10-Q 1 pt10q_0218.txt FORM 10-Q 02/18/2005 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: December 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 0-24242 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) 3100 Copper Avenue, Fenton, Michigan 48430 (Address of Principal Offices)(Zip Code) Registrant's Telephone Number, Including Area Code (810) 714-0200 ----------------------------- 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 February 18, 2005: 2,747,500 shares of common stock. 1 Productivity Technologies Corp. INDEX Page Number PART I FINANCIAL INFORMATION.................................................3 Item 1. Financial Statements..................................................3 Condensed Consolidated Balance Sheets at December 31, 2004 (Unaudited) and June 30, 2004.....................................3 Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003 (Unaudited)...........5 Condensed Consolidated Statement of Shareholders' Equity for the six months ended December 31, 2004 (Unaudited)............6 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003 (Unaudited)...........7 Notes to Unaudited Condensed 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............13 Item 4. Controls and Procedures..............................................13 PART II OTHER INFORMATION....................................................14 Item 1. Legal Proceedings ...................................................14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........14 Item 3. Defaults upon Senior Securities (not applicable).....................14 Item 4. Submission of Matters to a Vote of Security Holders (not applicable).14 Item 5. Other Information (not applicable)..................................14 Item 6. Exhibits ...........................................................14 SIGNATURES....................................................................15 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements. 3

See accompanying notes to unaudited condensed consolidated financial statements. 4

See accompanying notes to unaudited condensed consolidated financial statements. 5

See accompanying notes to unaudited condensed consolidated financial statements. 6

See accompanying notes to unaudited condensed consolidated financial statements. 7 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited condensed 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 six months ended December 31, 2004, are not necessarily indicative of the results that may be expected for the year ending June 30, 2005. 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, 2004. Information provided includes the consolidated audited financial statements, including footnotes for the year ended June 30, 2004 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. In March 2004, Atlas formed a German subsidiary, Atlas Technologies GmbH, in order to facilitate its operations in Europe. 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, packaging, adhesive and sealants, engine part machining and other industries. 8 Revenue and Cost Recognition 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." Options to purchase shares of common stock were outstanding as of December 31, 2004 but were not included in the computation of diluted earnings per share because the shares would be anti-dilutive. 3. Stock Option Plan SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of accounting for stock-based compensation that recognizes compensation cost based on the fair value of options at grant date. In lieu of applying this fair value based method, a company may elect to disclose only the pro forma effects of such application. The Company has adopted the disclosure-only provisions of SFAS No. 123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued, which requires that the Company illustrate the effect on net income and earnings per share if it had applied the fair value principles included in SFAS No. 123 for both annual and interim financial statements. Accordingly, if the Company had elected to recognize compensation cost based on the fair value of the options at grant date, the Company's earnings and earnings per share from continuing operations, assuming dilution, for the three and six month periods ended December 31, 2004 and 2003 would have been the pro forma amounts indicated below:

9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three and Six Months Ended December 31, 2004 Compared to Three and Six Months Ended December 31, 2003 Unaudited revenues earned for the quarter ended December 31, 2004 were $5,381,164, as compared to $7,839,274 for the quarter ended December 31, 2003, a decrease of 31%. Atlas' revenues decreased by 35% due to slower activity during the summer of 2004 and Westland's revenues declined by 22% due to slower activity during the beginning of the quarter. Unaudited revenues earned for the six months ended December 31, 2004 were $10,717,042, down 30% from the six months ended December 31, 2003 revenues earned of $15,403,737. The reduction in revenues was due to slower order activity as noted above. Gross profit for the quarter ended December 31, 2004 was $1,038,926, representing a 23% decrease compared to the $1,347,866 gross profit for the quarter ended December 31, 2003. The decrease in gross profits was due to the lower volumes reported by both Atlas and Westland. Gross profit as a percentage of sales increased by 2%, due principally to a more favorable mix of products sold by Westland. For the six months ended December 31, 2004 gross profit was $1,961,344, down 34% compared to the six months ended December 31, 2003 gross profit of $2,961,926. The decrease in gross profit for the six month period as compared to one year ago was due to lower revenues during the six month period. Consolidated selling, general and administrative (SG&A) expenses were $1,148,187 or 11% lower than the quarter ended December 31, 2003 SG&A expenses of $1,287,599. For the six months ended December 31, 2004, SG&A expense was $2,301,168 or $207,050 lower than the six months ended December 31, 2003. The company continued to reduce SG&A expenses for the quarter and six months ended December 31, 2004 due to the lower revenues reported by both operating subsidiaries. The loss from operations for the quarter ended December 31, 2004 was $109,261, compared to income from operations for the quarter ended December 31, 2003 of $60,267. For the six months ended December 31, 2004 the loss from operations was $339,824, compared to income from operations of $453,708 for the six months ending December 31, 2003. The loss from operations for the quarter and six months ended December 31, 2004 resulted from lower sales volumes reported by both operating subsidiaries which was partly offset by the lower SG&A expenses described above. Interest expense for the quarter ended December 31, 2004 was $196,412 as compared to $174,435 for the same time period ending December 31, 2003. For the six months ended December 31,2004 interest expense was $366,558 as compared to $346,184 for the prior six months ended December 31, 2003. Atlas' interest expenses for the quarter and year to date periods ending December 31, 2004 were lower due to lower borrowing levels which resulted from lower revenues during the subject periods. Westland's interest expenses increased due to its utilization of line of credit financing which Westland did not have for most of the quarter and six months ended December 31, 2003. The net loss for the quarter ended December 31, 2004 was $211,433 compared to a net income of $22,578 for the quarter ended December 31, 2003. The net loss for the six months ended December 31, 2004 was $590,120 as compared to a net income of $236,165 for the six months ended December 31, 2003. The reported net loss for the quarter of $0.08 per share and year-to-date net loss of $0.21 per share was based on 2,747,500 weighted average common shares outstanding (basic and diluted) during both time periods. This compared to a net income for the quarter and six months ended December 31, 2003 of $0.01 per share (basic and diluted) and $0.10 (basic) and $0.09 per share (diluted), respectively, with both calculations based upon 2,475,000 shares outstanding for these periods ending December 31, 2003. The net income for the three months and six months ended December 31, 2003 included a $125,000 gain on extinguishment of debt. The gross carrying amount and accumulated amortization of the Company's intangible assets other than goodwill as of December 31, 2004 is as follows: 10 December 31, 2004 ----------------------------------------------- Gross Net Carrying Accumulated Book Amount Amortization Value Patents $573,132 $364,985 $208,147 Non-compete Agreements 348,750 283,932 64,818 ML Closing Fees 154,603 34,428 120,175 ----------------------------------------------- Total $1,076,485 $683,345 $393,140 =============================================== Liquidity and Capital Resources Between 2000 and 2003, the Company was scheduled to repay approximately $974,833 due to the former owners of Atlas. Repayments of all of these amounts were postponed for an indefinite period of time. Instead, cash is being conserved for ongoing operations. These borrowings are subordinated to Atlas' senior lender and are subject to subordination agreements executed by the former owners of Atlas in favor of Atlas' senior lender. At December 31, 2004, the Company had (1) $3.3 million outstanding under a commercial mortgage loan for Atlas as part of a credit facility (the "MLB Credit Facility") with Merrill Lynch Business Financial Services Inc. ("Merrill Lynch"), (2) $0.347 million outstanding under an equipment term loan for Atlas as part of the MLB Credit Facility, (3) debt of $4.0 million outstanding under a revolving credit facility for Atlas as part of the MLB Credit Facility, (4) deferred executive compensation obligations of approximately $0.975 originally scheduled to be paid over three equal annual installments during the period from July 2000 through July 2002, (5) $0.97 million outstanding under the Spectrum Credit Facility, (6) $2.2 million outstanding under the Westland Loan ,and (7) $0.3 million outstanding in convertible subordinated debentures which mature in June 2007. This total of $12.1 million of debt compares to a total combined indebtedness approximating $11.1 million as of December 31, 2003. Working capital deficit at December 31, 2004 was ($1,993,320) and the current ratio was (.82) to 1, as compared to a working capital deficit of ($1,913,000) and a current ratio of (.85) to 1 for the Company at June 30, 2004. On December 12, 2004, the MLB Credit Facility matured and was not repaid. The Company is in discussions with Merrill Lynch to obtain an extension of this facility. Merrill Lynch has not demanded repayment of the outstanding amounts. While Atlas expects a renewal of the revolver, no assurances can be given that the Company will be successful in obtaining an extension of the MLB Credit Facility or in finding alternative financing. Unless it is successful in renewing the revolver or in obtaining revolving financing from another source, the Company may be unable to satisfy its current liabilities. Off Balance Sheet Arrangements During the quarter and six months ended December 31, 2004, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. Summary of Contractual Commitments The following table represents contractual commitments associated with operating agreements (excluding interest on debt obligations) for the fiscal years indicated, and thereafter. With respect to the lines of credit borrowed by Atlas and Westland, at December 31, 2004, these amounted to $4.0 million in maximum revolving commitments for Atlas and $1.25 million in maximum revolving commitments for Westland which will be up for renewal in December 2005. Atlas has been in discussions with its senior lender concerning renewal of the Atlas revolver. 11

Impact of Recently Issued Accounting Standards In March 2004, the Financial Accounting Standards Board ("FASB") issued a proposed statement, "Share-Based Payment--an Amendment to Statement Nos. 123 and 95" that would require stock based employee compensation to be recorded as a charge to earnings using a fair value based method. The proposed statement is effective for interim or annual periods beginning after June 15, 2005. The Company will continue to monitor the FASB's progress on this issuance of the proposed statement and its impact on the Company's consolidated financial statements. In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment". Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the financial statement impact of the adoption of SFAS 123(R). In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company is currently evaluating the financial statement impact of the adoption of SFAS 151. 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 rising raw material prices for steel and commodities which depend upon or use oil in their manufacture, 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 the Atlas' automation equipment; potential technological developments in the metal forming and handling automation equipment markets which may render Atlas' automation e 12 quipment noncompetitive or obsolete; the risk that Atlas' senior lender will not agree to renew its revolver; 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 refinance or extend the MLB Credit Facility or otherwise 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, 2004. 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, and excluding the conditions discussed below, the remainder of 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; however, management has begun to implement the changes necessary to address the issues identified below. In connection with its audit of the Company's consolidated financial statements as of and for the year ended June 30, 2004, the Company's auditor advised the Company's management and its Audit Committee that it had identified deficiencies which were designated as "reportable conditions" but which did not constitute "material weaknesses". Areas requiring improvement include (1) reconciling intercompany accounts and balances between consolidated entities, (2) recordkeeping over property, plant and equipment, (3) recordkeeping and evaluation of deferred tax assets and liabilities and analysis of valuation allowance against net deferred tax assets, and (4) reviewing accounting activity performed on amounts appearing in the Company' s consolidated financial statements. In addition, in the past the Company has not filed on a timely basis certain of its quarterly reports on Forms 10-Q and its annual report on Form 10-K with the Securities Exchange Commission within the required due dates. An extension of time to file was requested for the annual report on Form 10-K for the year ended June 30, 2004, the quarterly report on Form 10-Q for the quarter ended September 30, 2004 (as well as this quarterly report on Form 10-Q), which, under Section 404 of the Sarbanes Oxley Act, constitutes a deficiency in internal controls over financial reporting. The Company has assigned a priority to the short- and long-term correction of these internal control deficiencies and believes it can make significant progress toward correction of these matters in fiscal 2005. 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; however, management has begun to implement the changes necessary to address the issues identified below. 13 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, 2004, 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. On December 12, 2004, the MLB Credit Facility matured and was not repaid. The Company is in discussions with Merrill Lynch to obtain an extension of this facility. Merrill Lynch has not demanded repayment of the outstanding amounts. While Atlas expects a renewal of the revolver, no assurances can be given that the Company will be successful in obtaining an extension of the MLB Credit Facility or in finding alternative financing. Unless it is successful in renewing the revolver or in obtaining revolving financing from another source, the Company may be unable to satisfy its current liabilities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS. 31.1 Certification of chief executive officer under section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of chief financial officer under section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of chief executive officer under section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of chief financial officer under section 906 of the Sarbanes-Oxley Act of 2002. 14 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: February 18, 2005 By: /s/ Samuel N. Seidman --------------------------- Samuel N. Seidman Chairman, Chief Executive Officer and President Date: February 18, 2005 By: /s/ Jesse A. Levine ------------------------- Jesse A. Levine Vice President, Secretary, Treasurer and Chief Financial Officer 15

PRODUCTIVITY TECHNOLOGIES CORP / 10-Q