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, 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 November 16, 2004: 2,747,500 shares of common stock.
1
Productivity Technologies Corp.
INDEX
Page
Number
PART I FINANCIAL INFORMATION..................................................3
Item 1. Financial Statements...................................................3
Consolidated Balance Sheets at September 30, 2004 (unaudited)
and June 30, 2004..............................................3
Consolidated Statements of Operations for the three months ended
September 30, 2004 and 2003 (unaudited)........................5
Consolidated Statement of Shareholders' Equity for the three months
ended September 30, 2004 (unaudited)...........................6
Consolidated Statements of Cash Flows for the three months ended
September 30, 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. Unregistered Sales of Equity Securities and Use of Proceeds...........12
Item 3. Defaults upon Senior Securities (not applicable)......................13
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)..13
Item 5. Other Information (not applicable)...................................13
Item 6. Exhibits ............................................................13
SIGNATURES....................................................................14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 June 30, 2004
(Unaudited)
Assets
Current Assets
Cash $ 1,103,224 $ 233,882
Short-term investments, including accrued interest 253,997 450,080
Contract receivables, net of allowance for doubtful accounts of
$377,663 and $377,663 4,402,166 4,479,656
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,078,680 3,759,498
Inventories 1,141,236 1,151,703
Prepaid expenses and other 293,620 268,005
Deferred income taxes 173,000 173,000
----------- -----------
Total current assets 9,445,923 10,515,824
----------- -----------
Property and equipment
Land $ 591,514 $ 591,514
Buildings and improvements 4,962,778 4,962,690
Machinery and equipment 4,235,886 4,235,503
Transportation equipment 34,079 21,000
----------- -----------
9,824,257 9,810,707
Less accumulated depreciation 4,394,818 4,241,399
----------- -----------
Net property and equipment 5,429,439 5,569,308
----------- -----------
Other assets
Goodwill 2,985,909 2,985,909
Patent, net 232,520 256,893
Deferred income taxes 722,000 722,000
Other assets 405,227 299,570
----------- -----------
Total other assets 4,345,656 4,264,372
----------- -----------
$19,221,018 $20,349,504
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 June 30, 2004
(Unaudited)
Liabilities and shareholders' equity
Current liabilities
Current portion of long-term debt $ 7,458,814 $ 7,305,936
Accounts payable 2,478,035 3,427,383
Accrued expenses
Commissions payable 290,729 251,648
Payroll and related withholdings - 85,665
Warranty Reserve 150,000 225,000
Interest 252,224 240,755
Other 186,185 271,199
Billings in excess of costs and estimated
earnings on uncompleted contracts 840,650 652,849
Total current liabilities $11,656,637 $12,460,435
Executive deferred compensation agreements, less current maturities 974,933 974,933
Long-term debt, less current maturities 3,558,325 3,613,326
----------- -----------
Total liabilities 16,189,895 17,048,694
----------- -----------
Shareholders' equity
Common stock, $.001 par value, 20,000,000 shares authorized;
2,747,500 shares and 2,475,000 issued and outstanding at
September 30, 2004 and June 30, 2004, respectively 2,748 2,475
Additional paid-in capital 10,075,135 9,966,408
Accumulated deficit (7,046,760) (6,668,073)
----------- -----------
Total shareholders' equity 3,031,123 3,300,810
=========== ===========
Total liabilities and shareholders' equity $19,221,018 $20,349,504
=========== ===========
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,
2004 2003
------------- -------------
Revenues Earned $5,335,878 $7,564,463
Cost of Revenues Earned 4,413,460 5,950,403
---------- ----------
Gross profit 922,418 1,614,060
Selling, general and administrative expenses 1,152,981 1,220,619
---------- ----------
Income (loss) from operations (230,563) 393,441
---------- ----------
Other income (expense)
Interest income 263 239
Interest expense (170,146) (171,749)
Miscellaneous 21,759 (4,294)
---------- ----------
Total other expenses (148,124) (175,804)
---------- ----------
Income (loss) before income taxes (378,687) 217,637
Income tax expense - 4,050
Net income (loss) ($378,687) $213,587
=========== ==========
Basic Earnings per share ($0.14) $0.09
=========== ==========
Diluted Earnings per share ($0.14) $0.08
=========== ==========
Weighted average number of
Common shares outstanding (basic) 2,747,500 2,475,000
Weighted average number of 2,747,500 2,629,000
Common share outstanding (diluted)
See accompanying notes to unaudited consolidated financial statements.
5
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
Additional Total
Common Stock Paid-In Accumulated Shareholders'
------------ Capital Deficit Equity
Shares Amount
Balance June 30, 2004 2,475,000 $ 2,475 $ 9,966,408 $ (6,668,073) $ 3,300,810
Net loss -- -- -- (378,687) (378,687)
Issuance of common stock 272,500 273 108,727 -- 109,000
Balance September 30, 2004 2,747,500 $ 2,748 $ 10,075,135 (7,046,760) $ 3,031,123
========= ======== ============ ============= ===========
See accompanying notes to unaudited consolidated financial statements.
6
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
September 30, September 30,
2004 2003
------------- -------------
Cash flows from operating activities
Net income/(loss) ($378,687) $ 213,587
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation 153,419 152,421
Amortization 43,835 24,373
Deferred income tax -
Changes in operating assets and liabilities:
Contract receivables 77,490 1,557,538
Inventories, prepaid expenses and other (31,267) (2,222,825)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net effect 1,868,619 (1,510,090)
Accounts payable, accrued expenses and other (1,144,477) 993,181
---------- ----------
Net cash provided /(used) in operating activities 588,932 (791,815)
---------- ----------
Cash flows from investing activities
Proceeds from sale of short-term investments - net 196,083 280,903
Expenditures for property and equipment (13,550) (20,659)
---------- ----------
Net cash provided by investing activities 182,533 260,244
---------- ----------
Cash flows from financing activities
Net borrowings/(payments) under revolving credit agreement 152,879 (181,161)
Payments on long term debt (100,002) (68,148)
Proceeds from long-term debt arrangement 45,000 --
Net cash provided by/(used) in financing activities 97,877 (254,309)
---------- ----------
Net increase/(decrease) in cash 869,342 (785,880)
Cash at the beginning of the period 233,882 1,163,187
---------- ----------
Cash at the end of the period $1,103,224 $ 377,307
========== ==========
Supplemental Cash Flow Information
Cash paid during the period for interest $ 158,677 $ 169,629
Schedule of Non-Cash Financing Activities
Securities issued for commitment fees $ 109,000 $ --
---------- ----------
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, shareholders' 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, 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. Atlas also established locations in 2004 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, packaging 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 September 30,
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-month periods ended
September 30, 2004 and 2003 would have been the pro forma amounts indicated
below:
September 30,
--------------------------------------------
2004 2003
--------------------- -------------------
Net earnings:
As reported $ (378,687) $ 213,587
Pro forma $ (378,687) $ 213,587
Net earnings per share:
As reported:
Basic $ (0.14) $ 0.09
Diluted $ (0.14) $ 0.08
Pro forma:
Basic $ (0.14) $ 0.09
Diluted $ (0.14) $ 0.08
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Unaudited revenues earned for the quarter ended September 30, 2004 were
$5,335,878, as compared to $7,564,463 for the quarter ended September 30, 2003,
a decrease of 30%. Unaudited revenues for Atlas were down by 36% and Westland by
6%, due to slower order activity. Management believes that order activity,
starting at the end of the first quarter and the beginning of the second fiscal
quarter, is showing signs of increasing again.
Gross profit for the quarter ended September 30, 2004 was $922,418, representing
a 43% decrease compared to the $1,614,060 gross profit for the quarter ended
September 30, 2003. The decrease in gross profits was principally due to the
lower volume and less profitable product mix. Margins compressed due to lower
volumes and revenues over which to spread fixed and variable costs during the
quarter. As noted above, the lower volumes were due to continued slow economic
activity in the capital goods industry.
Consolidated selling, general and administrative (SG&A) expenses were $1,152,981
or 6% lower than the quarter ended September 30, 2003 SG&A expenses of
$1,220,619. The reduction in SG&A expenses for the quarter ended September 30,
2004 was due to continued cost controls and cost reductions at both operating
subsidiaries, and as partially offset by a $50,000 payment for the final
resolution of a legal matter which related to the Company's September 2002
settlement with the former owner of Westland.
The net loss from operations for the quarter ended September 30, 2004 was
$230,563, compared to income from operations for the quarter ended September 30,
2003 of $393,441. This decrease for the quarter resulted from the lower volume
offset by lower SG&A expenses explained above.
Interest expense for the quarter ended September 30, 2004 at $170,146 was
approximately 1% lower as compared to $171,749 for the quarter ended September
30, 2003.
Net loss for the quarter ended September 30, 2004 was $378,687, compared to net
income of $213,587 for the quarter ended September 30, 2003. The reported net
loss for the quarter of ($0.14) per share (basic and diluted), based on
2,747,500 weighted average common shares outstanding (basic and diluted) during
the quarter. This compared to net income for the quarter ended September 30,
2003 of $0.09 cents per share (basic) and $0.08 cents per share (diluted), based
on 2,475,000 weighted average common shares outstanding (basic) and 2,629,000
weighted average common shares outstanding (diluted) during the quarter a year
ago.
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill as of September 30, 2004 is as follows:
September 30, 2004
--------------------------------------------
Gross Accumulated Net
Carrying Book
Amount Amortization Value
Patents $573,132 $340,612 $232,520
Non-compete Agreements 348,750 274,992 73,758
ML Closing Fees 154,603 35,045 119,558
-----------------------------------------------
Total $1,076,485 $650,649 $425,836
===============================================
10
Liquidity and Capital Resources
At September 30, 2004, the Company had approximately (1) $3.4 million
outstanding under a commercial mortgage loan for Atlas as part of the MLB Credit
Facility, (2) $0.4 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 million
originally scheduled to be paid over three equal annual installments during the
period from July 2000 through July 2002, (5) $0.8 million outstanding under the
Spectrum Credit Facility, (6) $2.2 million outstanding under the Westland Loan,
and (7) $300,000 outstanding in convertible subordinated debentures which mature
in June 2007. This total of $11.98 million of debt compares to a total combined
indebtedness approximating $11.9 million as of June 30, 2004.
Working capital deficit at September 30, 2004 was ($2,210,714) and the current
ratio was (.81) 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.
Assuming no adverse developments in the near term, management believes that it
has sufficient funds available to it under the various facilities and operations
to provide for it working capital needs in the near term.
Off Balance Sheet Arrangements
During the quarter ended September 30, 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 September 30, 2004, these amounted to $4.0 million in maximum
revolving commitments for Atlas which will be up for renewal in December 2004
and $1.25 million in maximum revolving commitments for Westland which will be up
for renewal in December 2005.
2005 2006 2007 2008 2009 There-after Total
--------- --------- --------- --------- ---------- ---------- ----------
Real estate term loan 233,342 233,333 233,333 233,333 233,333 2,236,105 3,402,780
Equipment term loan 166,667 166,667 97,222 -- -- -- 430,555
Revolver - Atlas 3,998,177 -- -- -- -- -- 3,998,177
Revolver - Westland 695,167 695,167
Subordinated term loan 2,212,583 -- -- -- -- -- 2,212,583
Debentures -- -- -- 300,000 -- -- 300,000
--------- --------- --------- --------- ---------- ---------- ----------
Total debt 7,305,936 400,000 330,555 533,333 233,333 2,236,105 11,039,262
Building lease 214,867 214,867 429,734
--------- --------- --------- --------- ---------- ---------- ----------
Total 7,520,803 614,867 330,555 533,333 233,333 2,236,105 11,468,996
========= ========= ========= ========= ========== ========== ===========
Impact of Recently Issued Accounting Standards
In March 2004, the 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.
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
11
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 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, 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, 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 (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 high
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.
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. The company recorded a $50,000 payment for the final resolution of
a legal matter which related to the Company's September 2002 settlement with the
former owner of Westland.
Item 2. UNREGISTERED SALES OF equity securities AND USE OF PROCEEDS.
12
Recent Sales of Unregistered Securities
In June 2004, Cornell Capital Partners ("Cornell Capital") entered into a
securities purchase agreement with the Company under which Cornell Capital
agreed to purchase $300,000 face amount of the Company's convertible debentures.
Cornell Capital purchased $200,000 face amount of convertible debentures in June
2004. Cornell Capital subsequently purchased $50,000 face amount of convertible
debentures in July 2004 and $50,000 of face amount of convertible debentures in
September 2004. In each case, the purchase price of the debentures was 90% of
their face amount, so that Cornell Capital paid $270,000 in the aggregate for
$300,000 face amount of the Company's convertible debentures.
The debentures are convertible at the holder's option any time up to maturity at
a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the average
of the three lowest closing bid prices of the common stock for the thirty
trading days immediately preceding the conversion date. The debentures are
secured by a second mortgage on real property owned by the Company's Atlas
subsidiary. The debentures have a three-year term and accrue interest at 5% per
year. Interest accrues and must be paid at or prior to maturity. At maturity,
the Company has the option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures into shares of common
stock at a conversion price equal to the lower of (i) $0.48 or (ii) 100% of the
average of the three lowest closing bid prices of the common stock for the
thirty trading days immediately preceding the conversion date. No principal
payments are due prior to maturity.
The Company can redeem the debentures by paying Cornell Capital Partners 120% of
the face amount of the debentures to be redeemed and by issuing warrants to
Cornell Capital Partners to purchase 50,000 shares of the Company's common stock
for every $100,000 of debentures redeemed.
In connection with Cornell Capital's investment in the convertible debentures,
in July 2004, the Company issued to Cornell 247,500 shares of the Company's
common stock as a commitment fee, valued at $0.40 per share. The Company issued
to Newbridge Security Corporation ("Newbridge") an additional 25,000 shares of
its common stock as a placement agent fee. These shares were valued at $0.40 per
share, or $109,000 in the aggregate. Cornell Capital and Newbridge received the
shares of common stock from the Company in a private placement in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act of 1933.
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.
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.
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: November 16, 2004 By: /s/ Samuel N. Seidman
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Samuel N. Seidman
Chairman, Chief Executive Officer
and President
Date: November 16, 2004 By: /s/ Jesse A. Levine
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Jesse A. Levine
Vice President, Secretary, Treasurer
and Chief Financial Officer