlas estimates the status of individual contracts when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job condition, estimated profitability, and final contract settlement may result in revisions to costs and income, and are recognized in the period the revisions are determined. Revenues from time-and-material contracts are recognized currently as the work is performed. Westland recognizes sales and cost of sales upon shipment to the customer. Earnings Per Share Earnings per share have been computed by dividing the income by the weighted average number of common shares outstanding. The per share amounts reflected in the consolidated statements of operations are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per share." 3. Subsequent Events In May 2004, the Company signed two term sheets with an institutional investor, one for a standby equity distribution agreement proposed to be entered into (the "Equity Line"), and the second for a convertible redeemable debenture proposed to be issued by the Company to this investor (the "Debenture"). Consummation of these transactions will be subject to the investor's completion of due diligence and to the negotiation and execution of definitive documents on terms satisfactory to the investor and the Company. No assurance can be given that these transactions will be completed. Under the term sheet for the proposed Equity Line, the investor will commit to purchase, solely at the Company's option, up to $5.0 million of the Company's common stock during the 24 months after the effective time of a registration statement therefor, at a price equal to 99% of the market price. The market price is to be the lowest daily volume weighted average price during the five trading days immediately prior to the Company's election to require the investor to purchase shares under the Equity Line. The Company is required to issue to the investor at closing restricted common shares (with piggy-back and demand registration rights) having a market price of $175,000, and upon each election made by the Company to require the investor to purchase shares, 5% of the gross proceeds received therefrom will be paid to the investor. Under the term sheet for the proposed Debenture, the Company would issue its debenture in the principal amount of $500,000 to be funded $250,000 at closing, and the balance upon the satisfaction of specified conditions. The outstanding principal amount of the Debenture plus accrued interest thereon at 5% per annum will be convertible into the Company's common stock based upon the lowest of (i) 120% of the final closing price for the common stock on the closing date, (ii) 80% of the lowest closing price for the common stock: for the five trading days immediately prior to the conversion date or redemption date, or (iii) 100% of the average of the three lowest closing prices for the 30 days immediately prior to the conversion date. The Company has the option to redeem the Debenture at any time upon giving the specified notice, including following receipt of the investor's notice of election to convert into common stock at a conversion price equal to 120% of the outstanding principal amount of the Debenture plus accrued interest thereon. If the Company redeems the Debenture, the investor will be entitled to receive a warrant to purchase 50,000 of the Company's common shares (with piggy-back and demand registration rights) for each $100,000 invested. The Company is required to register the shares issuable upon conversion of the Debenture. The Debenture will also include provisions relating to collateral and fees and other terms to be agreed upon. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three and Nine Months Ended March 31, 2004 Compared to Three and Nine Months Ended March 31, 2003 Unaudited revenues earned for the quarter ended March 31, 2004 were $5,638,873, as compared to $6,663,341 for the quarter ended March 31, 2003, a decrease of 15%. This decrease was principally attributable to lower Atlas's revenues in the quarter ended March 31, 2004, partially offset by an increase in Westland's revenues. Westland's revenues increased in the quarter from the addition of new customers which began ordering from Westland for the first time, or which placed orders in greater volume, compared to the prior period of time. Revenues earned for the nine months ended March 31, 2004 of $21,042,610 were virtually unchanged from the nine months ended March 31, 2003, for which revenues earned were $21,017,260. Gross profit for the quarter ended March 31, 2004 was $1,358,361, representing a 21% decrease compared to the $1,708,495 gross profit for the quarter ended March 31, 2003. The decrease in gross profits was principally due to the volume decrease and mix of products sold at Atlas. For the nine months ended March 31, 2004, gross profit was $4,320,287, down 14% compared to the nine months ended March 31, 2003, for which gross profit was $4,999,995. The decrease was attributable to a change in the mix of products sold by Atlas. Consolidated selling, general and administrative (SG&A) expenses were $1,121,012 or 26% lower than the quarter ended March 31, 2003, for which SG&A expenses were $1,518,669. For the nine months ended March 31, 2004 SG&A expense was $3,629,230 or 19% lower than the nine months ended March 31, 2003. The reduction in SG&A expenses for the quarter and nine months ended March 31, 2004 was due to continued control of operating expenses. The income from operations for the quarter ended March 31, 2004 was $237,349, compared to an income from operations for the quarter ended March 31, 2003 of $189,826. The increase in income from operations in the third quarter of 2004 resulted from lower SG&A, which was partly offset by lower volume and a changing product mix at Atlas. For the nine months ended March 31, 2004, income from operations was $691,057 or $143,905 higher than the nine months ended March 31, 2003. The increase in income from operations for nine months ended March 31, 2004 was also primarily due to lower SG&A expenses as explained above. Interest expense for the quarter ended March 31, 2004 was $216,472, as compared to $144,875 for the quarter ended March 31, 2003. For the nine months ended March 31,2004 interest expense was $562,656 as compared to $507,740 for the prior nine months ended March 31, 2003. The higher interest expense was attributable to an increase in funded debt at Westland under its new credit facility with Spectrum Commercial Services, Inc. (the "Spectrum Credit Facility") and at Atlas under its new credit facility with Merrill Lynch Business Financial Services Inc. (the "MLB Credit Facility") and higher costs associated therewith. The net loss for the quarter ended March 31, 2004 was $16,281 ($0.01 per share basic and diluted) compared to a net income of $107,274 for the quarter ended March 31, 2003 ($0.04 per share basic and diluted). The net income for the nine months ended March 31, 2004 was $219,883 ($0.09 per share (basic) and $0.01 per share (diluted) as compared to a net income of $167,286 ($0.07 per share (basic and diluted) for the nine months ended March 31, 2003. The net income for the nine months ended March 31, 2004 included a $125,000 gain on extinguishment of debt.. 10 The gross carrying amount and accumulated amortization of the Company's intangible assets other than goodwill as of March 31, 2004 is as follows: March 31, 2004 ----------------------------------------------- Gross Net Carrying Accumulated Book Amount Amortization Value ------ ------------ ----- Patents $573,132 $291,867 $281,265 Non-compete Agreements 348,750 257,112 91,638 Bank Closing Fees 293,388 152,787 140,601 ----------------------------------------------- Total $1,215,270 $701,766 $513,504 =============================================== Liquidity and Capital Resources At March 31, 2004, the Company had (1) $3,461,111 outstanding under a commercial mortgage loan for Atlas as part of the MLB Credit Facility, (2) $472,222 outstanding under an equipment term loan for Atlas as part of the MLB Credit Facility, (3) debt of $4,581,622 outstanding under a revolving credit facility for Atlas as part of the MLB Credit Facility, (4) deferred executive compensation obligations of $974,933 originally scheduled to be paid over three equal annual installments during the period from July 2000 through July 2002, (5) $431,965 outstanding under the Spectrum Credit Facility, and (6) $2,212,584 outstanding under the Westland Loan. This total of $12,134,437 at March 31, 2004 compares to a total combined long-term debt financing and line of credit balance of $11,140,428 at December 31, 2003. As noted in previous filings, the Company completed refinancings for both Atlas and Westland, with two new lenders, as of December 12, 2003. Working capital deficit at March 31, 2004 was ($199,951) and the current ratio was (.98) to 1, as compared to a working capital deficit of ($5,866,497) and a current ratio of (.64) to 1 for the Company at June 30, 2003. Effective as of December 12, 2003, Atlas entered into the MLB Credit Facility, which provided for borrowing availability of up to $8.0 million (based in part upon eligible accounts receivable), of which $7.4 million was funded at closing, and Westland entered into the Spectrum Credit Facility, which provided for borrowing availability of up to $1.25 million (based upon eligible accounts receivable). Effective on March 4, 2004, Merrill Lynch Business Financial Services Inc. agreed to a modification of the terms of the MLB Credit Facility under which in which it increased the borrowing availability by $750,000 under the revolving credit facility for a 60-day period (the "overline period") and increased the interest rate by 0.5% per annum during this period. With the availability of funds under the MLB Credit Facility and the Spectrum Credit Facility, the anticipated additional funding expected to be available under the [ ], and assuming no adverse business or economic developments, management believes that it will have sufficient funds available to it to meet its working capital needs for the next 12 months. Off Balance Sheet Arrangements During the three and nine months ended March 31, 2004, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course of business. Forward-Looking Statements Various statements in this Report concerning the manner in which the Company intends to conduct its future operations and potential trends that may affect future results of operations are forward-looking statements. The Company may be unable to realize its plans and objectives due to various important factors. These factors include but are not limited to economic and business conditions, particularly in the automotive, machine tool and other industries principally served by the Company, including the ongoing and permanent (non-cyclical) loss of manufacturing capabilities in the United States to foreign competition, and continued volatile demand in the domestic and foreign markets for automobiles and automotive parts, in each case resulting in reduced or uncertain demand for 11 the Atlas' automation equipment; potential technological developments in the metal forming and handling automation equipment markets which may render Atlas' automation equipment noncompetitive or obsolete; the risk that Atlas or Westland customers may be unwilling or unable to continue ordering products; the potential inability of the Company to achieve adequate operating results or obtain needed access to the credit and capital markets to finance future operations or plans for capital improvement or growth. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 3 has been disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2003. There has been no material change in the disclosure regarding market risk. ITEM 4. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the chief executive officer and chief financial officer, the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. The chief executive officer and chief financial officer have concluded that, to their knowledge on the basis of that evaluation, the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the Company's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Since the date of the filing of the Company's Annual Report on Form 10-K for the year ended June 30, 2003, there have been no material new legal proceedings involving the Company or any material developments to the proceedings described in such 10-K. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. Reference is made to the disclosure under note 3 to the Company's consolidated financial statements for certain proposed securities transactions. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. In May 2004, the Company signed two term sheets with an institutional investor, one for a standby equity distribution agreement proposed to be entered into (the "Equity Line"), and the second for a convertible redeemable debenture proposed to be issued by the Company to this investor (the "Debenture"). Consummation of these transactions will be subject to the investor's completion of due diligence and to the negotiation and execution of definitive documents on terms satisfactory to the investor and the Company. No assurance can be given that these transactions will be completed. Under the term sheet for the proposed Equity Line, the investor will commit to purchase, solely at the Company's option, up to $5.0 million of the Company's common stock during the 24 months after the effective time of a registration statement therefor, at a price equal to 99% of the market price. The market price is to be the lowest daily volume weighted average price during the five trading days immediately prior to the Company's election to require the investor to purchase shares under the Equity Line. The Company is required to issue to the investor at closing restricted common shares (with piggy-back and demand registration rights) having a market price of $175,000, and upon each election made by the Company to require the investor to purchase shares, 5% of the gross proceeds received therefrom will be paid to the investor. Under the term sheet for the proposed Debenture, the Company would issue its debenture in the principal amount of $500,000 to be funded $250,000 at closing, and the balance upon the satisfaction of specified conditions. The outstanding principal amount of the Debenture plus accrued interest thereon at 5% per annum will be convertible into the Company's common stock based upon the lowest of (i) 120% of the final closing price for the common stock on the closing date, (ii) 80% of the lowest closing price for the common stock: for the five trading days immediately prior to the conversion date or redemption date, or (iii) 100% of the average of the three lowest closing prices for the 30 days immediately prior to the conversion date. The Company has the option to redeem the Debenture at any time upon giving the specified notice, including following receipt of the investor's notice of election to convert into common stock at a conversion price equal to 120% of the outstanding principal amount of the Debenture plus accrued interest thereon. If the Company redeems the Debenture, the investor will be entitled to receive a warrant to purchase 50,000 of the Company's common shares (with piggy-back and demand registration rights) for each $100,000 invested. The Company is required to register the shares issuable upon conversion of the Debenture. The Debenture will also include provisions relating to collateral and fees and other terms to be agreed upon. As previously disclosed by the Company, in February 2004, William Rogner replaced James Kolinski as the president of Atlas. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 10.1 Letter Agreement dated as of March 4, 2004 from Merrill Lynch Business Financial Services Inc. to Atlas Technologies, Inc. modifying the WCMA Loan and Security Agreement dated as of November 25, 2003. (1) 31.1 Rule 13a-14(a) certification of chief executive officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Rule 13a-14(a) certification of chief financial officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Section 1350 certification of chief executive officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 certification of chief financial officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------- (1) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003 (b) Reports on Form 8-K. None. 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRODUCTIVITY TECHNOLOGIES CORP. Date: May 20, 2004 By: /s/ Samuel N. Seidman --------------------------- Samuel N. Seidman Chairman, Chief Executive Officer and President Date: May 20, 2004 By: /s/ Jesse A. Levine ------------------------- Jesse A. Levine Vice President, Secretary, Treasurer and Chief Financial Officer 14

PRODUCTIVITY TECHNOLOGIES CORP / 10-Q