10-Q 1 d10q.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: September 30, 2002 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 Incorporation or Organization) (I.R.S. Employer Identification No.)

201 South Main Street, 8th Floor, Ann Arbor, Michigan 48104 -------------------------------------------------------------------- (Address of Principal Offices)(Zip Code) Registrant's Telephone Number, Including Area Code (734) 996-1700 ----------------------------- 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 _____________ ------------ 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 November 14, 2002: 2,475,000 shares, $ .001 par value common stock. 1 Productivity Technologies Corp. INDEX

Page ~~Part~~Number I.------ ~~Financial~~PART ~~Information~~I ~~for~~FINANCIAL ~~Productivity~~INFORMATION ~~Technologies Corp~~........ ~~3 (the "Company") and Subsidiaries Atlas Technologies, Inc~~. ~~("Atlas") and Westland Control Systems, Inc~~................................................................. ~~("Westland")~~3 Item 1. ~~Interim~~ Financial Statements .................................... ~~3 Consolidated Balance Sheets~~....................................... 43 Consolidated Balance Sheets at September 30, 2002 (unaudited) and June 30, 2002 ................ 3 Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 (unaudited) ........................................................................... 65 Consolidated Statement of Stockholders' Equity for September 30, 2002 (unaudited) ..............~~....~~ 76 Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001 (unaudited) ........................................................................... 87 Notes to Unaudited Consolidated Financial Statements ........................................... 98 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk ...................................... 1013 Item 34. ~~Quantitative~~Controls and ~~Qualitative~~Procedures ~~Disclosure about Market Risk~~........................................................................ 13 ~~Part~~PART II. ~~Other~~OTHER ~~Information~~INFORMATION .............................................................................. 13 Item 1. Legal Proceedings .............................................................................. 13 Item 2. Changes in Securities and Use of Proceeds (not applicable) ..................................... 13 Item 3. Defaults Upon Senior Securities ................................................................ 13 Item 4. Submission of Matters to a Vote of Security Holders (not applicable) ........................... 14 Item 5. Other Information (not applicable) ............................................................. 14 Item 6. Exhibits and Reports on Form 8-K ............................................................... 14 ~~Signatures~~SIGNATURES ............................................................................................... 1514 CERTIFICATIONS ........................................................................................... 14

2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

~~December~~September 3130, ~~2001~~2002 June 30, ~~2001~~2002 ------------------ ------------- (Unaudited) Assets Current Assets Cash $ 1$725,~~915,740~~895 $ ~~766~~4.971,~~052~~837 Short-term investments, including accrued interest 194,~~564~~742 ~~243~~149,~~136~~720 Contract receivables, net of allowance for doubtful accounts of $~~101~~265,~~400~~175 and $~~102~~250,~~500~~198 43,~~960~~539,~~368~~536 52,~~533~~898,~~773~~107 Costs and estimated earnings in excess of billings on uncompleted contracts 52,~~337~~926,~~389~~478 71,~~172~~773,~~626~~141 Inventories 1,~~203~~177,~~520~~908 1,~~463~~211,~~559~~249 Prepaid expenses and other ~~431~~351,~~937~~068 ~~356~~352,~~102~~542 Deferred income taxes ~~-0-~~282,000 ~~287~~282,000 ----------- ----------- Total current assets 149,~~043~~197,~~517~~627 1511,~~822~~638,~~248~~596 ----------- ----------- Property and equipment Land $ 591,514 $ 591,514 Buildings and improvements 4,917,~~860~~459 4,~~911~~917,~~665~~459 Machinery and equipment 4,~~529~~224,~~106~~574 4,~~444~~223,~~679~~506 Transportation equipment 21,000 21,000 ----------- ----------- 109,~~059~~754,~~480~~547 9,~~968~~753,~~858~~479 Less accumulated depreciation 3,~~028~~194,~~874~~989 23,~~738~~042,~~043~~568 ----------- ----------- Net property and equipment 76,~~030~~559,~~606~~558 76,~~230~~710,~~815~~911 ----------- ----------- Other assets Goodwill, ~~net of accumulated amortization of $883~~2,~~459 6~~985,~~521,887~~909 64,~~521~~926,~~888~~448 Patent, ~~net of accumulated amortization of $85~~427,~~637~~502 ~~and $63~~451,~~141~~875 ~~664,364 686,859~~ Deferred income taxes 1468,~~338,~~000 1468,~~051,~~000 Other assets ~~320~~286,~~460~~709 ~~444~~297,~~512~~959 ----------- ----------- Total other assets 84,~~844~~168,~~711~~120 86,~~704~~144,~~259~~282 ----------- ----------- $2919,~~918~~925,~~835~~305 $3124,~~757~~493,~~322~~789 =========== ===========

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

~~December~~September 3130, ~~2001~~2002 June 30, ~~2001~~2002 ------------------ ------------- (Unaudited) Liabilities and stockholders' equity Current liabilities Current portion of long-term debt $10 7,~~042~~984,~~397~~770 $ 912,~~831~~190,~~899~~338 Accounts payable 3,~~231~~050,~~659~~990 42,~~973~~193,~~710~~920 Accrued expenses Commissions payable ~~274~~210,000 ~~248~~189,000 Payroll and related withholdings 2526,~~501~~388 ~~173~~370,~~501~~178 Warranty Reserve 315,000 315,000 Royalties Payable ~~282,289~~- ~~265,398~~- Interest ~~550~~560,~~936~~026 ~~414~~1,~~535~~122,552 Other ~~145~~414,~~046~~120 ~~251~~367,~~393~~148 Billings in excess of costs and estimated earnings on uncompleted contracts ~~726~~845,~~687~~703 ~~251~~750,~~701~~970 Current maturities of executive deferred compensation agreements 974,933 ~~630~~974,~~282~~933 ----------- ----------- Total current liabilities 16$14,~~568~~381,~~448~~930 17$18,~~355~~474,~~419~~039 Executive deferred compensation agreements, less current maturities -0 - ~~344,651~~ Long-term debt, less current maturities 73,~~410~~417,000 73,~~710~~800,000 ----------- ----------- Total liabilities 2317,~~978~~798,~~448~~930 2522,~~410~~274,~~070~~039 ~~===========~~----------- ~~===========~~----------- Stockholders' equity Common stock, $.001 par value, 20,000,000 shares authorized; 2,475,000 shares issued and outstanding 2,475 2,475 Additional paid-in capital 9,966,408 9,966,408 Deficit (47,~~028~~842,~~495~~508) (37,~~621~~749,~~631~~133) ----------- ----------- Total stockholders' equity 52,~~940~~126,~~388~~375 62,~~347~~219,~~252~~750 ----------- ----------- $2919,~~918~~925,~~835~~305 $3124,~~757~~493,~~322~~789 =========== ===========

See accompanying notes to unaudited consolidated financial statements. 4 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended September 30, September 30, ------------- ------------- 2002 2001 ---- ---- Revenues Earned $ 6,736,943 $ 7,459,679 Cost of Revenues Earned 5,162,891 5,554,072 ----------- ----------- Gross profit 1,574,052 1,905,607 Selling, general and administrative expenses 1,526,416 1,665,955 ----------- ----------- Income from operations 47,636 239,652 ----------- ----------- Other income (expense) Interest income 7,467 5,444 Interest expense (192,558) (338,595) Miscellaneous 14,099 10,174 ----------- ----------- Total other expenses (170,992) (322,977) ----------- ----------- Income (loss) before income taxes (123,356) (83,325) Income tax expense (benefit) (29,981) -0- ----------- ----------- Net income (loss) ($93,375) ($83,325) =========== =========== Basic and Diluted Earnings per share $ (0.04) $ (0.03) =========== =========== Weighted average number of Common shares outstanding 2,475,000 2,475,000 See accompanying notes to unaudited consolidated financial statements. 5 PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)

~~Three~~Additional ~~Months~~Total ~~Ended~~Common ~~Six~~Stock ~~Months~~Paid-In ~~Ended~~Stockholders' ------------~~------~~ ~~----------------~~Shares ~~December~~Amount ~~31,~~Capital ~~2001~~Deficit ~~December~~Equity ~~31,~~Balance ~~2000~~June ~~December 31~~30, ~~2001~~2002 ~~December 31~~2,475,000 ~~2000 ----------------- ----------------- ----------------- ------------------ Revenues Earned~~ $6 2,~~056,998~~475 $ 69,~~979~~966,~~858~~408 ($137,~~516~~749,~~677~~133) $ 152,~~255~~219,~~723~~750 ~~Cost~~Net of Revenues Earned 4,591,434 5,686,780 10,145,507 12,158,441 ---------- ----------- ----------- ------------ Gross profit 1,465,564 1,293,078 3,371,170 3,097,282 Selling, general and administrative expenses 1,472,315 1,924,026 3,138,269 3,768,924 ---------- ----------- ----------- ------------ Income (loss) ~~from operations (6,751) (630,948) 232,900 (671,642)~~ --~~--------~~ --~~---------~~ --~~---------~~ ~~------------ Other income~~ (~~expense) Interest income 8~~$93,~~726 15,230 14,170 22,136 Interest expense (345,006~~375) (~~454~~$93,~~172~~375) ~~(683,601) (881,863) Miscellaneous 2,066 229 12,240 11,530~~ ---------- -~~----------~~ ----------- ------------ ~~Total other expenses (334,214) (438,713) (657,191) (848,197)~~ ---------- -~~----------~~ ----------- ~~------------~~September ~~Income (loss) before income taxes (340~~30,~~965)~~ ~~(1,069,661)~~2002 ~~(424~~2,~~291) (1~~475,~~519,839)~~000 ~~Income~~$ ~~tax expense (benefit) (17~~2,~~427)~~475 ~~(342,000)~~$ ~~(17~~9,~~427) (499~~966,~~320)~~408 ~~---------- ----------- ----------- ------------ Net income~~ (~~loss) (~~$~~323~~7,~~538) ($727~~842,~~661~~508) ($~~406,864)~~ ~~($1~~2,~~020~~126,~~519)~~375 ========== =~~==========~~ =========== ============ ~~Basic and Diluted Earnings per share $ (0.13) $ (0.29) $ (0.16) $ (0.41)~~ ========== =~~==========~~ =========== ~~============ Weighted average number of Common shares outstanding 2,475,000 2,475,000 2,475,000 2,475,000~~

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

~~Common~~Three ~~Stock~~Months ~~Additional~~Ended ~~Total~~September 30, September 30, 2002 2001 ---- ---- Cash flows from operating activities Net loss ($93,375) ($83,325) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 152,421 150,312 Amortization 35,623 22,499 Changes in operating assets and liabilities: Contract receivables (641,429) (601,033) Inventories, prepaid expenses and other 34,815 75,477 Costs and estimated earnings in excess of billings on uncompleted contracts, net effect (1,153,337) (1,590,227) Accounts payable, accrued expenses and other 113,460 370,086 ----------- ----------- ~~Paid~~Net cash used in operating activities (1,551,822) (1,666,210) -In---------- ~~Stockholders'~~----------- ~~Shares~~Cash ~~Amount~~flows ~~Capital~~from ~~Deficit~~investing ~~Equity~~activities ~~Balance~~Proceeds ~~June~~from ~~30,~~sale ~~2001~~(purchase ~~2,475,000~~of) ~~$2,475~~short-term ~~$9,966,408~~investments - net ($345,~~621,631~~022) $649,~~347,252~~779 ~~Net~~Expenditures ~~loss~~for property and equipment (1,068) (37,774) -- --------- ----------- Net cash provided by (~~$406,864~~used in) investing activities (~~$406~~46,~~864~~090) 12,005 ----------- -- --------- Cash flows from financing activities (Payments) or borrowings under revolving credit agreement (1,848,030) 1,312,000 Payments on long term debt (800,000) (10,251) ---- ------- ----------- Net cash provided by (used in) financing activities (2,648,030) 1,301,749 ----------- ----------- ~~December~~Net ~~31,~~decrease ~~2001~~in 2cash (4,~~475~~245,~~000~~942) $2(342,~~475~~432) $9Cash at the beginning of the period 4,~~966~~971,~~408~~837 (766,052 ----------- ----------- Cash at the end of the period $4 725,~~028,495)~~895 $5 423,~~940,388~~620 ============= ============= ~~===============~~Supplemental ~~===========~~Cash ~~==========~~Flow Information Cash paid during the period for interest $ 156,546 $ 338,595 Income Taxes Received $ 29,981 $ - Schedule of Non-Cash Financing Activities Goodwill reduction and debt extinguishment $ 1,940,538 $ -

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 three months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ending June 30, 2003. 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, 2002 (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, 2002 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. 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. 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"; the amounts of the Company's "basic" and "diluted" earnings per share (as defined in SFAS No. 128) are the same. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Unaudited revenues earned for the quarter ended September 30, 2002 were $6,736,943, as compared to $7,459,679 for the quarter ended September 30, 2001, a decrease of 10%. Atlas's revenues were down 20%, principally due to softness in the capital goods demand in the automotive industry. Westland's revenues increased 42% due to the addition of new customers' accounts that were not included in the prior year's quarter. The order backlog as of September 30, 2002 was $14.4 million, down 8% from the June 30, 2002 backlog of $15.7 million. The decline in backlog was primarily due to slower bookings of new orders in the first quarter caused by continued economic softness in the segments served by the Company. Gross profit for the quarter ended September 30, 2001 was $1,574,052, representing a 17% decrease compared to the $1,905,607 gross profit for the quarter ended September 30, 2001. The decrease in gross profits was principally due to the volume reduction at Atlas, a change in the mix of products sold by Westland, and continued pricing pressures due to competition and continued economic softness cited above. Consolidated selling, general and administrative (SG&A) expenses were $1,526,416 or 8% lower than the quarter ended September 30, 2001 SG&A expenses of $1,665,955. The reduction in SG&A expenses for the quarter ended September 30, 2002 was due to tighter control of operating expense at both operating subsidiaries. The income from operations for the quarter ended September 30, 2002 was $47,636, compared to income from operations for the quarter ended September 30, 2001 of $239,652. This decrease for the quarter was the direct result of the lower sales volumes, a change in the mix of products sold and lower gross margins, as described above, which were partially offset by the lower SG&A expenses. Interest expense for the quarter ended September 30, 2002 was $192,558, a decrease of 43% from $338,595 for the quarter ended September 30, 2001. The improvement was due principally to continued focus on collections of receivables and inventory management at both Atlas and Westland which reduced borrowing needs and to a lesser extent on the Westland litigation settlement on September 3, 2002 which resulted in the extinguishment of $1.8 million in debt obligations due to the former owner of Westland and a principal repayment of $800,000 to the Company's senior lender, which was coincident with the litigation settlement. Consequently, there was $2.6 million less in senior and subordinated debt outstanding from September 3, 2002 to September 30, 2002, which resulted in lower interest expenses. The net loss for the quarter ended September 30, 2002 was $93,375, compared to a net loss of $83,325 for the quarter ended September 30, 2001. The reported net loss for the quarter of $0.04 per share was based on 2,475,000 weighted average common shares outstanding during the quarter. This compared to a net loss for the quarter ended September 30, 2001 of $0.03 cents per share, based on 2,475,000 weighted average common shares outstanding during the quarter a year ago. 10 The gross carrying amount and accumulated amortization of the Company's intangible assets other than goodwill as of September 30, 2002 is as follows:

~~Six~~September ~~Months Ended December 31~~30, ~~2001~~2002 ~~December 31, 2000~~ ----------------------------------------~~-----~~ ~~Cash~~Gross ~~flows from operating activities~~ Net ~~loss~~Carrying ~~($406,863)~~Accumulated ~~($1,020,519)~~Book ~~Adjustments~~Amount ~~to reconcile net loss to net cash provided by operating activities: Depreciation 290,831 327,877~~ Amortization ~~22,496~~Value ~~236,327 Deferred income tax~~ -0- (505,800) Changes in operating assets and liabilities: Contract receivables 573,406 2,383,087 Inventories, prepaid expenses and other 308,255 5,803 Costs and estimated earnings in excess of billings on uncompleted contracts, net effect 2,310,223 1,013,365 Accounts payable, accrued expenses and other (1,817,108) (983,412) ---- ------- ----- ------- ~~Net~~Patents ~~cash provided by operating activities~~ $ 1573,~~364,565~~132 $ 1145,~~456,728~~630 ~~=========== ============ Cash flows from investing activities Proceeds from sale short-term investments - net 48~~$427,~~572~~502 ~~67,342 Expenditures for property and equipment (90,622) (90,208)~~ Non-~~----------~~compete ~~------------~~Agreements ~~Net cash used in investing activities ($42~~348,~~050)~~750 ~~($22~~203,~~866)~~482 ~~=========== ============ Cash flows from financing activities Net borrowings (payments) on revolving credit agreement $ 241~~145,~~000~~268 ~~($1,267,303)~~IRB ~~Net~~Closing ~~borrowings~~Fees ~~(payments) on long term debt (330~~138,~~502)~~785 ~~(420~~55,~~502)~~250 ~~Payments on executive deferred compensation agreement -0- (133~~83,~~419)~~535 ----------- ------------ ~~Net cash used in financing activities ($89,502) ($1,821,224)~~ ----------- ------~~------~~ ~~Net~~Total ~~increase (decrease) in cash~~ $1,~~233~~060,~~013~~667 ~~(387,362) Cash at the beginning of the period 766,052 538,575 ----------- ------------ Cash at the end of the period~~ $ 1404,~~915,740~~362 $ ~~151~~656,~~213~~305 =========== ============ ~~Supplemental Cash Flow Information Cash paid during the period for interest $ 547,200 $ 876,158 Income Taxes $ -0- $ -0- ----------- ------------~~=================

Liquidity and Capital Resources On July 31, 2000, the Company was scheduled to repay approximately $417,000 of the subordinated deferred indebtedness totaling $1,108,352 due to the former owners of Atlas. This repayment has been postponed for an indefinite period of time. Instead, cash is being conserved for ongoing operations. In addition, the Company's bank lender has requested the postponement of the payment of the $417,000 until the Company's financial results improve. At September 30, 2002, the Company had (1) $3,000,000 of Industrial Revenue Bond obligations, payable over the 12 years remaining in their term, (2) debt of $5,191,770 outstanding under a revolving credit facility with Bank One, Michigan ("Bank One") plus obligation for letters of credits issued thereunder (including in support of the $3,000,000 Industrial Revenue Bonds relating to Atlas' Copper Road facility), (3) 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, (4) a five year term loan from Bank One of $2,260,000, bearing interest at 125 basis points over the prime rate, incurred in February 2000 to purchase Westland, and (5) subordinated term debt (not including accrued interest) of $950,000, payable to the former owner of Westland. This total of $12,376,703 at September 30, 2002 compares to a total combined long-term debt financing and line of credit balance of $19,808,581 as of September 30, 2001. The decrease in indebtedness at September 30, 2002 is principally due to the extinguishment of $1.8 million of indebtedness owed to the former owner of Westland and a principal payment of $450,000 made to the former owner of Westland under the terms of the litigation settlement agreement reached in September 2002, and principal repayments of $4.4 million on Bank One and other indebtedness. Working capital deficit at September 30, 2002 was ($5,184,303) and the current ratio was (.64) to 1, as compared to a working capital deficit of ($6,835,443) and a current ratio of (.63) to 1 for the Company at June 30, 2002. Prior to the expiration of the Company's revolving credit facility with Bank One on January 31, 2002, the Company was not in compliance with certain financial covenants and borrowing base limitations thereunder. The Company also is not in compliance with certain financial covenants under its term loan with Bank One. To date, Bank One has not demanded that the Company repay either the term loan or the revolving credit facility. The Company and Bank One have, however, engaged in discussions concerning terms of forbearance, the terms of retirement of the 11 revolving credit facility in the event of a refinancing with another bank lender and/or other lenders, and possible modification of the term loan, and Bank One has consented to the settlement with the former owner of Westland. While Bank One is under no legal obligation to continue to forbear in demanding payment of outstanding obligations, management does not believe that it would be in Bank One's interest to take any action in the immediate future that could jeopardize the Company's efforts to refinance the obligations. Since the expiration of the revolving credit facility with Bank One on January 31, 2002, the Company has been able to meet its working capital needs from cash generated from operations without borrowing additional funds under a line of credit In addition, since such time, the Company has sought to pay down its borrowings from Bank One when and as cash has become available from operations. If Bank One continues to forbear in demanding the immediate repayment of these obligations (as to which no assurance can be given), the Company believes that it can continue to operate in the immediate future as it has since January 31, 2002, when the revolving credit facility expired. The Company does not, however, have funds available to it from its operations or otherwise to repay the amounts due under the credit facilities. The Company has engaged two investment banking firms to separately advise it in connection with a possible revolving credit facility (senior secured bank facility) and mezzanine financing (secured subordinated notes). In respect of a new revolving credit facility, the Company has initiated discussions with one prospective bank lender that has conducted due diligence review of the Company and its operations and scheduled submission of a prospective loan proposal to its credit committee to provide a revolving credit facility providing for borrowing availability based upon eligible receivables and work-in-progress of up to $6,000,000 principal amount and a new $3.0 million letter of credit (to replace an existing letter of credit under the Bank One credit facility). The Company also intends to seek to obtain mezzanine debt of up to $7,000,000 on market terms, which may include offering warrants to purchase common stock at a nominal exercise price or convertibility features. Management is hopeful as to the ability of the Company to consummate suitable financing arrangements based upon factors including but not limited to (1) the apparent value of the tangible assets owned by the Company, (2) management's belief concerning the Company's current competitive position in its principal markets, (3) recent improvements the Company has made in its cost structure as is evident in cash flow and operating results prior to goodwill impairment costs for the fiscal year ending June 30, 2002 and fiscal quarter ending September 30, 2002, and (4) the ability of the Company to reduce indebtedness and to meet its expenses with cash generated from operations during the fiscal year ending June 30, 2002 and the quarter ended September 30, 2002. However, if various important factors, such as those described under "Forward Looking Statements" in this Item 2 cause the Company to be unable to meet its objectives of obtaining a new revolving credit facility with another lender or, alternatively, renewing the existing facility with Bank One, modifying its existing term loan with Bank One to provide for a more favorable amortization schedule and obtaining mezzanine debt, all on suitable terms and in a timely manner, then the Company's operations could be materially adversely affected. 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 general economic and business conditions, particularly in light of economic deterioration which has been exacerbated by the terrorist incidents of September 11, 2001, the threat of war with Iraq, and high profile accounting scandals which have raised questions as to the integrity of the stock markets , and in the automotive and other industries principally served by the Company, including continued flat or declining demand in the domestic and foreign markets for automobiles and automotive parts resulting in reduced demand for 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 renew or replace its credit facilities, as described under "Liquidity and Capital Resources" in this Item 2, due to the Company's inability to achieve adequate operating results or the continued tightening of the credit and capital markets. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 3 has been disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year ended June 30, 2002. There has been no material change in the disclosure regarding market risk. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 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, 2002, 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 AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Upon the expiration of the Company's revolving credit facility with Bank One on January 31, 2002, the Company was unable to repay the outstanding principal due thereunder. As of September 30, 2002, debt of $5,191,770 was outstanding under this revolving credit facility plus obligation for letters of credits issued thereunder (including in support of the $3,000,000 Industrial Revenue Bonds relating to Atlas' Copper Road facility), which amounts are in arrears. In addition, $2,260,000 is outstanding under the Company's term loan with Bank One, which amounts may be deemed to be in arrears by reason of the Company's failure to repay the amounts due under the revolving credit facility. The Company has engaged two investment banking firms to separately advise it in connection with a possible revolving credit facility (senior secured bank facility) and mezzanine financing (secured subordinated notes). In respect of a new revolving credit facility, the Company has initiated discussions with one prospective bank lender that has conducted due diligence review of the Company and its operations and scheduled submission of a prospective loan proposal to its credit committee to provide a revolving credit facility providing for borrowing availability based upon eligible receivables and work-in-progress of up to $6,000,000 principal amount and a new $3.0 million letter of credit (to replace an existing letter of credit under the Bank One credit facility). The Company also intends to seek to obtain mezzanine debt of up to $7,000,000 on market terms, which may include offering warrants to purchase common stock at a nominal exercise price or convertibility features. Although Bank One has continued to forbear in demanding the immediate repayment of these obligations, no assurance can be given that it will continue to do so. Nonetheless, while Bank One is under no legal obligation to continue to forbear in demanding payment of outstanding obligations, management does not believe that it would be in Bank One's interest to take any action in the immediate future that could jeopardize the Company's efforts to refinance the obligations. Management is hopeful as to the ability of the Company to consummate suitable financing arrangements for the reasons described under "Liquidity and Capital Resources" in Part I, Item 2 of this Report. 13 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 99.1 Certification of chief executive officer and chief financial officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. None. 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: November 18, 2002 By: /s/ Samuel N. Seidman ------------------------- Samuel N. Seidman Chairman, Chief Executive Officer and President Date: November 18, 2002 By: /s/ Jesse A. Levine ----------------------- Jesse A. Levine Vice President, Secretary, Treasurer and Chief Financial Officer CERTIFICATIONS I, Samuel N. Seidman, the Chairman, Chief Executive Officer and President of Productivities Technologies Corp., hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of Productivities Technologies Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 14 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 18, 2002 By: /s/ Samuel N. Seidman ------------------------- Samuel N. Seidman Chairman, Chief Executive Officer and President I, Jesse A. Levine, the Vice President, Secretary, Treasurer and Chief Financial Officer of Productivity Technologies Corp., do hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of Productivities Technologies Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 15 (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 18, 2002 By: /s/ Jesse A. Levine ----------------------- Jesse A. Levine Vice President, Secretary, Treasurer and Chief Financial Officer 16

December 31, 2001 June 30, 2001 ----------------------------------------- ------------------------------------ Gross Net Gross Net Carrying Accumulated Book Carrying Accumulated Book Amount Amortization Value Amount Amortization Value ---------- -------- -------- ---------- -------- -------- Patents $ 750,000 $ 85,636 $664,364 $ 750,000 $ 63,141 $686,859 Non-compete Agreements 348,750 176,667 172,083 348,750 158,792 189,958 IRB Closing Fees 138,785 48,314 90,471 138,785 43,687 95,098 ---------- -------- -------- ---------- -------- -------- Total $1,237,535 $310,617 $926,918 $1,237,535 $265,620 $971,915 ========== ======== ======== ========== ======== ========

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