As filed with the Securities and Exchange Commission on December 28, 2004
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Delaware Productivity Technologies Corp. 13-3764753
(State or Other Jurisdiction of (Name of Registrant in Our (I.R.S. Employer Identification No.)
Incorporation Charter)
or Organization)
Samuel N. Seidman
3100 Copper Avenue 3100 Copper Avenue
Fenton, Michigan 48430 Fenton, Michigan 48430
(248) 645-9700 5084 (248) 645-9700
(Address and telephone number of Principal (Primary Standard Industrial (Name, address and telephone number
Executive Offices and Principal Place of Classification Code Number) of agent for service)
Business)
Copies to:
Clayton E. Parker, Esq. Harris C. Siskind, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305)539-3300 Telephone: (305)539-3300
Telecopier: (305)358-7095 Telecopier: (305)358-7095
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee(3)
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Common Stock, par value $0.001 per share 8,173,600 shares (2) $0.68 $5,558,048 $704.20
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TOTAL 8,173,600 shares (2) $0.68 $5,558,048 $704.20
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked prices
as of December 27, 2004.
(2) Of these shares, 4,151,100 are being registered under the Standby Equity
Distribution Agreement, 3,750,000 are being registered under the
convertible debentures, and 247,500 shares issued as fees under the
now-terminated Standby Equity Distribution Agreement.
(3) $670.39 of this fee was previously paid on July 23, 2004.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
Subject to completion, dated December 28, 2004
Productivity Technologies CORP.
8,173,600 shares of Common Stock
This prospectus relates to the sale of up to 8,173,600 shares of
Productivity Technologies Corp. ("Productivity Technologies" or the "Company")
common stock by certain persons who are stockholders of Productivity
Technologies including Cornell Capital Partners, L.P. ("Cornell Capital
Partners"). Please refer to "Selling Stockholders" beginning on page 12.
Productivity Technologies is not selling any shares of common stock in this
offering and therefore will not receive any proceeds from this offering.
Productivity Technologies will, however, receive proceeds from the sale of
common stock under the Standby Equity Distribution Agreement ("Standby Equity
Distribution Agreement"), which was entered into between Productivity
Technologies and Cornell Capital Partners, and no other stockholders. All costs
associated with this registration will be borne by Productivity Technologies.
Productivity Technologies has agreed to allow Cornell Capital Partners to retain
5% of the proceeds raised under the Standby Equity Distribution Agreement that
is more fully described below.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Pink Sheets or the Over-the-Counter
Bulletin Board during the term of this offering. On December 27, 2004, the last
reported sale price of our common stock was $0.80 per share. Our common stock is
quoted on the Over-the-Counter Bulletin Board under the symbol "PRAC." These
prices will fluctuate based on the demand for the shares of common stock.
The selling stockholders consists of Cornell Capital Partners, who intends
to sell up to 8,148,600 shares of common stock, 4,151,100 of which are under the
Standby Equity Distribution Agreement, 3,750,000 are under convertible
debentures and 247,500 shares of common stock received from Productivity
Technologies on July 13, 2004 as a fee under a now-terminated Standby Equity
Distribution Agreement equaling approximately $99,000, and Newbridge Securities
Corporation, who intends to sell up to 25,000 shares of common stock. Upon
issuance, the 4,151,100 shares of common stock under a now-terminated Standby
Equity Distribution Agreement would equal 60.17% of Productivity Technologies'
then-outstanding common stock.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay
Productivity Technologies 99% of, or a 1% discount to, the lowest volume
weighted average price of the common stock during the five consecutive trading
day period immediately following the notice date. In addition, Cornell Capital
Partners will retain 5% of each advance under the Standby Equity Distribution
Agreement. Cornell Capital Partners also received a one-time commitment fee
under a now-terminated Standby Equity Distribution Agreement in the form of
247,500 shares of common stock in the amount of $99,000 on July 13, 2004. The 1%
discount, the 5% retainage fee, and the $99,000 in compensation shares and the
247,500 shares previously issued are underwriting discounts payable to Cornell
Capital Partners.
Productivity Technologies has engaged Newbridge Securities Corporation, an
unaffiliated registered broker-dealer, to advise it in connection with the
Standby Equity Distribution Agreement. Newbridge Securities Corporation was paid
a fee of 25,000 shares of Productivity Technologies' common stock on July 13,
2004, equal to approximately $10,000 based on Productivity Technologies' stock
price on June 21, 2004, under a now-terminated Standby Equity Distribution
Agreement.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 7.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate twenty-four months
after the accompanying registration statement is declared effective by the
Securities and Exchange Commission. None of the proceeds from the sale of stock
by the selling stockholders will be placed in escrow, trust or any similar
account.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to buy these securities in any state where the offer
or sale is not permitted.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________ __, 2004.
2
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
SUMMARY FINANCIAL DATA.........................................................4
SUPPLEMENTARY FINANCIAL INFORMATION............................................5
CAPITALIZATION.................................................................6
RISK FACTORS...................................................................7
FORWARD-LOOKING STATEMENTS....................................................12
SELLING STOCKHOLDERS..........................................................13
USE OF PROCEEDS...............................................................15
DILUTION......................................................................16
STANDBY EQUITY DISTRIBUTION AGREEMENT.........................................17
PLAN OF DISTRIBUTION..........................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................21
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..............................................28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................29
DESCRIPTION OF BUSINESS.......................................................30
MANAGEMENT....................................................................35
PRINCIPAL STOCKHOLDERS........................................................40
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS...........................41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................43
DESCRIPTION OF CAPITAL STOCK..................................................44
EXPERTS.......................................................................46
VALIDITY OF SECURITIES........................................................46
INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS...........................46
HOW TO GET MORE INFORMATION...................................................46
PART II ...................................................................II-1
EXHIBIT 23.2..............................................................23.2-1
EXHIBIT 23.3..............................................................23.3-1
FINANCIAL STATEMENTS.........................................................F-1
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i
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements
and the notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision.
Our Company
The Company operates in a single segment through its Atlas Technologies,
Inc. and Westland Control Systems, Inc. subsidiaries. Atlas is a leading
innovator and supplier of quick die change, flexible transfer, and
stacking/destacking equipment used to automate metal stamping operations. Atlas
operates two manufacturing plants in Fenton, Michigan and has sales and
engineering offices in Michigan, Europe and China. Atlas also established
locations in late 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, 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.
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 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, 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. 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.
About Us
Our principal executive offices are located at 3100 Cooper Avenue, Fenton,
Michigan 48430. Our telephone number is (810) 714-0200.
1
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are the selling stockholders consists of Cornell Capital Partners, who intends
to sell up to 8,148,600 shares of common stock, 4,151,100 of which are under the
Standby Equity Distribution Agreement, 3,750,000 are under convertible
debentures and 247,500 shares of common stock received from Productivity
Technologies on July 13, 2004, as a fee under a now-terminated Standby Equity
Distribution Agreement equaling approximately $99,000, and Newbridge Securities
Corporation, who intends to sell up to 25,000 shares of common stock.
The commitment amount of the Standby Equity Distribution Agreement is $3
million, and at an assumed price of $0.7227 per share, Productivity Technologies
would be able to receive the entire gross proceeds of $3 million using all of
the 4,151,100 shares being registered in this registration statement.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
common stock for a total purchase price of $3 million. Whether we choose to
issue and sell stock is entirely at our discretion. We may choose to not sell
any shares hereunder, or we could decide to sell a small portion of shares or a
large amount of shares. The amount of each advance is subject to a maximum
advance amount of $200,000, and we may not submit any advance within seven
trading days of a prior advance. Cornell Capital Partners will pay Productivity
Technologies 99% of, or a 1% discount to, the lowest volume weighted average
price of the common stock during the five consecutive trading day period
immediately following the notice date. Of each advance made by Productivity
Technologies, Cornell Capital Partners shall retain 5% of each advance. In
addition, Cornell Capital Partners received a one-time commitment fee in the
form of 247,500 shares of Productivity Technologies' common stock in the amount
of $99,000 on July 13, 2004, under a now-terminated Standby Equity Distribution
Agreement. Cornell Capital Partners intends to sell any shares purchased under
the Standby Equity Distribution Agreement at the then prevailing market price.
Among other things, this prospectus relates to the shares of common stock to be
issued under the Standby Equity Distribution Agreement. There are substantial
risks to investors as a result of the issuance of shares of common stock under
the Standby Equity Distribution Agreement. These risks include dilution of
shareholders, significant decline in the Company's stock price and the inability
of the Company to draw sufficient funds when needed.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent price of $0.4356 per share and 25%, 50% and 75% discounts to the recent
price.
Purchase Price: $0.7227 $0.5420 $0.3614 $0.1807
No. of Shares(1): 4,151,100 4,151,100 4,151,100 4,151,100
Total Outstanding (2): 6,898,600 6,898,600 6,898,600 6,898,600
Percent Outstanding (3): 60.17% 60.17% 60.17% 60.17%
Net Cash to Productivity Technologies:(4) $2,765,000 $2,052,500 $1,340,000 $627,500
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the Standby Equity Distribution Agreement at
the prices set forth in the table, assuming sufficient authorized shares
are available.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners, L.P. under the Standby
Equity Distribution Agreement, not including shares issued under the
convertible debentures.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals gross proceeds minus the 5% retainage and minus an
assumption of $85,000 in expenses.
We have engaged Newbridge Securities Corporation, a registered
broker-dealer, to advise us in connection with the Standby Equity Distribution
Agreement. Newbridge Securities Corporation was previously paid a fee of 25,000
shares of Productivity Technologies' common stock on July 13, 2004, equal to
approximately $10,000 based on Productivity Technologies' stock price on the
effective date of the now-terminated Standby Equity Distribution Agreement.
Newbridge Securities Corporation is not participating as an underwriter in this
offering.
In June 2004, Cornell Capital Partners entered into a securities purchase
agreement with Productivity Technologies under which Cornell Capital Partners
agreed to purchase the total amount of $300,000 of convertible debentures.
Cornell Capital purchased $200,000 of convertible debentures on June 21, 2004,
purchased $50,000 of convertible debentures on approximately June 30, 2004, upon
a Form 211 being filed with the National Association of Securities Dealers
relating to
2
Productivity Technologies, and purchased an additional $50,000 upon the filing
of a now-withdrawn registration statement. 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) 80% 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 Atlas. 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, Productivity Technologies 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) 80% 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. Cornell
Capital Partners is entitled to a 10% discount from the purchase price of the
convertible debentures and, therefore, the net proceeds received by the Company
is 10% less than the face amount of the convertible debentures. Productivity
Technologies can redeem the debentures by paying Cornell Capital Partners 120%
of the amount redeemed and by issuing warrants to Cornell Capital Partners to
purchase 50,000 shares of Productivity Technologies' common stock for every
$100,000 of debentures redeemed. Cornell Capital Partners purchased the
convertible debentures from Productivity Technologies in a private placement.
Common Stock Offered 8,173,600 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering(1) 2,747,500 shares as of December 27, 2004
Use of Proceeds We will not receive any proceeds of the shares offered by
the selling stockholders. Any proceeds we receive from the
sale of common stock under the Standby Equity Distribution
Agreement and the sale of additional convertible debentures
will be used for general working capital purposes. See "Use
of Proceeds."
Risk Factors The securities offered hereby involve a high degree of risk
and immediate substantial dilution. See "Risk Factors" and
"Dilution."
Pink Sheet Symbol PRAC
______________
1 Excludes $300,000 of debentures convertible into 625,000 shares of common
stock (assuming a conversion price equal of $0.48), up to 4,151,100 shares
of common stock to be issued under the Standby Equity Distribution
Agreement and 459,000 options outstanding.
3
SUMMARY FINANCIAL DATA
The following selected financial data have been derived from the Company's
and its predecessor's consolidated financial statements which have been audited
by Doeren Mayhew as of and for the year ended June 30, 2002; and by Follmer
Rudzewicz PLC as of and for the years ended June 30, 2003 and 2004. The
financial data as of and for the three months ended September 30, 2004 is
derived from our unaudited consolidated financials included elsewhere in this
prospectus. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Prospectus and the Consolidated Financial Statements and notes thereto
included in this Prospectus.
(Dollars in thousands, except per share data)
----------------------------------------------------------
For the Three
Months Ended
September 30,
Consolidated Statement of Operations Data 2004 2004 2003 2002
- -------------------------------------------------- ------------- ----------- ----------- ----------
Revenues earned $ 5,336 $ 28,155 $ 29,051 $ 24,768
Cost of revenues earned 4,413 21,537 22,197 18,261
Gross profit 922 6,618 6,853 6,507
Selling, general and administrative 1,153 5,497 6,004 6,453
Impairment of intangible assets -- -- -- 2,087
Income (loss) from operations (231) 1,121 849 (2,033)
Net income (loss) (379) 721 361 (4,128)
Net income (loss) per share of common stock (diluted) ($0.14) $0.26 $0.15 ($1.67)
Weighted average common shares (diluted) 2,748 2,731 2,475 2,475
September 30,
Consolidated Balance Sheet Data 2004 2004 2003 2002
- -------------------------------------------------- ------------- ----------- ----------- ----------
Current assets $ 9,446 $ 10,516 $ 10,521 $ 11,639
Current liabilities 11,657 12,460 16,388 18,474
Working capital (2,211) (1,944) (5,867) (6,835)
Property, plant and equipment, net 5,429 5,569 6,159 6,711
Total assets 19,221 20,350 20,703 24,494
Long-term debt, less current maturities 3,558 3,613 1,735 3,800
Total liabilities 16,190 17,049 18,123 22,274
Stockholders' equity 3,031 3,301 2,580 2,220
4
SUPPLEMENTARY FINANCIAL INFORMATION
The following tables present Productivity Technologies Corp. and
Subsidiaries condensed operating results for each of the eight fiscal quarters
for the period ended September 30, 2004. The information for each of these
quarters is unaudited. In the opinion of management, all necessary adjustments,
which consist only of normal and recurring accruals, have been included to
fairly present the unaudited quarterly results. This data should be read
together with Productivity Technologies Corp. and Subsidiaries consolidated
financial statements and the notes thereto, the Independent Auditors Report and
Management's Discussions and Analysis of Financial Condition and Results of
Operations.
THREE MONTHS ENDED (IN THOUSANDS)
------------------------------------------------------------------------------------------------
SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31,
2004 2004 2004 2003 2003 2003 2003 2002
-------- -------- --------- --------- -------- -------- -------- --------
Revenues $ 5,336 $ 7,113 $ 5,639 $ 7,839 $ 7,564 $ 8,034 $ 6,663 $ 7,617
Cost of revenues 4,413 4,815 4,281 6,491 5,950 6,179 4,955 5,900
Net income (loss) (379) 500 (16) 23 214 194 107 153
Net income (loss) per
share:
Basic (0.14) 0.20 (0.01) 0.01 0.09 0.08 0.04 0.06
Diluted (0.14) 0.17 (0.01) 0.01 0.08 0.08 0.04 0.06
Shares used in
computing per share
amounts:
Basic 2,748 2,475 2,475 2,745 2,475 2,475 2,475 2,475
Diluted 2,748 2,731 2,475 2,629 2,629 2,475 2,475 2,475
5
CAPITALIZATION
The following table sets forth as of September 30, 2004, Productivity
Technologies' actual capitalization and pro forma capitalization after giving
effect to the issuance of 4,151,100 shares of common stock under the Standby
Equity Distribution Agreement and 625,000 shares upon conversion of $300,000 of
convertible debentures at an assumed conversion price of $0.48 less the 10%
discount. This information assumes a purchase price under the Standby Equity
Distribution Agreement of $0.7227 per share resulting in gross proceeds of
$3,000,000; less estimated offering expenses of $85,000 and a retention of
$150,000, for net proceeds of $2,765,000. This table should be read in
conjunction with the information contained in "Management's Discussion and
Analysis or Plan of Operation" and the consolidated financial statements and the
notes thereto included elsewhere in this prospectus.
September 30, 2004
----------------------------
Actual Proforma
--------- ---------
Long-term debt, net of current portion 3,558,325 3,258,325
----------- ----------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 authorized,
2,747,500 shares issued and outstanding as of September 30,
2004(1) 2,748 7,524
Additional paid-in capital: 10,075,135 13,105,359
Accumulated deficit (7,046,760) (7,046,760)
----------- ----------
Total stockholders' equity 3,031,123 6,066,123
----------- ----------
(1) Total pro forma shares outstanding equal 7,523,500, which include 4,151,100
shares of common stock to be issued under the Standby Equity Distribution
Agreement, 625,000 shares of common stock underlying certain outstanding
convertible debentures.
6
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
Risks Related To Our Business
We Lost Money In Our Last Fiscal Quarter And Losses May Continue In The Future
We lost money for the three months ended September 30, 2004. We have
incurred other operating losses since inception and had an accumulated deficit
of ($7,046,760) as of September 30, 2004. Losses may continue in the future.
Accordingly, we may experience significant liquidity and cash flow problems. No
assures can be given that we will be successful in maintaining profitable
operations.
We Have A Working Capital Deficit, Which Means That Our Current Assets On
September 30, 2004 Were Not Sufficient To Satisfy Our Current Liabilities On
That Date
We had a working capital deficit of $2,210,714 at September 30, 2004, which
means that our current liabilities exceeded our current assets on September 30,
2004 by that amount. Current assets are assets that are expected to be converted
into cash within one year and, therefore, may be used to pay current liabilities
as they become due. Our working capital deficit means that our current assets on
September 30, 2004 were not sufficient to satisfy all of our current liabilities
on that date.
Our Success Is Highly Dependant Upon Our Ability To Protect Our Trademarks And
Proprietary Rights
To succeed, we will need to protect our intellectual property rights. We
own 13 patents and 11 foreign patents and we have filed 29 foreign patent
applications to protect our intellectual property rights. Monitoring for
unauthorized use of our intellectual property is difficult, and we cannot be
certain that the steps we have taken will be effective to prevent unauthorized
use. We may have to litigate to enforce our patents, trademarks and trade
secrets. Such lawsuits, regardless of their merits, would likely be time
consuming and expensive and would divert managements' time and attention away
from our business.
We Could Fail To Attract Or Retain Key Personnel
Our success largely depends on the efforts and abilities of our key
executives, including Samuel N. Seidman, our President. The loss of the services
of Mr. Seidman could materially harm our business because of the cost and time
necessary to recruit and train a replacement. Such a loss would also divert
management attention away from operational issues. We do not presently maintain
a key-man life insurance policy on Mr. Seidman.
Our Obligations Under The Convertible Debentures Are Secured By A Second
Mortgage On Our Real Property, Which Could Result In Foreclosure
Our obligations under the convertible debentures issued to Cornell Capital
are secured by a second mortgage on our real property. As a result, if we
default under the terms of the convertible debentures, Cornell Capital could
foreclose its mortgage and the sale of its interest in our real property, which
could be disruptive or distracting to our management, and could severe hardship
on our operations.
Risks Related To Our Industry
Productivity Technologies Operates In An Industry Which Is Highly Competitive,
Has In Recent Years Suffered From Overcapacity And Has Experienced Numerous
Business Failures
Productivity Technologies operates in an industry which is highly
competitive and has suffered from overcapacity in recent years. A number of
competitors have become insolvent, filed for bankruptcy protection or ceased or
significantly
7
reduced operations in recent years. While management of Productivity
Technologies believes that such industry shakeout may ultimately benefit the
remaining companies operating in the sector, including the Company, no assurance
can be given that this overcapacity does not continue to exist or that
Productivity Technologies will not itself face the difficult choices many of its
competitors have faced in recent years. If any customer becomes dissatisfied
with Productivity Technologies' prices, quality or timeliness of performance, it
could award future business to a competitor. There can also be no assurance that
Productivity Technologies' products will continue to compete successfully with
the products of competitors, many of which are significantly larger and have
greater financial and other resources than the Company.
The Markets Served By Productivity Technologies Are Highly Cyclical
The markets served by Productivity Technologies are highly cyclical and, in
large part, impacted by the strength of the economy generally, by prevailing
interest rates and by other factors that may have an effect on the level of
sales of automotive and other vehicles, appliances, and other durable goods.
Downturns in segments of durable goods could materially affect the revenues,
profitability and cash flow of companies providing support to these industries,
including Productivity Technologies, and there can be no assurance that one or
all such industries will not experience similar downturns in the future. An
economic recession may impact substantially leveraged companies, such as
Productivity Technologies, more than similarly situated companies with less
leverage. A cyclical decline in overall demand in any of the markets served by
the Company could have a material adverse effect on Productivity Technologies'
financial condition, results of operations and debt service capability.
Risks Associated With International Operations
Productivity Technologies operates sales and service facilities in Brazil,
China, Germany, the United Kingdom, and is developing sub-manufacturing
capabilities in Brazil, China and Germany. In fiscal 2004, sales of its products
in foreign countries accounted for approximately 21% of Productivity
Technologies' net sales. As a result, Productivity Technologies is subject to
risks associated with operations in foreign countries, including fluctuations in
currency exchange rates, imposition of limitations on conversion of foreign
currencies into dollars or remittance of dividends and other payments by foreign
subsidiaries, imposition or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries, hyperinflation in
certain foreign countries and imposition or increase of investment, subjection
to certain foreign labor laws and other restrictions by foreign governments.
Fluctuations in currency exchange rates have had an impact on Productivity
Technologies' operations in the past. No assurance can be given that the risks
associated with operating in foreign countries will not have a material adverse
effect on the Company in the future.
Dependence Specialty Materials; Reliance On Limited Sources Of Supply
Important principal raw material inputs used by Productivity Technologies'
operating subsidiaries are certain specifications of steels, electronics,
specialty items and other materials. In some cases, the Company relies on
limited sources for its supply of such materials. The loss of any such source,
or any major disruption in such source's business or failure by it to meet
Productivity Technologies' needs on a timely basis could cause shortages in the
Company's supply of these specialty items that could have a material adverse
effect on the Company's business and financial condition.
Certain specialty material industries are highly cyclical in nature and are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, cyclical movements in foreign domain, labor costs,
competition, import duties, tariffs and currency exchange rates.
In addition, if the Company is unable to pass some or all of future steel
price or specialty material increases to its customers, we could be materially
and adversely affected.
Productivity Technologies' Operations Are Subject To Various Environmental
Regulations
Productivity Technologies' operations, as well as those of other companies
in our industry, are subject to various federal, state and local environmental
laws, ordinances and regulations, including those governing discharges into the
air and water, the storage, handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by petroleum products or
hazardous substances or wastes and the health and safety of employees. These
regulations may expose Productivity Technologies to the risk of liabilities or
claims with respect to environmental and related worker health and safety
matters. Compliance with environmental laws, stricter interpretations of or
amendments to such laws or more vigorous enforcement policies by regulatory
agencies may require material expenditures by the Company. In addition, under
certain environmental laws a current or previous owner or operator of property
may be liable for the costs of removal or remediation of certain hazardous
substances or petroleum products on, under or in such property, without regard
8
to whether the owner or operator knew of, or caused, the presence of the
contaminants, and regardless of whether the practices that resulted in the
contamination were legal at the time they occurred. The presence of, or failure
to remediate properly, such substances may adversely affect the ability to sell
or rent such property or to borrow using such property as collateral. The
Company's Atlas owned facilities have been in operation for many years. Persons
who generate, arrange for the disposal or treatment of, or dispose of hazardous
substances may be liable for the costs of investigation, remediation or removal
of such hazardous substances at or from the disposal or treatment facility,
regardless of whether the facility is owned or operated by such person. Finally,
the owner of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
Risks Related To This Offering
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 2,747,500 shares of common stock outstanding as of December 27, 2004,
approximately 1.9 million shares are, or will be, freely tradable without
restriction, unless held by our "affiliates." The remaining shares of common
stock, which will be held by existing stockholders, including the officers and
directors, are "restricted securities" and may be resold in the public market
only if registered or pursuant to an exemption from registration. Some of these
shares may be resold under Rule 144. In addition, we have issued, or will issue,
debentures convertible into 625,000 shares of common stock (assuming a
conversion price equal to $0.48).
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement
The sale of shares pursuant to the Standby Equity Distribution Agreement
will have a dilutive impact on our stockholders. For example, if the offering
occurred on September 30, 2004 at an assumed offering price of $0.7227 per share
(99% of a closing bid price of $0.73 per share), the new stockholders would
experience an immediate dilution in the net tangible book value of $0.5124 per
share. Dilution per share at prices of $0.5420, $0.3614 and $0.1807 per share
would be $0.4351, $0.3577 and $0.2803, respectively.
As a result, our net income per share could decrease in future periods, and
the market price of our common stock could decline. In addition, the lower our
stock price, the more shares of common stock we will have to issue under the
Standby Equity Distribution Agreement to draw down the full amount. If our stock
price is lower, then our existing stockholders would experience greater
dilution.
Under The Standby Equity Distribution Agreement Cornell Capital Partners Will
Pay Less Than The Then-Prevailing Market Price Of Our Common Stock
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 1% discount to the lowest closing bid price for
the five days immediately following the notice date of an advance. In addition,
Cornell Capital Partners will retain 5% from each advance. Based on this
discount, Cornell Capital Partners will have an incentive to sell immediately to
realize the gain on the 1% discount. These discounted sales could cause the
price of our common stock to decline, based on increased selling of Productivity
Technologies' common stock.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market 8,173,600
shares of common stock being registered in this offering. That means that up to
8,173,600 shares may be sold pursuant to this registration statement. Such sales
may cause our stock price to decline. The officers and directors of Productivity
Technologies and those shareholders who are significant shareholders as defined
by the SEC will continue to be subject to the provisions of various insider
trading and rule 144 regulations.
9
The Sale Of Our Stock Under Our Standby Equity Distribution Agreement Could
Encourage Short Sales By Third Parties, Which Could Contribute To The Future
Decline Of Our Stock Price
In many circumstances the provision of a Standby Equity Distribution
Agreement for companies that are traded on the Pink Sheets has the potential to
cause a significant downward pressure on the price of common stock. This is
especially the case if the shares being placed into the market exceed the
market's ability to take up the increased stock or if Productivity Technologies
has not performed in such a manner to show that the equity funds raised will be
used to grow Productivity Technologies. Such an event could place further
downward pressure on the price of common stock. Under the terms of our Standby
Equity Distribution Agreement, Productivity Technologies may request numerous
draw downs pursuant to the terms of the Standby Equity Distribution Agreement.
Even if Productivity Technologies uses the Standby Equity Distribution Agreement
to grow its revenues and profits or invest in assets which are materially
beneficial to Productivity Technologies the opportunity exists for short sellers
and others to contribute to the future decline of Productivity Technologies'
stock price. If there are significant short sales of stock, the price decline
that would result from this activity will cause the share price to decline more
so which in turn may cause long holders of the stock to sell their shares
thereby contributing to sales of stock in the market. If there is an imbalance
on the sell side of the market for the stock the price will decline.
It is not possible to predict if the circumstances where by short sales
could materialize or to what the share price could drop. In some companies that
have been subjected to short sales the stock price has dropped to near zero.
This could happen to Productivity Technologies.
The Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This Offering
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Pink Sheets. Accordingly, the price you pay in
this offering may be higher or lower than the prices paid by other people
participating in this offering.
We May Not Be Able To Access Sufficient Funds Under The Standby Equity
Distribution Agreement When Needed
We are to some extent dependent on external financing to fund our
operations. Our financing needs are expected to be partially provided from the
Standby Equity Distribution Agreement and the additional debentures to be
purchased by Cornell Capital Partners. No assurances can be given that such
financing will be available in sufficient amounts or at all when needed, in
part, because we are limited to a maximum draw down of $200,000 during any seven
trading day period. In addition, the number of shares being registered may not
be sufficient to draw all funds available to us under the Standby Equity
Distribution Agreement. Based on the assumed offering price of $0.7227 and the
4,151,100 shares we have registered, we would be able to draw the entire
$3,000,000 under the Standby Equity Distribution Agreement. However, if the
average price Cornell Capital Partners pays for shares of Productivity
Technologies common stock under the Standby Equity Distribution Agreement is
lower than the assumed offering price of $0.7227, it will limit the total amount
available under the Standby Equity Distribution Agreement. For example, if the
average price is $0.5420, Productivity Technologies would only be able to draw
the net amount of $2,052,500 with the 4,151,100 shares being registered under
the Standby Equity Distribution Agreement. If the average price is $0.3614, we
would need to register 4,151,100 additional shares of our common stock to fully
utilize the funds available under the Standby Equity Distribution Agreement. We
may not have sufficient remaining authorized shares of common stock to register
those additional shares and therefore, under Delaware law, we may need to obtain
shareholder approval to increase our authorized shares.
We May Not Be Able To Draw Down Under The Standby Equity Distribution Agreement
If The Investor Holds More Than 9.9% Of Our Common Stock
In the event Cornell Capital holds more than 9.9% of the then-outstanding
common stock of Productivity Technologies, we will be unable to draw down on the
Standby Equity Distribution Agreement. Currently, Cornell Capital has beneficial
ownership of 9.01% of our common stock and therefore we would be able to draw
down on the Standby Equity Distribution Agreement so long as Cornell Capital's
beneficial ownership remains below 9.9%. If Cornell Capital Partner's beneficial
ownership increases to 9.9%, we would be unable to draw down on the Standby
Equity Distribution Agreement. A possibility exists that Cornell Capital
Partners may own more than 9.9% of Productivity Technologies' outstanding common
stock at a time when we would otherwise plan to make an advance under the
Standby Equity Distribution Agreement.
10
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
o (Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
11
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
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 the recent economic malaise 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 volatile demand in the domestic and
foreign markets for automobiles and automotive parts 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 the continued volatility of credit and capital markets
which could affect the Company's credit and financing arrangements in the
future.
These statements may be found under "Management's Discussion and Analysis
or Plan of Operations" and "Description of Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
12
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The selling shareholders are the entities who have assisted in or
provided financing to Productivity Technologies. A description of each selling
shareholder's relationship to Productivity Technologies and how each selling
shareholder acquired the shares to be sold in this offering is detailed in the
information immediately following this table.
Percentage
of
Percentage Outstanding
of Shares to be Shares to Be
Outstanding Acquired Acquired Percentage
Shares Shares under the under the of Shares
Beneficially Beneficially Standby Standby Beneficially
Owned Owned Equity Equity Shares to be Owner
Before Before Distribution Distribution Sold in the After
Selling Stockholder Offering Offering (1) Agreement Agreement Offering Offering (1)
- ----------------------- ------------ ------------ ------------ ------------ ------------ -------------
Shares Acquired in Financing Transactions with Productivity Technologies
Cornell Capital
Partners, L.P. 247,500(2) 9.01% 4,151,100 60.17% 8,148,600(3) 0%
Consultants and Others
Newbridge Securities
Corporation 25,000 * -- --% 25,000 0%
------------ ------------ ------------- ------------ ------------ -------------
Total 262,500 9.92% 4,151,100 60.17% 8,173,600 0%
============ ============ ============= ============= ============== =============
_________________________________________
* Less than 1%.
(1) Applicable percentage of ownership is based on 2,747,500 shares of
common stock outstanding as of December __, 2004, together with
securities exercisable or convertible into shares of common stock
within 60 days of December 27, 2004, for each stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that
are currently exercisable or exercisable within 60 days of December
27, 2004 are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(2) Represents shares of common stock received by Cornell Capital Partners
as a fee under the Standby Equity Distribution Agreement. Based on the
4.99% beneficial ownership conversion limitation contained in the
debentures, shares underlying conversion of the $250,000 of
convertible debentures issued to Cornell Capital Partners have not
been included.
(3) Includes the shares acquired by Cornell Capital Partners under the
Standby Equity Distribution Agreement, the 247,500 shares of common
stock received as commitment fees under the Standby Equity
Distribution Agreement and a good faith estimate of the number of
shares needed as a result of conversion of a total of $300,000 of the
convertible debentures. The following information contains a
description of each selling shareholder's relationship to Productivity
Technologies and how each selling shareholder acquired the shares to
be sold in this offering is detailed below. None of the selling
stockholders have held a position or office, or had any other material
relationship, with Productivity Technologies, except as follows:
Shares Acquired In Financing Transactions With Productivity Technologies
Cornell Capital Partners, L.P. Cornell Capital Partners, L.P. is the
investor under the Standby Equity Distribution Agreement and a holder of
convertible debentures and compensation debentures. All investment decisions of,
and control of, Cornell Capital Partners are held by its general partner,
Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors,
makes the investment decisions on behalf of and controls Yorkville Advisors.
Cornell Capital Partners acquired all shares being registered in this offering
in financing transactions with Productivity Technologies. Those transactions are
explained below:
o Standby Equity Distribution Agreement. On December 27, 2004, we
entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price of
up to $3 million. For each share of common stock purchased under the
Standby Equity Distribution Agreement, Cornell Capital Partners will
pay Productivity Technologies 99%
13
of, or a 1% discount to, the lowest volume weighted average price of
our common stock on the principal market on which our common stock is
traded for the five days immediately following the notice date.
Further, Cornell Capital Partners will retain 5% of each advance under
the Standby Equity Distribution Agreement. In connection with a
now-terminated Standby Equity Distribution Agreement, Cornell Capital
Partners received a one-time commitment fee in the form of 247,500
shares of common stock, equaling approximately $99,000. We are
registering 4,151,100 shares in this offering which may be issued
under the Standby Equity Distribution Agreement. At an assumed price
of $0.7227 per share, Productivity Technologies would be able to
receive gross proceeds of $3 million using the 4,151,100 shares being
registered in this registration statement.
o Convertible Debentures. On June 21, 2004, Cornell Capital Partners
entered into a securities purchase agreement with Productivity
Technologies under which Cornell Capital Partners agreed to purchase
the total amount of $300,000 of convertible debentures. Cornell
Capital purchased $200,000 of convertible debentures on June 21, 2004,
and purchased $50,000 on June 30, 2004 upon a Form 211 being filed on
behalf of Productivity Technologies with the National Association of
Securities Dealers. Cornell Capital Partners purchased $50,000 in
additional debentures upon the filing of a registration statement on
July 23, 2004. 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) 80% 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 Productivity Technologies. 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, Productivity Technologies 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) 80% of the average of
the three lowest closing bid prices of the common stock for thirty
trading days immediately preceding the conversion date. No principal
payments are due prior to maturity. Cornell Capital Partners is
entitled to a 10% discount from the purchase price of the convertible
debentures and, therefore, the net proceeds received by the Company is
10% less than the face amount of the convertible debentures. Cornell
Capital Partners purchased the convertible debentures from
Productivity Technologies in a private placement. We are registering
3,750,000 shares of common stock issuable upon conversion of the
debentures.
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares will be issued based on discount to the
market rate. As a result, the lower the stock price around the
time Cornell is issued shares, the greater chance that Cornell
gets more shares. This could result in substantial dilution to
the interests of other holders of common stock.
o To the extent Cornell sells its common stock, the common stock
price may decrease due to the additional shares in the market.
This could allow Cornell to sell greater amounts of common stock,
the sales of which would further depress the stock price.
o The significant downward pressure on the price of the common
stock as Cornell sells material amounts of common stocks could
encourage short sales by Cornell or others. This could place
further downward pressure on the price of the common stock.
Newbridge Securities Corporation. Newbridge Securities Corporation is an
unaffiliated registered broker-dealer that has been retained by us. Guy Amico,
Newbridge Securities Corporation's President, makes the investment decisions on
behalf of and controls Newbridge Securities Corporation. For its services in
connection with a now-terminated Standby Equity Distribution Agreement between
Productivity Technologies and Cornell Partners, Newbridge Securities Corporation
received a fee of 25,000 shares of common stock, on June 30, 2004, equal to
approximately $10,000 based on Productivity Technologies' stock price on June
21, 2004. These shares are being registered in this offering.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 99% of the lowest volume weighted average price of
our common stock on the Over-the-Counter Bulletin Board ("OTCBB") for the five
days immediately following the notice date. Productivity Technologies will pay
Cornell Capital 5% of each advance as an additional fee.
Pursuant to the Standby Equity Distribution Agreement, Productivity
Technologies cannot draw more than $200,000 every seven trading days or more
than $3 million over twenty-four months.
For illustrative purposes only, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $85,000, plus 5% retainage payable to Cornell Capital Partners under
the Standby Equity Distribution Agreement and a 10% discount on the convertible
debentures. The figures below are estimates only, and may be changed due to
various factors, including the timing of the receipt of the proceeds.
Gross proceeds $ 1,500,000 $ 2,250,000 $ 3,000,000
Net proceeds 1,340,000 2,052,500 2,765,000
No. of shares issued under the Standby Equity
Distribution Agreement at an assumed price of $0.7227 2,075,550 3,113,325 4,151,100
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------
General Working Capital $ 1,340,000 $ 2,052,500 $ 2,765,000
Total $ 1,340,000 $ 2,052,500 $ 2,765,000
=============== =============== ==============
15
DILUTION
The net tangible book value of Productivity Technologies as of September
30, 2004 was a deficit of $1,314,533 or ($0.4784) per share of common stock. Net
tangible book value per share is determined by dividing the tangible book value
of Productivity Technologies (total tangible assets less total liabilities) by
the number of outstanding shares of our common stock. Since this offering is
being made solely by the selling stockholders and none of the proceeds will be
paid to Productivity Technologies, our net tangible book value will be
unaffected by this offering. Our net tangible book value and our net tangible
book value per share, however, will be impacted by the common stock to be issued
under the Standby Equity Distribution Agreement. The amount of dilution will
depend on the offering price and number of shares to be issued under the Standby
Equity Distribution Agreement. The following example shows the dilution to new
investors at an offering price of $0.7227 per share which is in the range of the
recent share price.
If we assume that Productivity Technologies had issued 4,151,100 shares of
common stock under the Standby Equity Distribution Agreement at an assumed
offering price of $0.7227 per share (i.e., the number of shares registered in
this offering under the Standby Equity Distribution Agreement), less retention
fees of $150,000 and offering expenses of $85,000, our net tangible book value
as of September 30, 2004 would have been $1,450,467 or $0.2103 per share. Note
that at an offering price of $0.7227 per share, Productivity Technologies would
receive gross proceeds of $3,000,000, or the entire amount available under the
Standby Equity Distribution Agreement. At an assumed offering price of $0.7227,
Cornell Capital Partners would receive a discount of $30,000 on the purchase of
4,151,100 shares of common stock. Such an offering would represent an immediate
increase in net tangible book value to existing stockholders of $0.6887 per
share and an immediate dilution to new stockholders of $0.5124 per share. The
following table illustrates the per share dilution:
Assumed public offering price per share $0.7227
Net tangible book value per share before this offering $(0.4784)
Increase attributable to new investors $ 0.6887
---------
Net tangible book value per share after this offering $0.2103
-------
Dilution per share to new stockholders $0.5124
=======
The offering price of our common stock is based on the then-existing market
price. In order to give prospective investors an idea of the dilution per share
they may experience, we have prepared the following table showing the dilution
per share at various assumed offering prices:
DILUTION
ASSUMED NO. OF SHARES TO BE PER SHARE
OFFERING PRICE ISSUED TO NEW INVESTORS
-------------- ------------------- ----------------
$0.7227 4,151,100(1) $0.5124
$0.5420 4,151,100 $0.4351
$0.3614 4,151,100 $0.3577
$0.1807 4,151,100 $0.2803
(1) This represents the maximum number of shares of common stock that are being
registered under the Standby Equity Distribution Agreement at this time.
16
STANDBY EQUITY DISTRIBUTION AGREEMENT
Summary
On December 23, 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price of up to $3
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay 99% of, or a 1%
discount to, the lowest volume weighted average price of our common stock on the
OTCBB or other principal market on which our common stock is traded for the five
days immediately following the notice date. The number of shares purchased by
Cornell Capital Partners for each advance is determined by dividing the amount
of each advance by the purchase price for the shares of common stock. Further,
Cornell Capital Partners will retain 5% of each advance under the Standby Equity
Distribution Agreement. Cornell Capital Partners is a private limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. In addition, we engaged Newbridge Securities
Corporation, a registered broker-dealer, to advise us in connection with the
Standby Equity Distribution Agreement. For its services, Newbridge Securities
Corporation had previously received 25,000 shares of our common stock on July
13, 2004, equal to approximately $10,000 based on Productivity Technologies'
stock price on June 21, 2004. The effectiveness of the sale of the shares under
the Standby Equity Distribution Agreement is conditioned upon us registering the
shares of common stock with the Securities and Exchange Commission and obtaining
all necessary permits or qualifying for exemptions under applicable state law.
The costs associated with this registration will be borne by us. There are no
other significant closing conditions to draws under the Standby Equity
Distribution Agreement.
Standby Equity Distribution Agreement Explained
Pursuant to the Standby Equity Distribution Agreement, we may periodically
sell shares of common stock to Cornell Capital Partners to raise capital to fund
our working capital needs. The periodic sale of shares is known as an advance.
We may request an advance every seven trading days. A closing will be held six
trading days after such written notice at which time we will deliver shares of
common stock and Cornell Capital Partners will pay the advance amount. There are
no closing conditions imposed on the Company for any of the draws other than
that the Company has filed its periodic and other reports with the Securities
and Exchange Commission, has delivered the stock for an advance, the trading of
the Company's common stock has not been suspended, and the Company has given
written notice and associated correspondence to Cornell Capital Partners. We are
limited however, on our ability to request advances under the Standby Equity
Distribution Agreement based on the number of shares we have registered on this
registration statement. For example, at an assumed offering price of $0.7227, we
would be able to draw the gross proceeds of $3,000,000 under the Standby Equity
Distribution Agreement with the 4,151,100 shares we are registering. However, if
the average price Cornell Capital Partners pays for shares of Productivity
Technologies common stock under the Standby Equity Distribution Agreement is
lower than the assumed offering price of $0.7227, it will limit the total amount
available under the Standby Equity Distribution Agreement. For example, if the
average price is $0.5420, Productivity Technologies would only be able to draw
the net amount of $2,052,500 with the 4,151,100 shares being registered under
the Standby Equity Distribution Agreement. If the average price is the assumed
offering price of $0.3614, we would need to register 4,151,100 additional shares
of our common stock to fully utilize the funds available under the Standby
Equity Distribution Agreement. We may not have sufficient remaining authorized
shares of common stock to register those additional shares, and in that
situation, under Delaware law, we would need to obtain shareholder approval to
increase our authorized shares.
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $3 million or 24 months after the effective date
of the this registration statement, whichever occurs first.
The amount of each advance is subject to a maximum amount of $200,000, and
we may not submit an advance within seven trading days of a prior advance. The
amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of our common stock. Our ability to request
advances is conditioned upon us registering the shares of common stock with the
SEC. In addition, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners owning
more than 9.9% of our outstanding common stock. Cornell Capital Partners'
beneficial ownership of Productivity Technologies common stock is currently
9.01% and therefore we would be permitted to make draws on the Standby Equity
Distribution Agreement so long as Cornell Capital Partners' beneficial ownership
of our common stock remains lower than 9.9%. A possibility exists that Cornell
Capital Partners may
17
own more than 9.9% of Productivity Technologies' outstanding common stock at a
time when we would otherwise plan to make an advance under the Standby Equity
Distribution Agreement.
We do not have any agreements with Cornell Capital Partners regarding the
distribution of such stock, although Cornell Capital Partners has indicated that
intends to promptly sell any stock received under the Standby Equity
Distribution Agreement.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Standby Equity Distribution Agreement, in part, because
the purchase price of the shares will fluctuate based on prevailing market
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our common stock that
will be issued using certain assumptions. Assuming we issued the number of
shares of common stock being registered in the accompanying registration
statement at an assumed price of $0.7227 per share, we would issue 4,151,100
shares of common stock to Cornell Capital Partners for gross proceeds of
$3,000,000. These shares would represent 60.17% of our outstanding common stock
upon issuance. We are registering 8,148,600 shares of common stock for the sale
under the Standby Equity Distribution Agreement, the conversion of debentures,
and the 247,500 commitment fee shares. We will need to register additional
shares of common stock in order to fully utilize the $3 million available under
the Standby Equity Distribution Agreement if the average price at which we sell
shares under the Standby Equity Distribution Agreement is lower than $0.7227 per
share.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent price of $0.4356 per share and 25%, 50% and 75% discounts to the recent
price.
Purchase Price: $0.7227 $0.5420 $0.3614 $0.1807
No. of Shares(1): 4,151,100 4,151,100 4,151,100 4,151,100
Total Outstanding (2): 6,898,600 6,898,600 6,898,600 6,898,600
Percent Outstanding (3): 60.17% 60.17% 60.17% 60.17%
Net Cash to Productivity Technologies:(4) $2,765,000 $2,052,500 $1,340,000 $627,500
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the Standby Equity Distribution Agreement at
the prices set forth in the table, assuming sufficient authorized shares
are available.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners, L.P. under the Standby
Equity Distribution Agreement, not including shares issued under the
convertible debentures.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals gross proceeds minus the 5% retainage and minus $85,000 in
expenses.
Proceeds used under the Standby Equity Distribution Agreement will be used
in the manner set forth in the "Use of Proceeds" section of this prospectus. We
cannot predict the total amount of proceeds to be raised in this transaction
because we have not determined the total amount of the advances we intend to
draw. Cornell Capital Partners has the ability to permanently terminate its
obligation to purchase shares of common stock from Productivity Technologies
under the Standby Equity Distribution Agreement if there shall occur any stop
order or suspension of the effectiveness of this registration statement for an
aggregate of fifty (50) trading days other than due to acts by Cornell Capital
Partners or if Productivity Technologies fails materially to comply with certain
terms of the Standby Equity Distribution Agreement, which remain uncured for
thirty (30) days after notice from Cornell Capital Partners.
All fees and expenses under the Standby Equity Distribution Agreement will
be borne by Productivity Technologies. We expect to incur expenses of
approximately $85,000 in connection with this registration, consisting primarily
of professional fees. In connection with the Standby Equity Distribution
Agreement, Cornell Capital Partners received a one-time commitment fee in the
form of 247,500 shares of common stock on July 13, 2004, equaling approximately
$99,000 under a now-terminated Standby Equity Distribution Agreement. In
addition, we issued 25,000 shares of common stock to Newbridge Securities
Corporation, an unaffiliated registered broker-dealer, on July 13, 2004, as
compensation for its services as a placement agent under a now-terminated
Standby Equity Distribution Agreement equal to approximately $10,000 based on
Productivity Technologies' stock price on June 21, 2004.
18
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the OTCBB
or in any other market on which the price of our shares of common stock are
quoted or (ii) in transactions otherwise than on the OTCBB or in any other
market on which the price of our shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling stockholders or by agreement between the selling stockholders and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of common stock to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved).
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay us 99%
of, or a 1% discount to, the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the five days immediately following the advance date.
In addition, Cornell Capital Partners will retain 5% of the proceeds received by
us under the Standby Equity Distribution Agreement, and received a one-time
commitment fee in the form of 247,500 shares of common stock on July 13, 2004,
equaling approximately $99,000 under a now-terminated Standby Equity
Distribution Agreement. The 1% discount, the 5% retainage and the 247,500 shares
of common stock are underwriting discounts. In addition, we engaged Newbridge
Securities Corporation, an unaffiliated registered broker-dealer, to advise us
in connection with the Standby Equity Distribution Agreement. Newbridge
Securities Corporation has entered into a placement agent agreement with
Productivity Technologies pursuant to which Newbridge Securities Corporation has
reviewed the terms of the Standby Equity Distribution Agreement and has advised
Productivity Technologies concerning these terms. Newbridge Securities
Corporation, to the Company's knowledge, will not be participating in the
distribution of shares that may be issued under the Standby Equity Distribution
Agreement. For its services in regard to the Standby Equity Distribution
Agreement. Newbridge Securities Corporation received 25,000 shares of our common
stock, on July 13, 2004, equal to approximately $10,000 based on Productivity
Technologies' stock price on June 21, 2004, under a now-terminated Standby
Equity Distribution Agreement.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in our stock or to otherwise engage in stabilizing
or other transactions intended to help support the stock price. Prospective
investors should take these factors into consideration before purchasing our
common stock.
Under the securities laws of certain states, the shares of common stock may
be sold in such states only through registered or licensed brokers or dealers.
The selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. If
any of these other expenses exists, Productivity Technologies expects the
selling stockholders to pay these expenses. We have agreed to indemnify Cornell
Capital Partners and its controlling persons against certain liabilities,
including liabilities under the Securities Act. We estimate that the expenses of
the offering to be borne by us will be approximately $85,000. For its services,
Newbridge Securities Corporation received 25,000 shares of our common stock on
July 13, 2004, under a now-terminated Standby Equity Distribution Agreement. The
estimated offering expenses consist of: a SEC registration fee of $704.20,
printing expenses of $2,500, accounting fees of $15,000, legal fees of $50,000
and miscellaneous expenses of $16,795.80. We will not receive any proceeds from
the sale of any of the shares of common stock by the selling stockholders. We
will, however, receive proceeds from the sale of common stock under the Standby
Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders
19
or their agents may not bid for, purchase, or attempt to induce any person to
bid for or purchase, shares of our common stock while such selling stockholders
are distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Standby Equity Distribution Agreement. The selling stockholders are advised
that if a particular offer of common stock is to be made on terms constituting a
material change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Revenues at Atlas are recognized using the percentage-of-completion method,
which measures the percentage of contract costs incurred to date and compares
these costs to the total estimated costs for each contract. 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 in which such
revisions are determined. Sales at Westland are recognized when products are
shipped.
Recent Developments
In June 2004, 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 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.
Critical Accounting Policies And Estimates
Management's discussion addresses the Company's consolidated financial
statements which have been prepared in conformity with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses reported in those
financial statements. These judgments can be subjective and complex, and
consequently actual results could differ from those estimates. A discussion of
the more significant estimates follows. Management has discussed the
development, selection and disclosure of these estimates and assumptions with
the full Board of Directors.
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.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 revises
and rescinds certain sections of SAB No. 101 in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations.
21
Accordingly there is no impact to the Company's results of operations, financial
position or cash flows as a result of the issuance of SAB No. 104.
On December 23, 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits, an
amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB
Statement No. 132" ("FAS 132 (revised 2003)"). This statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The new rules require additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and postretirement benefit plans. The new
disclosures are generally effective for 2003 calendar year-end financial
statements of public companies, with a delayed effective date for certain
disclosures and for foreign plans. The adoption of SFAS No. 132 did not have an
effect on the Company's consolidated financial statements.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and
Hedging Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of this standard had no effect on the Corporation's
financial condition or results of operations
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision to FIN 46, "Consolidation of Variable Interest Entities." FIN 46R
clarifies some of the provisions of FIN 46 and exempts certain entities from its
requirements. FIN 46R is effective at the end of the first interim period ending
after March 15, 2004. Entities that have adopted FIN 46 prior to this effective
date can continue to apply the provisions of FIN 46 until the effective date of
FIN 46R. The adoption of FIN 46R did not have an effect on the Company's
consolidated financial statements.
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 29%. 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
22
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 Carrying Accumulated Net 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
===============================================
Fiscal Year 2004 Compared To Fiscal Year 2003
Revenues earned for the year ended June 30, 2004 were $28,155,198 as
compared to $29,050,542 for the year ended June 30, 2003, a decrease of 3%.
Atlas's revenues were down 6% principally as a result of slower order activity.
Westland's revenues increased 7% due to the addition of new customers which
began ordering from Westland, or ordered in greater volume, compared to previous
years.
Gross profit for the year ended June 30, 2004 was $6,617,834, representing
a 3% decrease from the $6,853,324 gross profit for the year ended June 30, 2003.
The decrease in gross profit was due to the Company's overall volume decrease.
Gross profit as a percentage of revenues earned for the year ended June 30, 2004
as compared to prior fiscal year remained constant at 23%.
Consolidated selling, general and administrative (SG&A) expenses for fiscal
2004 were $5,497,191, down 8.0% as compared to SG&A expenses of $6,003,959 for
fiscal 2003. The decrease was principally due to continued efforts by management
to contain expenses.
Income from operations for the year ended June 30, 2004 amounted to
$1,120,643 compared to the income from operations of $849,365 for the year ended
June 30, 2003. The improvement in income from operations resulted primarily from
lower SG&A expenses noted above which was offset in part by the decreased gross
profit due to lower volume.
Interest expense for fiscal 2004 was $695,702, which was $55,880 greater
than fiscal year 2004. The increase was due in part to Westland's higher costs
for borrowing funds from its new senior lender effective as of December 2003 and
a slightly higher Company debt level compared to one year ago.
The Company recognized in fiscal 2004 an increase in its long term deferred
income tax asset of $175,000 as a result of profitability in fiscal 2003 and
2004. Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance at June 30, 2004. As a result, the deferred income tax asset
was increased at the end of fiscal 2004 by $175,000 to $895,000, as compared to
the Company's total net operating loss carryforwards which approximated $2.39
million at June 30, 2004. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The net income for fiscal 2004 was $720,536 as compared to net income for
the year ended June 30, 2003 of $360,574. Net income for the fiscal year 2004
included a $125,000 gain on extinguishment of debt.
23
Fiscal Year 2003 Compared To Fiscal Year 2002
Revenues earned for the year ended June 30, 2003 were $29,050,542 as
compared to $24,767,655 for the year ended June 30, 2002, an increase of 17%.
Atlas's revenues were up 13% principally as a result of slightly greater order
and business activity. Westland's revenues increased 39% due to the addition of
new customers who began ordering from Westland, or ordered in greater volume,
compared to one year earlier.
Gross profit for the year ended June 30, 2003 was $6,853,324, representing
a 5% increase from the $6,506,891 gross profit for the year ended June 30, 2002.
The increase in gross profit was principally due to the volume increases at both
Atlas and Westland. Gross profit as a percentage of revenues earned for the year
ended June 30, 2003 as compared to prior fiscal year decreased from 26.3% to
23.6%, principally as the result of a change in the mix of products sold by
Westland and to continued competitive pricing pressures in the segments served
by Westland.
Consolidated selling, general and administrative (SG&A) expenses, were
$6,003,959, down 7% as compared to SG&A expenses of $6,452,908 for the year
ended June 30, 2002. The decrease was principally due to continued efforts by
management to contain expenses.
Income from operations for the year ended June 30, 2003 amounted to
$849,365 compared to a loss from operations for the year ended June 30, 2002 of
$2,033,325. The loss in fiscal 2002 was principally attributable to the
write-off of $2,087,308 for impairment of intangible assets, including a patent.
The improvement in income from operations for fiscal year 2003 resulted
primarily from higher sales volume and lower SG&A expenses noted above and the
absence of a write-off for intangible assets.
Interest expense for fiscal 2003 was $639,822 a decrease of 62% as compared
to $1,668,519 for fiscal 2002. The improvement was due principally to the
Company's continued focus on collections of receivables and inventory management
at both Atlas and Westland, which reduced borrowing needs. Interest also
declined in comparison as the 2002 figure included a one-time interest rate swap
unwinding fee of $388,000. Further, Westland's interest costs were lower in
fiscal 2003 due to its litigation settlement on September 3, 2002 which resulted
in the extinguishment of $1.8 million of indebtedness owed to the former owner
of Westland.
The net income for fiscal 2003 was $360,574 as compared to net loss for the
year ended June 30, 2002 of $4,127,502. This improvement was due to the numerous
factors cited above including higher sales volume, lower SG&A expense and lower
interest expenses.
Liquidity And Capital Resources
At September 30, 2004, the Company had (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.
At June 30, 2004, the Company had (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 $0.95 million originally scheduled to
be paid over three equal annual installments during the period from July 2000
through July 2002, (5) $0.7 million outstanding under the Spectrum Credit
Facility, (6) $2.2 million outstanding under the Westland Loan, and (7) $200,000
outstanding in convertible subordinated debentures which mature in June 2007.
This total of approximately $11.9 million as of June 30, 2004 compares to a
total combined indebtedness of $11.1 million as of June 30, 2003.
24
The Company's working capital deficit at June 30, 2004 was $(1,913,000) and
the current ratio was 0.85 to 1, as compared to a working capital deficit of
($5,866,497) and a current ratio of 0.64 to 1 for the Company at June 30, 2003.
Effective as of December 12, 2003, Merrill Lynch Business Financial
Services Inc. ("Merrill Lynch") entered into new credit facilities with Atlas
(the "MLB Credit Facility") which provides for borrowing availability of up to
$8.0 million (based in part upon eligible accounts receivable), of which $7.4
million was funded at closing. Effective on March 4, 2004, Merrill Lynch agreed
to a modification of the terms of the MLB Credit Facility under which in which
it increased the borrowing availability by $750,000 under the revolving credit
facility for a 60-day period (the "overline period") and increased the interest
rate by 0.5% per annum during this period. As of April 10, 2004, the Company
paid back all amounts over the original $4.0 million revolver, and the overline
period expired in early May 2004. At June 30, 2004, the weighted average
interest payable under the MLB Credit Facility approximated 4.75%.
The MLB Credit Facility consists of:
o a seven-year real estate term loan in the original principal amount of
$3.5 million, bearing interest at a variable per annum rate equal to
3.15% in excess of one-month LIBOR, payable in monthly installments of
interest plus 1/180th of principal (a 15-year amortization schedule)
with the balance of principal due at maturity in December 2010, and
secured by substantially all of the assets of Atlas;
o a three-year equipment term loan in the original principal amount of
$500,000, bearing interest at a variable per annum rate equal to 3.15%
in excess of one-month LIBOR, payable in monthly installments of
interest plus 1/36th of principal (full amortization), maturing in
December 2006, and secured by substantially all of the assets of
Atlas; and
o a one-year revolving working capital credit facility providing for
borrowing availability of up to $4.0 million based upon eligible
accounts receivable, bearing interest at a variable per annum rate
equal to 2.85% in excess of one-month LIBOR, payable in monthly
installments of interest only, maturing on December 31, 2004 and
secured by substantially all of the assets of Atlas.
The MLB Credit Facility is guaranteed by the Company and, in addition, the
Company has pledged all of the capital stock of Atlas to secure the guaranty.
The proceeds of the MLB Credit Facility were used to retire the revolving credit
facility and commercial mortgage loan from Bank One, NA to Atlas in the
aggregate outstanding principal amount of $7.4 million.
In addition, also effective as of December 12, 2003, Spectrum Commercial
Services, Inc. ("Spectrum") entered into a two-year credit facility with the
Company (the "Spectrum Credit Facility") providing for borrowing availability of
up to $1.25 million based upon eligible accounts receivable, bearing interest at
a variable per annum rate equal to 5.25% in excess of the prime rate of Wells
Fargo Bank, NA, (subject to certain minimum payments of $5,575 per month, and
subject to reduction by 0.5% if specified profitability thresholds are met),
maturing in December 2005 and secured by substantially all of the assets of
Westland.
Bank One, N.A. agreed to subordinate its rights to Spectrum in connection
with Bank One's term loan in the outstanding principal amount of approximately
$2.2 million, bearing interest at 1.25% over Bank One's prime rate, which the
Company incurred in February 2000 to purchase Westland (the "Westland Loan").
As a condition to agreeing to subordinate to Spectrum, Bank One required
the Company to restate the obligations under a new Guarantor Payment Agreement
effective as of December 12, 2003. Under these terms, Bank One will look to
Westland to repay the remaining obligations owed to Bank One (which continues to
be the $2.2 million principal amount that was outstanding prior to the
restatement). Although the Company continues to be the primary obligor under the
Westland Loan as restated, the Company is prohibited from making payments to
Bank One so long as the MLB Credit Facility remains outstanding. Under the terms
of the restated Westland Loan, Westland is required to pay to Bank One $10,000
per month plus interest as well as 25% of excess cash flow (as defined in the
restated loan agreement) from Westland's operations. Under the restatement,
without expressly waiving the previously existing covenant defaults under
Westland Loan, Bank One has agreed to honor the scheduled maturity date of the
Westland Loan (February 23, 2005) absent any further defaults. The Westland Loan
bears interest at the per annum rate of 3.0% in excess of Bank One's prime rate.
Westland has suspended payments to Bank One under the Guarantor Payment
Agreement (as part of the Westland Loan) and Bank One has made no demand for
payment thereunder. Bank One continues to hold a lien on substantially all of
Westland's assets, subordinated to the lien of Spectrum.
25
In connection with these financing transactions, the Company, Atlas and
Westland retired the remaining obligations to the former owner of Westland,
Thomas Lee, in consideration of a payment of $525,000, resulting in a gain on
the extinguishment of debt of approximately $125,000. Under agreements entered
into with Bank One in January 1999, Ronald Prime, formerly an owner and
executive officer of Atlas (now deceased), and Michael Austin, formerly an owner
and executive officer of Atlas and currently a director of the Company, agreed
to subordinate their rights to receive payments for deferred executive
compensation obligations of approximately $974, 000 (which were originally
scheduled to be paid during the period from July 2000 through July 2002). These
executives agreed to continue to subordinate their right to payment to MLB.
With the availability of funds under the MLB Credit Facility and the
Spectrum Credit Facility, and the proceeds from the sale of its convertible
debentures to Cornell Capital (described in "Recent Developments") and assuming
no adverse business or economic developments, management believes that the
Company will have sufficient funds available to it to meet its working capital
needs for the next 12 months.
On December 23, 2004, Productivity Technologies entered into a Standby
Equity Distribution Agreement with Cornell Capital Partners, which replaced a
now-terminated Standby Equity Distribution Agreement entered into on June 21,
2004. Pursuant to the Standby Equity Distribution Agreement, Productivity
Technologies may, at its discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $3 million.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell Capital Partners will pay Productivity Technologies 99% of,
or a 1% discount to, the lowest volume weighted average price of our common
stock on the Pink Sheets or other principal market on which our common stock is
traded for the five days immediately following the notice date. Further, Cornell
Capital Partners will retain 5% of each advance under the Standby Equity
Distribution Agreement. In connection with the now-terminated Standby Equity
Distribution Agreement, Cornell Capital Partners received a one-time commitment
fee in the form of 247,500 shares of common stock, equaling approximately
$99,000. We are registering 4,151,100 shares in this offering which may be
issued under the now-terminated Standby Equity Distribution Agreement. At an
assumed price of $0.7227 per share, Productivity Technologies would be able to
receive gross proceeds of $3 million using the 4,151,100 shares being registered
in this registration statement.
On June 21, 2004, Cornell Capital Partners entered into a securities
purchase agreement with Productivity Technologies under which Cornell Capital
Partners agreed to purchase the total amount of $300,000 of convertible
debentures. Cornell Capital purchased $200,000 of convertible debentures on June
21, 2004, purchased $50,000 on June 30, 2004 upon a Form 211 being filed on
behalf of Productivity Technologies with the National Association of Securities
Dealers and purchased $50,000 in additional debentures in September 2004. 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) 80% 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 Atlas. 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, Productivity Technologies 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) 80% of the average of
the three lowest closing bid prices of the common stock for thirty trading days
immediately preceding the conversion date. No principal payments are due prior
to maturity. Cornell Capital Partners is entitled to a 10% discount from the
purchase price of the convertible debentures and, therefore, the net proceeds
received by the Company is 10% less than the face amount of the convertible
debentures.
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.
26
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 -- -- -- 270,000 -- -- 300,000
----------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total debt 7,305,936 400,000 330,555 413,333 233,333 2,236,105 11,039,262
Building lease 214,867 214,867 429,734
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total 7,520,803 614,867 330,555 413,333 233,333 2,236,105 11,468,996
=========== ========== ========== ========== ========== ========== ==========
Off Balance Sheet Arrangements
During the three months ended September 30, 2004, Productivity Technologies
had no off-balance sheet arrangements other than operating leases entered into
in the normal course of business.
During fiscal 2004, Productivity Technologies had no off-balance sheet
arrangements other than operating leases entered into in the normal course of
business.
Submission Of Matters To A Vote Of Stockholders
No matters have been submitted to a vote of security holders during fiscal
year beginning July 1, 2004.
27
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in Productivity Technologies' current report on Form 8-K filed
March 31, 2003, Doeren Mayhew, then Productivity Technologies' independent
auditor terminated its client-auditor relationship with Productivity
Technologies effective March 24, 2003. Doeren's resignation was based upon its
decision to terminate its audit engagements with all public companies. Doeren's
report on Productivity Technologies' financial statements as of and for the year
ended June 30, 2002 included an explanatory paragraph regarding Productivity
Technologies' ability to continue as a going concern. The report did not contain
an adverse opinion or a disclaimer of opinion and was not qualified or modified
as to any uncertainty or as to audit scope, or accounting principles. In
connection with the audits of Productivity Technologies' financial statements
for fiscal year 2001 or fiscal year 2002 (the two most recent fiscal years prior
to its resignation), there have been no disagreements between Productivity
Technologies and Doeren on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Doeren, would have caused Doeren to make
reference to the matter in its report. As reported in Productivity Technologies'
current report on Form 8-K filed on July 23, 2003, Productivity Technologies
engaged Follmer Rudzewicz PLC as its independent auditor.
Prior to the Company's engagement of Follmer, the Company had not consulted
Follmer regarding the application of accounting privileges to any transaction or
proposed transaction or any matter as to which there was a disagreement with
Doeren Mayhew. As previously reported in the Current Report on Form 8-K dated
March 24, 2003, there was no such disagreement with Doeren Mayhew.
28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $11.7 million at June 30, 2004, almost all
of the indebtedness comprises variable rate obligations. Assuming an immediate
10% increase, as of June 30, 2004, in the interest rates on all of the Company's
variable rate obligations, management has calculated that the impact to the
Company in annualized interest payable would approximate $120,000.
29
DESCRIPTION OF BUSINESS
General
Productivity Technologies Corp. (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.
Atlas sells products 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 sealant, and other industries.
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.
Metal stamping presses are used to form a wide variety of sheet metal
components used in automobiles, appliances and other consumer and industrial
products. Atlas offers a complete range of products within three categories
critical to the operation of metal stamping presses: quick die changing
equipment, press automation equipment, and stacking and destacking equipment,
which, together, have historically accounted for approximately 85% to 90% of its
sales revenues. It also sells, on a turnkey basis, fully integrated metal
stamping systems comprised of components provided by Atlas and other
manufacturers. During 1998, Atlas began producing and selling finger tooling for
use with its and third party transfer press automation equipment. During fiscal
2000, Atlas also began to offer standard transfer press cells where Atlas acts
as the systems integrator for its customers.
Metal stamping involves setting pieces of flat sheet metal over a shaped
die, which is set in a press, and then lowering a matching die onto the sheet
metal to form it into the desired shape. The sheet metal pieces typically pass
through several stamping press operations, each performing a different forming
function. Atlas' products stack cut sheet metal blanks for feeding into the
presses, move components from one press station to another within a
multi-station transfer press or between presses within a tandem line of presses,
facilitate the changing of dies on a press and subsequent die handling
operations (storage, retrieval, and maintenance). Certain Atlas products also
handle stamped parts after they have passed through the stamping presses,
functions known as "End-of-Line" applications.
In recent years, the increasing complexity and precision required in
stamped metal components, such as automobile body and appliance parts, coupled
with the large variety of such components necessary to meet consumer
preferences, has required manufacturers of such products to increase the
flexibility and efficiency of the machinery used in their manufacture. The
presses must accommodate rapid changes in production schedules and produce
profitable batch runs of varying sizes. Equipment such as that made by Atlas is
important to meet the needs of the manufacturers.
Westland designs, manufactures and field installs custom electrical control
panels primarily for use in production machinery and machine tools utilized in
automotive, adhesive & sealant, food processing, and other industrial
applications. Westland operates one manufacturing plant in Westland, Michigan,
which is located one hour from Atlas' plants in Fenton, Michigan. Westland's
plant comprises approximately 34,000 square feet of manufacturing space and
4,000 square feet of offices. Its Westland location is centrally located in
Southeastern Michigan nearby numerous machinery manufacturers.
The manufacture of control panels for industrial machinery often but not
always occurs in the latter stages of construction. Machinery typically is first
built and subsequently wired. Machine wiring is conducted through the control
panel. While machine wiring and control panels are manufactured in the latter
stages of machine production, they are
30
essential to effective machinery operation as they turn stationary metal into
functional machines. As a result, management believes control panels are
considered a higher value added machinery module.
Management believes the Company has been a leader in the refinement of the
processes by which custom electrical panels are built. In particular, management
believes it has effective internal processes to convert the production of a
custom panel into more of a mass production process. At many stages in the panel
build process, Westland has reduced or eliminated certain steps, which incur
costs or extend production time. Management believes Westland's processes help
its customers. A number of Westland's customers seek to outsource a substantial
portion of their panel building requirements. Often, machinery builders, which
outsource the production of their control panels, are focused on machinery
construction first, while the outsourcing of panel design and production remains
a secondary concern. This can lead to a situation where panels are required
within shorter lead times. Management believes Westland's streamlined production
processes allow the Company to satisfy rapid delivery requirements of customers.
Customers And Marketing
Sales of Atlas products have principally been to two customer markets -
automobile and automotive parts manufacturers, and, to a lesser extent,
appliance manufacturers. Other customers include manufacturers of garden and
lawn equipment, office furniture, heating, air conditioning and ventilation
(HVAC) equipment and aircraft. Westland's products are utilized in machinery for
automotive adhesive and sealant, engine part machining, food processing and
other industrial applications.
In the 2002, 2003 and 2004 fiscal years, automotive industry customers for
the Company accounted for approximately 84%, 89% and 83% of sales, respectively.
For such fiscal years, sales by the Company to General Motors Corporation
represented 5%, 8% and 21% respectively and sales to The Ford Motor Company
represented 22%, 31% and 23%, respectively, of total sales. Sales are
predominantly in the United States and Canada but, in recent years the Company
targeted sales efforts in Mexico, Brazil, Europe and Asia. International sales
for the 2002, 2003 and 2004 fiscal years represented approximately 23%, 17% and
17%, respectively, of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Porthcawl, South Wales, U.K., and Beijing,
China; commissioned sales representatives; and original equipment manufacturers
(OEMs) specializing in metal presses and related equipment. Atlas also
established offices in Brazil and Germany in the fiscal year 2004. Westland's
sales are primarily direct and on occasion it has utilized outside
manufacturers' sales representatives.
The order backlogs were approximately $15.7 million, $14.9 million and $6.0
million at June 30, 2002, 2003 and 2004, respectively. The Company believes
substantially all of the June 30, 2004 backlog will be produced during fiscal
2005.
Products
Atlas offers production critical, higher technology products based on
proven designs and engineering, which it believes offer superior technology,
engineering and features compared to certain products offered by its
competitors. Atlas products are modular and may be used with existing systems as
well as with completely new systems. As a result of their modular design, a
variety of pieces of equipment can be combined to form an appropriate solution
for a customer's metal stamping needs. Virtually all of its products are
manufactured on a made-to-order basis. Because of their many desirable features,
Atlas products are positioned at an above-average price comparative to its
competitors. The raw materials and components used by Atlas in the manufacturing
process are readily available and, generally, there are numerous suppliers that
are capable of providing these materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues seeking
to achieve greater modularity in the engineering and design of its products. To
date, this focus has resulted in faster order fulfillment and production, and
improved fabrication. Atlas believes that meaningful cost-reducing improvements
can still be made in the manufacturing process, particularly from further
development of configurable modules.
Quick die change equipment made by Atlas includes automated die carts, die
tables and high rise automated storage-retrieval systems which are used to
maneuver stamping press dies and molds weighing up to 100 tons each. The
Atlas-developed products allow die swapping to be accomplished in minutes as
compared to hours if conventional equipment is used. Atlas storage-retrieval
systems permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured for
use with either manually controlled or fully automated
31
presses. Atlas believes that its equipment is instrumental in increasing the
"up-time" of presses while also facilitating short run capability, gentle die
handling, safer and improved ergonomics and easier and more efficient die
maintenance.
Transfer press automation equipment is sold by Atlas under the names Flex
2000, Flex 3000, and Flex 5000(R). Transfer presses use as many as ten dies
within a single press to progressively form the component (typically including
tasks such as drawing or forming, trimming, piercing and flanging). Unlike
tandem press lines, which use multiple presses arranged in a line and require
multiple devices to move a component, transfer presses move the component being
processed from one die station to another using a single automation device.
Compared to tandem presses, transfer presses generally operate at higher
production rates, require less floor space, consume less energy and allow more
component processes per press. Because of this, and because they have fewer
parts and require less expensive quick die change equipment than tandem presses,
transfer presses have become the preferred type of press for new purchases
although many tandem presses will remain in use for many years and can be
refitted with automation equipment. Atlas recently began offering standard
Transfer Press Cells as a systems integrator, comprised of Atlas equipment and
presses made by other manufacturers to more aggressively pursue the transfer
press process market segment.
Stacking and destacking automation equipment is used to handle the sheet
metal in the initial stages of the stamping process. Stackers stack flat blanks
cut from the coiled rolls, which are delivered to the manufacturer. Destacking
equipment feeds the flat blanks into the press and includes functions to
wash/scrub or roll-coat the metal blanks and to queue them to assure a steady
flow. Atlas also produces and sells precision steel pallets for handling the
stacks of sheet metal so as to reduce handling damage and to eliminate the need
for strapping the stack of sheets together.
Westland designs, manufactures and field installs custom electrical control
panels primarily for use in production machinery and machine tools utilized in
automotive, adhesive and sealant, food processing, and other industrial
applications. The design and manufacture of control panels for machinery
occasionally occurs in the later stages of the machinery design and construction
process. Machinery must first be constructed, and then wired, where the wiring
is conducted through the control panel. While the wiring of machinery may occur
later in the construction process, the wiring and control panels are essential
to effective machinery operation, as the wiring and controls convert the
machinery from stationary metal to functional machines.
Westland's products range from small, single door electrical panels to
larger six door panels. Selling prices for Westland's products range from less
than $5,000 to more than $100,000 per unit. The electrical control panels are
used by customers to control the mechanical functions of machinery used in
applying adhesives and sealants in automobile production, material handling
equipment for metal forming for automobiles and appliances, the machining of
cylinders for the manufacture of vehicle engines, and the fabrication of
containers for food and juice packaging.
Competition
Atlas management believes Atlas' products are sold in specialized markets
that have limited customers and competitors. In any case, in many instances,
Atlas products are procured through competitive bidding. Because of the capital
cost and the need for skilled personnel, such as engineers, designers, mechanics
and sales persons, entry into this industry is expensive and difficult to
achieve and Atlas does not expect competition to increase significantly over
present levels. Primary competitors of Atlas include ABB Flexible Automation
(Sweden), Automatic Feed Company (U.S.A.), Binar (Sweden), Orchid International
(Canada), Linear Transfer Systems (Canada), Gudel/Rapindex (Switzerland,
U.S.A.), Wayne Trail (U.S.A.), HMS Products Co. (U.S.A.), Schuler Automation
Group (Germany), Strothmann GmbH (Germany), and Aisaku (Japan). Each of these
companies offers components, which compete with certain components manufactured
or sold by Atlas. A number of the competitors are well established with
substantial financial resources, recognized brand names, customer loyalty and
established market positions, capable engineering, strong distribution networks
and comprehensive manufacturing capabilities.
Westland management believes Westland's competitors sell their products
primarily regionally, and there are numerous competitors both regionally and
nationally. Typically, custom-built control panels are commodity type products
purchased by customers on the basis of quality and reliability, delivery timing,
and pricing. Westland's major competitors in the Southeast Michigan region
include Bentech, K-R Automation, Con-Syst-Int, JIC Electric, X-Bar Automation
and Control Technique, Incorporated.
In contrast to the possible regional focus of certain competitors, Westland
is focused on customers both within and outside its local region. Westland also
seeks to sell more than control panel building services. It seeks to educate
customers on how they can reduce their internal labor costs by having Westland,
at a cost lower than the customers' labor expenses, more fully prepare the
control panels for final, and more rapid, installation on the customers'
machinery.
32
Trademarks And Patents
Atlas owns exclusive rights to U.S. and foreign patents previously owned by
the deceased inventor, Mr. John H. Maher, having acquired assignment of these
rights in April 2002 from Mr. Maher's trust in a cash transaction in April 2002.
The patents are associated with the manufacture, sale, and use of Atlas FLEX
5000(R) and related transfer press automation equipment products. The relevant
patents registered with the United States Patent and Trademark Office will
expire on June 23, 2008. As a result of the purchase of the patent rights in
April 2002, Atlas no longer pays any royalties to the former patents owner, but
is now fully responsible for all associated patent defense and maintenance
costs. The exclusive rights agreement covers three U.S. patents for a system for
transferring work pieces through a series of workstations, a fourth US patent
for a synchronized dual axis actuator, and a fifth U.S. patent for a transfer
system. The system for transferring work pieces through a series of workstations
is protected by foreign patents in Canada, China, France, Germany, Great
Britain, Japan, Republic of Korea, Russian Federation, Spain and Sweden. This
license agreement also encompasses rights to transfer system patents that are
pending in several foreign countries covered under the Patent Coordination
Treaty. A royalty-bearing sub-license has been granted by Atlas to the Orchid
Automation Group (Canada).
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)" that it uses to market its line of transfer
equipment.
Atlas owns and has registered with the United States Patent and Trademark
Office eight (8) patents, one for an asynchronous conveyer construction, one for
a transfer arm for supporting work pieces, one for a magnetic sheet separator
construction, one for a work piece transfer support apparatus, one for a
magnetic sheet fanner, one for an apparatus for supporting a work piece for
transfer, one for a pallet cover, and one for apparatus and methods for forming
work pieces. Foreign patents for the latter are held in Australia, China,
France, Germany, Italy, Great Britain, Poland, Spain and Sweden with patent
applications pending in Canada, Korea, and Mexico. Atlas has applied for five
United States patents for an articulating work piece transfer apparatus, a
magnetic sheet fanner, a tooling gage, a finger tooling receiver for transfer
press automation equipment and a pin pallet cover. Foreign patent applications
have been filed for the articulating work piece transfer apparatus.
Management And Employees
The Company employs approximately 160 persons. None of these persons is a
member of a union. The Company believes that its employee relations are good.
The Company's facilities are located in highly industrialized areas that benefit
the Company by reason of their proximity to customers and a skilled labor force.
Description Of Property
Atlas owns and operates two manufacturing facilities in Fenton, Michigan
and Westland leases and operates one manufacturing facility in Westland,
Michigan. The two Fenton facilities have an aggregate of 94,200 square feet of
space. One of these facilities, built in 1997, has higher roofs and heavier
cranes to facilitate manufacturing of larger equipment and provides
approximately 51,000 square feet of manufacturing space and 8,000 square feet of
office space. This facility also is capable of expanding at a later date to
approximately 130,000 square feet of manufacturing and 25,000 square feet of
office space. Operations performed in the two Fenton facilities include
fabrication, machining, assembly, electrical panel construction and testing.
Project management, engineering, finance/human resources, service, quality,
purchasing and sales offices are also located in Fenton.
The Westland plant, which is leased, has approximately 34,000 square feet
of manufacturing and assembly space and 4,000 square feet for offices.
Operations performed in the Westland facility are manufacturing, assembly,
quality control, testing, field installation and service. Sales, operations,
finance and administration are all located in Westland, Michigan.
The principal executive offices of the Company are located at 3100 Copper
Avenue, Fenton, Michigan 48430.
Legal Proceedings
Productivity Technologies is a party to routine litigation matters in the
ordinary course of its business. No such pending matters, individually or in the
aggregate, if adversely determined, are believed by management to be material to
the business or financial condition of the Company. Productivity Technologies
maintains general liability insurance, workers' compensation insurance, property
insurance, automobile insurance, employee benefit liability insurance, fidelity
insurance and directors' and officers' liability insurance.
33
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.
34
MANAGEMENT
Directors
Set forth below is information concerning each director of Productivity
Technologies, including his business experience during at least the past five
years, his positions with Productivity Technologies, and certain directorships
held by him. Except as hereinafter described, there are no family relationships
among any of the directors or any arrangements or understandings between any
director and another person pursuant to which he was selected as a director.
Director Age Director Since Current Position
- -------------------------------------- -------------- -------------- ------------------------------------------
Class I Directors
Jesse A. Levine 37 1993 Director, Chief Financial Officer,
Vice President, Secretary and Treasurer
Class II Directors
Michael D. Austin 53 1999 Director, President of the Company's Atlas
Technologies, Inc. subsidiary and Senior Vice
President of Strategic Planning and Marketing of
the Company
Class III Directors
Samuel N. Seidman 70 1993 Director, Chairman of the Board, President and
Chief Executive Officer
Alan H. Foster 79 1993 Director
The Company's Board of Directors is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of office of the Class II director will continue
until the next annual meeting of the Company expected in fiscal 2005. In turn,
the term of office of the Class III and Class I directors will continue until
the annual meetings of the Company expected to be held in fiscal 2006 and 2007,
respectively. A director will hold office until the next annual meeting of
stockholders at which his class of directors is to be elected.
Class I Director
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company
since its inception, Chief Financial Officer since June 1995 and a Vice
President since May 1996. Since January 1992, Mr. Levine has been Vice President
and then Senior Vice President of Seidman & Co., Inc., specializing in financial
and business analysis, corporate finance, private placement financing, merger
and acquisition, and corporate advisory services. Previously, Mr. Levine served
as a commercial credit analyst for Society Bank, Michigan. Mr. Levine earned a
B.A. degree, with highest honors distinction, in economics from the University
of Michigan and obtained a chartered financial analyst certification in 1995.
Samuel N. Seidman, the President, Chief Executive Officer, and Chairman of the
Company, is Mr. Levine's uncle.
Class II Director
Michael D. Austin is currently the President of the Company's Atlas
Technologies, Inc. subsidiary and Vice President of Strategic Planning and
Marketing of the Company. From 1998 to 2000, Mr. Austin held the position of CEO
and President of Atlas Technologies, Inc. From 1996 to 1998, Mr. Austin held the
position of President of Atlas Technologies, Inc., and was primarily responsible
for directing the marketing and sales activities of the company for determining
the overall product directions, managing product research and development, and
managing the application engineering department. From 1977 to 1996, Mr. Austin
held various other management positions at Atlas Technologies, Inc., including
Vice President of Operations, Vice President of Sales and Marketing, Sales
Manager, and Controls Manager.
35
From 1973 to 1977, Mr. Austin held various controls engineering and management
positions at Fluid & Electric Control Co., including Chief Engineer. Mr. Austin
serves on the board of directors or board of advisors of the Society of
Manufacturing Engineers, the Flint-Genesee Economic Growth Alliance, the Genesee
Area Focus Council, the Manufacturers Innovation Council, Kettering University,
Baker College and Mott Community College. Mr. Austin holds U.S. and foreign
patents for certain apparatus and methods for forming work pieces.
Class III Directors
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking firm, and serves as its President. In this capacity, he has provided a
broad range of investment banking services, including financial analysis and
valuations, private financings, and corporate recapitalizations and debt
restructurings. Mr. Seidman also serves as a director of AMREP Corporation, a
real estate development corporation listed on the New York Stock Exchange. He
has acted as financial advisor to manufacturers of various kinds of production
systems and components for a number of industries, including ASM International,
N.V., and a multi-national producer of automated equipment and systems for the
production of semiconductor traded on the NASDAQ National Market. Mr. Seidman
advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national
manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman
was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of
Sharon Steel Corp., an integrated manufacturer of finished steel products, and
served as financial advisor in Chapter 11 to Chyron Corp., a specialized
producer of television character generation equipment for video productions
listed on the New York Stock Exchange, and Mr. Gasket Co., a manufacturer of
automobile aftermarket products. Prior to founding Seidman & Co., Mr. Seidman
worked in corporate finance at Lehman Brothers. Mr. Seidman earned a B.A. degree
from Brooklyn College and a Ph.D. in economics from New York University. He was
a Fulbright Scholar and a member of the graduate faculty of the City University
of New York. Mr. Seidman's nephew, Jesse A. Levine, is Vice President, Chief
Financial Officer, Secretary, Treasurer and a Director of the Company.
Alan H. Foster has been a Director of the Company since its inception. From
1986 until September 2001, he served as an Adjunct Professor of Finance and
Corporate Strategy at the University of Michigan. Since 1978, Mr. Foster has
been the principal of A.H. Foster & Company, a consulting firm, which serves as
a consultant in corporate finance to foreign governments, and domestic and
international clients. Previously, Mr. Foster was a director of Code-Alarm,
Inc., a manufacturer of automobile security systems, which was subsequently
sold. For the last 12 years, Mr. Foster has served numerous times as a
court-appointed trustee in bankruptcy for both Chapter 7 and Chapter 11 cases.
He was employed by the American Motors Corporation from 1963 to 1978, where he
first served as Director, Financial Planning and Analysis and then as Vice
President and Treasurer for the last ten of those years. From 1953 to 1963, Mr.
Foster worked at Sylvania Electric Products in various capacities, including
Manager, Corporate Planning and Control. Mr. Foster is the author of Practical
Business Management, published in 1962. Mr. Foster earned a B.S.B.A. degree from
Boston College and an M.B.A. degree from Harvard Business School.
Executive Officers
The following table sets forth certain information concerning each
individual who currently serves as an executive officer of Productivity
Technologies. Executive officers are appointed by the Board of Directors and
serve at the discretion of the Board. Except as specifically described, there
are no family relationships among any of the executive officers or any
arrangements or understandings between any executive officer and another person
pursuant to which he was selected as an executive officer.
Executive Officers Current Position
- ----------------------------------------- -----------------------------------------------------------------------
Samuel N. Seidman Chairman of the Board, President and Chief Executive Officer
Jesse A. Levine Chief Financial Officer, Vice President, Secretary and Treasurer
William G. Rogner Chief Executive Officer of Atlas Technologies, Inc.
Michael D. Austin Vice President of Strategic Planning and Marketing of the Company and
President of Atlas Technologies, Inc.
Robert J. Cuccaro Vice President, Corporate Controller of the Company and President of
Westland Control Systems, Inc.
36
See above for a description of the business experience during at least the
past five years of Messrs. Seidman, Levine and Austin.
Robert J. Cuccaro, 49 years of age, joined the company on May 26, 2000 as
Vice President, Corporate Controller. In January 2001, Mr. Cuccaro was promoted
to President and Chief Executive Officer of Westland Control Systems, Inc. From
1998 to 2000, Mr. Cuccaro held positions of General Manager and Controller for
the Ring Group and Karmazin Products Corporation and was responsible for
directing sales, human resources, production control, accounting and finance.
From 1996 to 1998, Mr. Cuccaro held the position of Chief Financial
Officer/Division Controller for Stewart Connectors Division, Inc. a subsidiary
of Insilco Corporation. From 1994 to 1996, Mr. Cuccaro held various positions
including Plant Controller and Corporate Controller with Clark Material Handling
Corporation, a subsidiary of Terex Corporation. Previously, from 1982 to 1994,
Mr. Cuccaro held various financial positions at UNISYS Corporation including
Controller and Sales Director. Mr. Cuccaro has extensive international,
manufacturing, financial reporting and systems experience. Mr. Cuccaro earned
his B.S. degree from Rutgers University and attended graduate studies classes at
Fairleigh Dickinson University in New Jersey.
William G. Rogner, 53 years of age, is Chief Executive Officer of Atlas.
Mr. Rogner has approximately 18 years experience with Atlas, including having
previously served as its Executive Vice President, Vice President of
Engineering, Director of Contract Management and Project Manager. In these and
other capacities, Mr. Rogner has at various times had direct responsibilities
for sales, manufacturing, engineering, and mechanical engineering, fluid
engineering, and electrical controls. As Executive Vice President, Mr. Rogner
assisted in development and implementation of the Company's strategic plan,
including the reduction of Atlas' financial break-even point by approximately 35
percent. He initiated a value analysis and value engineering (VA/VE) program to
reduce costs at least 5 percent while maintaining or improving product
functionality.
Mr. Rogner also had direct responsibility for establishing Atlas' Brazilian
subsidiary, which was profitable in its first year, and he assisted in
developing sales and service in Europe and Asia and sales representation in
India. As part of a continuous focus on costs, Mr. Rogner reduced headcount by
over 40% in approximately three years and sought to level load (smooth out)
manufacturing schedules and direct labor manpower by utilizing production
outsourcing. He also supervised the implementation of the Company's enterprise
resource planning (ERP) system. From 1984 to 1997, as Director of Contract
Management at Atlas, Mr. Rogner had direct responsibility for major projects,
customer service, and warranty. He also was a Project Manager with direct
responsibility for the mechanical design and building of machines and projects.
During this time, he managed some of the largest projects in the history of
Atlas, including an $18 million system which included an engineering study and
implementation of a Greenfield project for an entire press room for a major
appliance manufacturer, including sheet metal dies for a new product. This
project employed 18 presses, three coil lines, more than 130 tools, as well as
equipment automation, and quick die change capabilities.
Mr. Rogner spent two years away from Atlas in the past 20 years, when he
co-founded an engineering design and consulting firm. As a company principal,
Mr. Rogner arranged the firm's line of credit, more than doubled firm revenues
in its first two years of operations, broadened the firm's initial customer
base, enabling the firm to report net earnings of 10 percent of its sales. Mr.
Rogner received his B.S. from Michigan State University and he also recently
completed an immersion course at the Wharton School of Business in finance for
non-financial executives.
Executive Compensation
Director Compensation And Arrangements
During fiscal 2004, Productivity Technologies' non-employee director, Alan
H. Foster, received $18,000 per annum, payable quarterly.
Executive Officer Compensation
The following table shows all compensation paid by Productivity
Technologies for the fiscal years ended June 30, 2002, 2003 and 2004 to (1) the
person who has served as the chief executive officer of Productivity
Technologies at all times since the beginning of fiscal 2004 (Samuel N.
Seidman), and (2) each executive officer of Productivity Technologies, other
than the chief executive officer, who served as an executive officer at any time
during fiscal 2004 and whose income exceeded $100,000 (Bill Rogner and Robert J.
Cuccaro) (collectively, the "Named Executive Officers").
37
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------ ----------------------- ----------------------------
Securities
Fiscal Year Restricted Underlying
Ended Salary Bonus Stock Awards Options
Name and Principal Position June 30, ($) ($) (#) (#)
- --------------------------- -------------- ----------- ---------- -------------- -------------
Samuel N. Seidman, 2004 120,000 -- -- --
Chairman of the Board, 2003 120,000 -- -- --
President and Chief 2002 120,000 -- -- --
Executive Officer
William G. Rogner, 2004 150,000 -- -- --
Chief Executive Officer of 2003 150,000 -- -- --
Atlas 2002 150,000 -- -- --
Robert J. Cuccaro, 2004 103,000 -- -- --
Vice President, 2003 103,000 -- -- --
Corporate Controller of the 2002 103,000 -- -- --
Company and President of
Westland
Option Awards and Values. No options or stock appreciation rights were
awarded to any of the Named Executive Officers in fiscal 2004. The following
table sets forth information concerning the aggregate number and values of
options held by the Named Executive Officers as of June 30, 2004. None of the
Named Executive Officers holds stock appreciation rights and none of such
persons exercised any options in fiscal 2004.
Aggregate Year-End Option Values at June 30, 2003
Number of unexercised options Value of unexercised in the money options
at fiscal year end (#) at fiscal year end ($)
---------------------------------- ------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ----------- ------------- ----------- -------------
Samuel N. Seidman 107,000 --- --- ---
William G. Rogner 34,000 --- --- ---
Robert J. Cuccaro 19,000 --- --- ---
Compensation Committee Interlocks And Insider Participation
The full Board of Directors of the Company serves as the Company's
Compensation Committee. Mr. Foster as the outside director serves as the
Chairman of the Audit Committee which in turn reports to the full Board of
Directors of the Company. There have not been since the beginning of fiscal 2004
any interlocking relationships, as defined in the regulations of the Securities
and Exchange Commission, involving any person who has served on the Company's
Board of Directors since that time. See Item 13 for a description of certain
transactions and relationships of the Company with directors of the Company
since the beginning of fiscal 2004.
38
Equity Compensation Plan Information
Number of securities
to be issued upon Weighted average
exercise of outstanding exercise price of Number of securities
options, warrants and outstanding options, remaining available
Plan category rights warrants and rights for future issuance
- ------------------------------------- ----------------------- -------------------- ---------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 459,000 $ 0.76 71,000
------- ------- ------
Total 459,000 $ 0.76 71,000
======= ======= ======
39
PRINCIPAL STOCKHOLDERS
The following table and accompanying footnotes set forth certain
information as of December 27, 2004 with respect to the stock ownership of (1)
each stockholder known by Productivity Technologies to be a beneficial owner of
more than 5% of Productivity Technologies' common stock, (2) each director and
nominee of Productivity Technologies, (3) Productivity Technologies' Chief
Executive Officer, and (4) all directors and executive officers of Productivity
Technologies as a group (based upon information furnished by such persons).
Shares of common stock issuable upon exercise of options which are currently
exercisable or exercisable within 60 days of the date of this report have been
included in the following table. See "executive compensation" section for
additional information regarding the stock options granted to the indicated
persons. Unless otherwise indicated below, the business address of the persons
listed below is Productivity Technologies Corp., 3100 Copper Avenue, Fenton,
Michigan 48430.
Number of Percentage of
Shares Shares
Beneficially Beneficially
Name of Beneficial Owner Owned Owned(3)
- ------------------------------ ------------ -------------
Cornell Capital Partners, L.P.
101 Hudson Street, Suite 3700
Jersey City, NJ 07307 247,500(5) 9.1%
Michael D. Austin 312,600(1) 11.4%
Samuel N. Seidman 258,250(1) 9.0%
Jesse A. Levine(2) 143,500 5.0%
Alan H. Foster 39,750(1) 1.4%
Estate of Ronald Prime 163,000 5.9%
William G. Rogner 59,000(1) 2.1%
Robert J. Cuccaro 29,000(1) 1.0%
All directors and executive officers as a group (4) 842,100(4) 27.9%
(1) Includes shares of common stock issuable upon immediately exercisable
warrants and options at prices ranging from $0.15 to $1.37 per share, as
follows: Mr. Austin - 6,500 shares; Mr. Seidman - 107,000 shares; Mr.
Levine - 97,000 shares; Mr. Rogner - 34,000 shares; Mr. Cuccaro - 19,000
shares; Mr. Foster - 18,500 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
(3) Applicable percentage of ownership is based on 2,747,500 shares of common
stock outstanding as of December 27, 2004, together with securities
exercisable or convertible into shares of common stock within 60 days of
December 27, 2004, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of December 27, 2004 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(4) Includes shares of common stock issuable upon immediately exercisable
warrants and options to all executive officers and directors.
(5) In July 2004, Cornell Capital was paid a $99,000 fee, which was paid in
restricted shares of the Company, in consideration for Cornell Capital
entering into the now-terminated Standby Equity Distribution Agreement.
40
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
In 2001, Productivity Technologies' common stock was de-listed for trading
on the NASDAQ Small Cap Market. At that time, Productivity Technologies' common
stock became listed for quotation on the NASD's electronic over the counter
quotation system, the OTCBB. In October, 2003, due to a delay in Productivity
Technologies' filing its annual report on Form 10-K for the fiscal year ended
June 30, 2003, Productivity Technologies' quotation on the OTCBB was suspended.
The Company's common stock then traded through the Pink Sheets LLC. In August
2004, the Company's common stock was re-listed on the OTCBB. The
over-the-counter quotations of Productivity Technologies' common stock reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily reflect actual transactions.
The following table sets forth the range of high and low closing bid prices
for common stock as reported through both the Pink Sheets LLC and the OTCBB.
Within the last two fiscal years there has been extremely limited trading in
Productivity Technologies' Units and Warrants and, therefore, no trading
information is provided. The Warrants expired effective on June 24, 2002.
High Low
($) ($)
----------------------------------------------------------
Year ended June 30, 2003:
First Quarter 0.17 0.07
Second Quarter 0.11 0.05
Third Quarter 0.15 0.05
Fourth Quarter 0.34 0.05
Year ended June 30, 2004
First Quarter 0.40 0.15
Second Quarter 1.25 0.54
Third Quarter 1.15 0.70
Fourth Quarter 1.01 0.27
As of December 27, 2004, Productivity Technologies had 20 holders of record
of its common stock. Productivity Technologies believes that there are in excess
of 140 beneficial holders of Productivity Technologies' common stock.
Dividends
We have not declared any dividends, and we do not plan to declare any
dividends in the foreseeable future.
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) 80% 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
41
the lower of (i) $0.48 or (ii) 80% 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. Cornell Capital purchased the
convertible debentures 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.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed below, none of our directors or officers, nor any
proposed nominee for election as a director, nor any person who beneficially
owns, directly or indirectly, shares carrying more than 10% of the voting rights
attached to all of our outstanding shares, nor any promoter, nor any relative or
spouse of any of the foregoing persons has any material interest, direct or
indirect, in any transaction since our incorporation or in any presently
proposed transaction which, in either case, has or will materially affect us.
Seidman & Co., Inc., an affiliate of Productivity Technologies, makes
available to Productivity Technologies office space, as well ascertain office,
administrative and secretarial services as may be required by the Company.
Productivity Technologies paid Seidman & Co., Inc. approximately $10,000 for
such services, plus reimbursement for third-party administrative and secretarial
services, in the fiscal year ended June 30, 2004. Samuel N. Seidman, a director
and the Chairman, President and Chief Executive Officer of the Company, is
President of Seidman & Co., Inc., and Jesse A. Levine, a director, Chief
Financial Officer, Vice President, Secretary and Treasurer of the Company, is
Senior Vice President of Seidman & Co., Inc.
43
DESCRIPTION OF CAPITAL STOCK
Common Stock
Productivity Technologies is authorized to issue 20,000,000 shares of
Common Stock $0.001 par value, of which 2,747,500 were issued and outstanding at
December 27, 2004. The securities being offered hereby are common stock, with
one vote per share on all matters to be voted on by shareholders, without any
right to accumulate their votes. Shareholders have no preemptive rights and have
no liability for further calls or assessments on their shares. The shares of
common stock are not subject to repurchase by Productivity Technologies or
conversion into any other security. All outstanding shares of common stock are,
and those issued pursuant to the Standby Equity Distribution Agreement will be
fully paid and non assessable.
Shareholders are entitled to receive such dividends as may be declared by
the Board of Directors of the Productivity Technologies out of funds legally
available therefore and, upon the liquidation, dissolution or winding up of
Productivity Technologies, are entitled to share ratably in all net assets
available for distribution to such holders after satisfaction of all of our
obligations, including stock preferences. It is not anticipated that we will pay
any dividends in the foreseeable future since we intend to follow the policy of
retaining its earnings to finance the growth of its business. Future dividend
policies will depend upon the Productivity Technologies' earnings, financial
needs and other pertinent factors.
Preferred Stock
Productivity Technologies is authorized to issue 1,000,000 shares of
Preferred Stock, $0.001 par value. The preferred stock may be issued in
different series. All rights and preferences of any series of preferred stock
are to be set by the Board of Directors upon issue.
The issuance of preferred stock may have the effect of delaying or
preventing a change in control of Productivity Technologies. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the common stock. As of
the date of this prospectus, no shares of preferred stock will be outstanding
and we currently have no plans to issue any shares of preferred stock.
Debentures
Productivity Technologies has outstanding convertible debentures, which
were issued in the original principal amount of $250,000. On June 21, 2004,
Cornell Capital Partners entered into a securities purchase agreement with
Productivity Technologies under which Cornell Capital Partners agreed to
purchase the total amount of $300,000 of convertible debentures. Cornell Capital
purchased $200,000 of convertible debentures on June 21, 2004, and purchased
$50,000 on June 30, 2004 upon a Form 211 being filed on behalf of Productivity
Technologies with the National Association of Securities Dealers and purchased
$50,000 in additional debentures in September 2004. 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) 80% 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 Productivity Technologies. 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, Productivity Technologies 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) 80% of the average of
the three lowest closing bid prices of the common stock for thirty trading days
immediately preceding the conversion date. No principal payments are due prior
to maturity. Cornell Capital Partners is entitled to a 10% discount from the
purchase price of the convertible debentures and, therefore, the net proceeds
received by the Company is 10% less than the face amount of the convertible
debentures. Cornell Capital Partners purchased the convertible debentures from
Productivity Technologies in a private placement.
Warrants
As of December 27, 2004, there are no unexpired warrants outstanding
exerciseable into shares of Productivity Technologies' common stock.
44
Options
Productivity Technologies adopted a Performance Equity Plan in 1996 to
enable the Company to offer to selected personnel an opportunity to acquire an
equity interest in the Company through the award of incentives such as stock
options, stock appreciation rights and/or other stock-based awards. The total
number of shares of common stock reserved and available for distribution under
the Plan is 530,000 shares. As of June 30, 2004, there were options outstanding
to purchase 459,000 shares of Productivity Technologies' common stock with
exercise prices ranging from $0.15 to $1.88.
On July 16, 2003, Productivity Technologies' board of directors authorized
and directed the Company to issue options to purchase 256,000 shares of
Productivity Technologies' common stock in replacement of options which had been
granted in 1997 and expired in 2002 under Productivity Technologies' Performance
Equity Plan (PEP). The board approved for 256,000 options to be reissued under
the continuing Performance Equity Plan by Productivity Technologies at an
exercise price equal to the current market closing price for Productivity
Technologies' common shares. The options were allocated as follows: 126,000
options were reserved for operating and management personnel; 49,000 options
were allocated to Mr. Seidman, 39,000 options were allocated to Mr. Levine;
29,000 options were allocated to Mr. Cuccaro; and 6,500 options each were
allocated to Messrs. Austin and Foster.
As of December 27, 2004, 459,000 options remain outstanding and unexpired.
Transfer Agent
The transfer agent for Productivity Technologies common stock is
Continental Stock Transfer & Trust Company. Its address is 17 Battery Place, New
York, New York 10004, and its telephone number is (212) 845-3212.
Reports To Shareholders
We intend to furnish our shareholders with annual reports which will
describe the nature and scope of our business and operations for the prior year
and will contain a copy of the Productivity Technologies' Company's audited
financial statements for its most recent fiscal year.
Limitation Of Liability: Indemnification
Our Certificate of Incorporation and Bylaws provide our directors or
officers with certain indemnification rights. In addition, Section 145 of the
Delaware General Corporation Law allows us to indemnify any person who was or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, by reason of the fact that he or she is or was a director,
officer, employee or agent of Productivity Technologies, or is or was serving at
our request as a director, officer, employee, or agent of any corporation,
partnership, joint venture, trust, or other enterprise.
Delaware law also permits us to advance expenses in connection with
defending any such proceedings, provided that the indemnified party undertakes
to repay any such advances if it is later determined that such person was not
entitled to be indemnified by us.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions or otherwise, we have been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in such act, and is therefore unenforceable.
Anti-Takeover Effects Of Provisions Of The Articles Of Incorporation
There are no provisions in our Articles of Incorporation or bylaws related
to preventing or restricting takeovers, mergers or acquisitions of Productivity
Technologies by another company.
45
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement for the fiscal years ended June 30, 2004 and June
30, 2003 have been audited by Follmer Rudzewicz PLC and have been audited by
Doeren Mayhew for the fiscal year ended June 30, 2002. The reports of Follmer
Rudzewicz PLC and Doeren Mayhew are included in this prospectus in reliance upon
the authority of this firm as experts in accounting and auditing.
VALIDITY OF SECURITIES
The validity of the shares offered herein will be opined on for us by
Kirkpatrick & Lockhart LLP, which has acted as our outside legal counsel in
relation to certain, restricted tasks.
INTERESTS OF NAMED EXPERT AND COUNSEL
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their being
fully paid, legally issued and non-assessable will be passed upon for us by
Kirkpatrick and Lockhart LLP, Miami, Florida. Kirkpatrick & Lockhart LLP does
not have any interests in Productivity Technologies and has never been employed
by Productivity Technologies on a contingent basis.
The audited consolidated financial statements of Productivity Technologies
for the year ended June 30, 2004 and June 30, 2003, have been audited by Follmer
Rudzewicz PLC and have been audited by Doeren Mayhew for the year ended June 30,
2002. Follmer Rudzewicz PLC and Doeren Mayhew do not have any interests in
Productivity Technologies and have never been employed by Productivity
Technologies on a contingent basis.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
DC, a registration statement on Form S-1 under the Securities Act of 1933 with
respect to the shares we are offering. Prior to the effective date of the
registration statement we were not subject to the information requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"). At the time of the
effectiveness of the registration statement we will become a "reporting company"
and required to file reports pursuant to the provisions of the Exchange Act.
This prospectus does not contain all of the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. Reference is hereby made to the registration statement and exhibits
thereto for further information with respect to Productivity Technologies and
the shares to which this prospectus relates. Copies of the registration
statement and other information filed by with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission in
Washington, DC at 450 Fifth Street, NW, Washington, DC 20549. In addition, the
Commission maintains a World Wide Web site that contains reports, proxy
statements and other information regarding registrants such as Productivity
Technologies which filed electronically with the Commission at the following
Internet address: (http:www.sec.gov).
46
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
CONTENTS
Page
Consolidated Balance Sheet as of September 30, 2004 (Unaudited)
and June 30, 2004 F-2
Consolidated Statements of Operations for the three month periods ended
September 30, 2004 and September 30, 2003 (Unaudited) F-4
Consolidated Statements of Shareholders' Equity for the three month
period ended September 30, 2004 F-5
Consolidated Statements of Cash Flows for the three month period
ended September 30, 2004 and September 30, 2003 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Registered Public Accounting Firm F-9
Independent Auditors' Report F-10
Consolidated Balance Sheets as of June 30, 2004 and 2003 F-11
Consolidated Statements of Operations for each of the years
in the three-year period ended June 30, 2004 F-13
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended June 30, 2004 F-14
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended June 30, 2004 F-15
Notes to Consolidated Financial Statements F-16
F-1
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2004 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.
F-2
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2004 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.
F-3
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 Common share outstanding (diluted) 2,747,500 2,629,000
See accompanying notes to unaudited consolidated financial statements.
F-4
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
Common Stock
------------
Total
Additional Shareholders'
Shares Amount Paid-In Capital Accumulated Deficit Equity
--------- --------- --------------- ------------------- -------------
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.
F-5
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.
F-6
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.
F-7
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
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Productivity Technologies Corp. and Subsidiaries as of June 30, 2004 and 2003,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/S/ FOLLMER RUDZEWICZ PLC
Southfield, Michigan
September 13, 2004
F-9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Productivity Technologies Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended June 30, 2002. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Productivity
Technologies Corp. and Subsidiaries as of June 30, 2002, and the results of
their operations and their cash flows for the year ended June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
Our previous report on the June 30, 2002 financial statements, dated August 23,
2002 (except for Note 5, which the date is October 11, 2002) included an
explanatory paragraph that described the uncertainty of the Company continuing
as a going concern. Due to the Company operating currently in January 2004, the
going concern uncertainty as related to our report does not apply.
/s/ Doeren Mayhew
- -------------------------
Doeren Mayhew
August 23, 2002 (Except for Note 5,
which the date is the October 11, 2002)
Troy, Michigan
F-10
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
June 30,
--------------------------------------
2004 2003
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 233,882 $ 1,163,187
Short-term investments, including accrued interest 450,080 540,582
Contract receivables, net of allowance for doubtful accounts
of $377,663 in 2004 and $227,663 in 2003 (note 2) 4,479,656 3,620,852
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 3) 3,759,498 3,423,457
Inventories, net of reserve of $50,000 in 2004 and $150,000 in 2003 1,151,703 1,154,512
Prepaid expenses and other current assets 268,005 328,517
Deferred income taxes (note 8) 173,000 290,000
----------------- -----------------
Total current assets $ 10,515,824 $ 10,521,107
----------------- -----------------
PROPERTY AND EQUIPMENT:
Land 591,514 $ 591,514
Buildings and improvements 4,962,690 4,962,690
Machinery and equipment 4,235,503 4,215,036
Transportation equipment 21,000 21,000
----------------- -----------------
$ 9,810,707 $ 9,790,240
Less: Accumulated depreciation 4,241,399 3,631,717
----------------- -----------------
Net property and equipment $ 5,569,308 $ 6,158,523
----------------- -----------------
OTHER ASSETS:
Goodwill (note 4) 2,985,909 $ 2,985,909
Patents (note 4) 256,893 354,384
Deferred income taxes (note 8) 722,000 430,000
Other assets 299,570 252,955
----------------- -----------------
Total other assets $ 4,264,372 $ 4,023,248
----------------- -----------------
Total assets $ 20,349,504 $ 20,702,878
================= =================
F-11
LIABILITIES
June 30,
--------------------------------------
2004 2003
----------------- -----------------
CURRENT LIABILITIES:
Current portion of long-term debt (note 5) $ 7,305,936 $ 8,385,918
Accounts payable 3,427,383 3,784,778
Accrued expenses:
Commissions payable 251,648 310,000
Warranty reserve 225,000 250,000
Payroll and related withholdings 85,665 62,464
Interest 240,755 610,957
Other 271,199 143,574
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 3) 652,849 1,864,980
----------------- -----------------
Total current liabilities $ 12,460,435 $ 15,412,671
----------------- -----------------
Executive deferred compensation agreements (note 11) $ 974,933 $ 974,933
Long-term debt, less current maturities (note 5) 3,613,326 1,735,000
----------------- -----------------
Total liabilities $ 17,048,694 $ 18,122,604
----------------- -----------------
SHAREHOLDERS' 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 (6,668,073) (7,388,609)
----------------- -----------------
Total shareholders' equity $ 3,300,810 $ 2,580,274
----------------- -----------------
Total liabilities and shareholders' equity $ 20,349,504 $ 20,702,878
================= =================
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-12
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
---------------------------------------------------
2004 2003 2002
----------------------------------------------------
REVENUES EARNED $ 28,155,198 $ 29,050,542 $ 24,767,655
COST OF REVENUES EARNED 21,537,364 22,197,218 18,260,764
------------ ----------- -------------
GROSS PROFIT $ 6,617,834 $ 6,853,324 $ 6,506,891
SELLING, GENERAL AND ADMINISTRA-
TIVE EXPENSES 5,497,191 6,003,959 6,452,908
IMPAIRMENT OF INTANGIBLE ASSETS
(NOTE 4) - - 2,087,308
------------ ----------- -------------
INCOME (LOSS) FROM OPERATIONS $ 1,120,643 $ 849,365 $ (2,033,325)
------------ ----------- -------------
OTHER INCOME (EXPENSES):
Interest expense (695,702) $ (639,822) $ (1,668,519)
Loss on disposal of equipment - (8,629)
Interest income 2,699 10,019 56,912
Miscellaneous (expense) income, net (7,104) 111,031 74,387
------------ ----------- -------------
Total other expenses $ (700,107) $ (518,772) $(1,545,849)
------------ ----------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM $ 420,536 $ 330,593 $ (3,579,174)
INCOME TAX (BENEFIT) EXPENSE (NOTE 8) (175,000) (29,981) 548,328
------------ ----------- -------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM $ 595,536 $ 360,574 $ (4,127,502)
EXTRAORDINARY ITEM, GAIN ON
EXTINGUISHMENT OF DEBT 125,000 - -
------------ ----------- -------------
NET INCOME (LOSS) $ 720,536 $ 360,574 $ (4,127,502)
============ =========== ============
BASIC INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY GAIN $ 0.24 $ 0.15 $ (1.67)
EXTRAORDINARY GAIN 0.05 - -
------------ ----------- -------------
TOTAL BASIC EARNINGS (LOSS) PER SHARE $ 0.29 $ 0.15 $ (1.67)
============ =========== ============
DILUTED INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY GAIN $ 0.21 $ 0.15 $ (1.67)
EXTRAORDINARY GAIN 0.05 - -
------------ ----------- -------------
TOTAL DILUTED INCOME (LOSS) PER SHARE $ 0.26 $ 0.15 $ (1.67)
============ =========== ============
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-13
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2004, 2003 and 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Common Additional
Stock Common Paid-in Accumulated
Shares Stock Capital Deficit Total
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - July 1, 2001 2,475,000 2,475 $ 9,966,408 $(3,621,681) $6,347,202
NET LOSS - - - (4,127,502) (4,127,502)
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - June 30, 2002 2,475,000 2,475 $ 9,966,408 $(7,749,183) $2,219,700
NET INCOME - - - 360,574 360,574
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - June 30, 2003 2,475,000 2,475 $ 9,966,408 $(7,388,609) $2,580,274
NET INCOME - - - 720,536 720,536
--------------- ------------- ---------------- ------------------- -----------------
BALANCE - June 30, 2004 2,475,000 2,475 $ 9,966,408 $(6,668,073) $3,300,810
=============== ============= ================ =================== =================
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-14
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
--------------------------------------------
2004 2003 2002
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 720,536 $ 360,574 $(4,127,502)
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation 620,856 589,149 619,653
Amortization 237,841 142,444 103,119
Loss on disposal of property and equipment - - 8,629
Gain on foreign currency exchange (11,127) - -
Gain on extinguishment of debt (125,000) - -
Provisions for losses on contract receivables 150,000 (22,535) (89,802)
Impairment of intangible assets - - 2,087,308
Inventories net realizable value reserve (100,000) 50,000 (50,000)
Deferred income taxes (175,000) 30,000 588,000
Changes in assets and liabilities:
Decrease (increase) in contract receivables (1,008,804) (700,210) 2,725,468
Decrease in inventories, prepaid expenses and other current
assets, and other assets 128,411 30,762 407,420
Decrease (increase) in costs estimated earnings in excess of
billings on uncompleted contracts - net (1,548,172) (536,306) 5,898,754
Decrease (increase) in accounts payable and accrued expenses 660,123 603,975 (2,083,739)
----------- ----------- -----------
Total adjustments $(2,491,118) $ 187,279 $10,214,810
----------- ----------- -----------
Net cash (used in) provided from operating activities $(1,770,582) $ 547,853 $ 6,087,308
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (17,969) $ (36,761) $ (108,378)
Purchase of patent - - (315,000)
Proceeds from sale of (purchases of) short-term investments - net 90,502 (390,862) 93,416
----------- ----------- -----------
Net cash provided from (used in) investing activities $ 72,533 $ (427,623) $ (329,962)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit agreement $ 225,574 $(2,712,568) $ (677,662)
Borrowings on long-term debt 4,047,770 - -
Payments on long-term debt (3,350,000) (1,216,312) (873,899)
Debt issuance costs (154,600) - -
----------- ----------- -----------
Net cash provided from (used in) financing activities $ 768,744 $(3,928,880) $(1,551,561)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH $ (929,305) $(3,808,650) $ 4,205,785
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,163,187 4,971,837 766,052
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 233,882 $ 1,163,187 $ 4,971,837
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,065,904 $ 1,037,915 $ 960,502
=========== =========== ===========
Noncash investing and financing activities:
Note payable reduced by purchase price adjustment $ - $(1,940,539) $ -
=========== =========== ===========
Write-down of goodwill based on purchase price adjustment $ - $ 1,940,539 $ -
=========== =========== ===========
The attached NOTES TO CONSOIDATED FINANCIAL STATEMENTS
form an integral part of these statements.
F-15
PRODUCTIVITY TECHNOLOGIES
CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2004, 2003 and 2002
NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is a manufacturer of automated industrial systems, machinery,
equipment, custom electrical control panels and a provider of engineering
services. It operates with four manufacturing plants, sales and engineering
offices. Two of the manufacturing plants are located in Fenton, Michigan, the
third plant is located in Westland, Michigan and a fourth office located in
Germany.
Sales of products have principally been to automobile and automotive parts
manufacturers and appliance manufacturers. Other customers include manufacturers
of garden and lawn equipment, office furniture, heating, ventilation and air
conditioning equipment and aircraft. Sales to automotive-related customers have
accounted for the majority of total annual sales. Sales are predominantly in the
United States but, in recent years, the Company has targeted sales efforts in
Canada, Mexico, Europe and Asia. Export sales during the years ended June 30,
2004, 2003 and 2002, amounted to approximately 21%, 17% and 23% of annual sales,
respectfully.
In March 2004, the Company began operations in Germany. The Company formed Atlas
Technologies, GmbH, which is owned 100% by Atlas Technologies (wholly owned
subsidiary) and is included in these consolidated financial statements.
Company Operations
The Company operates in one segment. This is based on the fact that the
Company's chief operating decision maker, the Company's Chief Executive Officer,
regularly reviews operating results, assesses performance and makes decisions
about resources at the parent company level.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principals generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Such management estimates include an
allowance for doubtful accounts receivable, recognition of profit under
long-term contracts, valuation allowances against deferred income taxes,
estimates related to recovery of long lived assets and accruals of product
warranty and other liabilities.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of PTC
and its wholly owned subsidiaries, Atlas Technologies, Inc. ("Atlas") and its
wholly owned subsidiary Atlas Technologies, Gmbh (ATG) and Westland Control
Systems, Inc. ("Westland") (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated upon consolidation.
F-16
Cash Equivalents
Cash equivalents are money market investments. Short-term investments,
representing U.S. Treasury Bills with maturities of twelve months or less, are
carried at cost, which approximates market value.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, short-term
investments and contract receivables. While a significant portion of the
Company's accounts receivable is concentrated with a few customers as shown
below, the Company attempts to minimize its credit risk by reviewing all
customers' credit histories before extending credit and by monitoring customers'
credit exposure on a continuing basis. In addition, sales to customers in South
America and China typically are supported by Export-Import Bank (EXIM)
guarantees and letters of credit, respectively. The Company establishes an
allowance for possible losses on contract receivables, if necessary, based upon
factors surrounding the credit risk of specific customers, historical trends and
other information. The Company's inability to collect on its contract
receivables could have a material adverse effect on the Company's operations.
Two customers accounted for 44%, 39% and 38% of total revenue for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively.
The following individual customers accounted for 10% or more of total accounts
receivable for the fiscal years ended:
June 30,
----------------------------------------
2004 2003
------------------ ------------------
Ford Motor Company 23% 19%
GKN Aerospace 9% 15%
General Motors 21% 4%
Veltri Modular 1% 18%
Fair Values of Financial Instruments
The carrying amounts of the Company's cash, short-term investments, contract
receivables, accounts payable and accrued expenses approximate fair value. The
long-term debt pursuant to the Company's bank credit agreements approximate fair
value because the interest rates on the majority of the loans outstanding change
with market rates.
Advertising
The Company expenses advertisement costs as incurred.
F-17
Revenue and Cost Recognition
Atlas Technologies, Inc. and Atlas Technologies GmbH - Revenues earned consist
primarily of contract revenues from fixed price contracts, and the related
contract costs, are recognized using the percentage-of-completion method,
measured by the percentage of contract costs incurred to date to total estimated
costs for each contract. The Company estimates the status of individual
contracts when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, repairs
and depreciation costs. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
Changes in job performance, job conditions, estimated profitability, and final
contract settlement may result in revisions to costs and income, and are
recognized in the period the revisions are determined.
The amount of earnings, which the Company will ultimately realize would differ
in the near term from the amounts estimated in the accompanying consolidated
financial statements if total actual costs upon completion of a contract are
either higher or lower than the amount estimated.
Westland Control Systems, Inc. - Revenues are recognized upon product shipment.
Shipping and Handling
The Company classifies amounts billed to customers in sales transactions related
to shipping and handling as revenue and costs incurred by the Company for
shipping and handling as cost of revenues earned.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
primarily include raw materials and spare parts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line and accelerated methods, generally using the following estimated
useful lives:
Building and improvements 20-40 years
Machinery and equipment 3-10 years
Transportation equipment 2-5 years
F-18
Goodwill and Intangible Assets
The Company evaluates the recoverability of goodwill on an annual basis or in
certain circumstances as required under Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Intangible assets are evaluated whenever events or changes in circumstances
indicate that the carrying value of the asset may be impaired. An impairment
loss is recognized when the fair value or the estimated future cash flows
expected to result from the use of the asset, including disposition, is less
than the carrying value of the asset.
The patents are amortized over their estimated useful lives of six to seventeen
years using the straight-line method.
Warranty
The Company warrants under certain circumstances that its products meet certain
agreed-upon manufacturing and material specifications. The Company records a
warranty liability based on anticipated future claims.
Health Insurance
Atlas was self-insured for certain losses relating to employee medical benefits.
Atlas discontinued its self-insured plan for the majority of health benefits
during the year ended June 30, 2002 and now uses a third party insurer. Atlas
continues to be self-insured for vision and dental insurance.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes specified by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under the asset and liability method of
accounting for income taxes, deferred tax assets and liabilities are recognized
based on the estimated future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
F-19
Stock Based Compensation
The Company has adopted SFAS No. 148 and the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." The Company records
compensation expense for stock options only if the market price of the Company's
stock, on the date of grant, exceeds the amount an individual must pay to
acquire the stock, if dilutive. 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 fiscal 2004, 2003 and 2002 would have been the pro forma
amounts indicated below (in thousands, except per share amounts):
June 30,
---------------------------------------------
2004 2003 2002
------------ ------------- --------------
Net income (loss) as reported $ 721 $ 361 $ (4,128)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 23 - -
------------ ------------- --------------
Pro forma net earnings $ 698 $ 361 $ (4,128)
------------ ------------- --------------
Earnings (loss) per share:
As reported - Basic $ 0.29 $ 0.15 $ (1.67)
------------ ------------- --------------
As reported - Diluted $ 0.26 $ 0.15 $ (1.67)
------------ ------------- --------------
Pro forma - Basic $ 0.28 $ 0.15 $ (1.67)
------------ ------------- --------------
Pro forma - Diluted $ 0.26 $ 0.15 $ (1.67)
------------ ------------- --------------
The fair value of options at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in fiscal 2004: dividend yield of 0%; expected volatility of 217.85%;
risk free interest rate of 1.75%; and expected life of 5 years. The effects of
applying SFAS No. 123 in the above pro forma disclosures are not necessarily
indicative of future amounts, because additional stock option awards could be
made in future years.
Income (Loss) Per Share
Income (Loss) per share reflected in the consolidated statement of operations is
presented in accordance with SFAS No. 128, "Earnings per Share". The following
presents the income (loss) per share calculations:
June 30,
----------------------------------------------------
2004 2003 2002
------------ ------------ --------------
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 720,536 $ 360,574 $ (4,127,502)
Denominator for basic and diluted
earnings per share:
Weighted average shares 2,475,000 2,475,000 2,475,000
outstanding, basic
Weighted average shares
outstanding, diluted 2,731,000 2,475,000 2,475,000
F-20
Options to purchase shares of common stock were outstanding at June 30, 2003 and
2002 but were not included in the computation of diluted earnings per share
because the shares would be antidilutive.
Long-Lived Assets
Long-lived assets, such as goodwill, patent and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value.
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition". SAB No. 104 revises
and rescinds certain sections of SAB No. 101 in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. Accordingly there is no impact to our results of
operations, financial position or cash flows as a result of the issuance of SAB
No. 104.
On December 23, 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132
("FAS 132 (revised 2003)")". This statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by SFAS No. 87, "Employers'
Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits",
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". The new rules require additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and postretirement benefit plans. The new disclosures are
generally effective for 2003 calendar year-end financial statements of public
companies, with a delayed effective date for certain disclosures and for foreign
plans. The adoption of SFAS No. 132 did not have an effect on our consolidated
financial statements.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of this standard had no effect on the Corporation's
financial condition or results of operations
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to FIN 46, "Consolidation of Variable Interest Entities". FIN 46R clarifies some
of the provisions of FIN 46 and exempts certain entities from its requirements.
FIN 46R is effective at the end of the first interim period ending after March
15, 2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provisions of FIN 46 until the effective date of FIN 46R.
The adoption of FIN 46R did not have an effect on our consolidated financial
statements.
F-21
NOTE 2 CONTRACT RECEIVABLES
The contract receivables consist of the following:
June 30,
------------------ -- ------------------
2004 2003
------------------ ------------------
Billed
Completed contracts $ 1,784,168 $ 1,514,981
Uncompleted contracts 3,073,151 2,333,534
------------------ ------------------
Total contract receivables $ 4,857,319 $ 3,848,515
Less: Allowance for doubtful accounts 377,663 227,663
------------------ ------------------
Total $ 4,479,656 $ 3,620,852
================== ==================
NOTE 3 COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
June 30,
-----------------------------------------
2004 2003
------------------- -------------------
Costs incurred on uncompleted contracts $ 25,558,246 $ 28,839,346
Estimated earnings on uncompleted contracts 11,273,444 12,501,450
------------------- -------------------
Total costs and estimated earnings incurred
on uncompleted contracts $ 36,831,690 $ 41,340,796
Less: Billings to date 33,725,041 39,782,319
------------------- -------------------
Total $ 3,106,649 $ 1,558,477
=================== ===================
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,759,498 $ 3,423,457
Billings in excess of costs and estimated
earnings on uncompleted contracts (652,849) (1,864,980)
------------------- -------------------
Total $ 3,106,649 $ 1,558,477
=================== ===================
F-22
NOTE 4 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on July
1, 2001. As defined by SFAS No. 142, the Company has identified two reporting
units: 1) Atlas and 2) Westland, which constitute components of the Company's
business that includes goodwill.
The write-down of goodwill for the fiscal year ended June 30, 2003 was due to a
reduction of the purchase price of Westland, thus the write-down was recognized
as a reduction in the note payable to the prior shareholder.
For the fiscal year ended June 30, 2002, the Company completed the transitional
and annual impairment test resulting in Productivity Technologies Corp. and
Subsidiaries recording a charge to earnings of $1,595,440, or $0.65, per diluted
share for the write-down of goodwill related to its Westland reporting unit. The
impairment charge is included in the caption "Impairment of Intangible Assets"
in the statement of operations for the year ended June 30, 2002.
This write-down resulted from management's consideration of factors related to
the performance of the Westland reporting unit, including lower than projected
sales, operating losses and negative cash flows. Based on these considerations
and others, the Company updated its operating and cash flow projections for the
Westland business. An analysis of the projected discounted future cash flows
indicated that future recoverability of goodwill related to the Westland
operations was uncertain. Accordingly, an impairment charge was recorded for
fiscal year ended June 30, 2002.
Management has assessed the remaining carrying amount of previously recorded
goodwill of $2,985,909 and determined that such amount is not impaired in
accordance with SFAS No. 142. Accordingly, goodwill impairment was not recorded
for the year ended June 30, 2004.
The changes in the carrying amount of goodwill for fiscal 2004 and fiscal 2003
are as follows:
Westland Atlas Total
------------------- ------------------- -------------------
Balance as of June 30, 2002 $ 2,678,250 $ 2,248,198 $ 4,926,448
Purchase price adjustment (1,940,539) (1,940,539)
------------------- ------------------- -------------------
Balance as of June 30, 2003 $ 737,711 $ 2,248,198 $ 2,985,909
=================== =================== ===================
Balance as of June 30, 2004 $ 737,711 $ 2,248,198 $ 2,985,909
=================== =================== ===================
F-23
Patents and Other Intangible Assets
Intangible assets excluding goodwill consist of the following:
June 30, 2004 June 30, 2003
--------------------------------------------- ---------------------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
----------------- --------------------------- ----------------- --------------------------
Patent - Atlas $ 315,000 $ 118,125 $ 196,875 $ 315,000 $ 65,625 $ 249,375
Patent - Westland 258,132 198,114 60,018 258,132 153,123 105,009
----------------- ------------- ------------- ----------------- ------------ ------------
Total patents $ 573,132 $ 316,239 $ 256,893 $ 573,132 $ 218,748 $ 354,384
----------------- ------------- ------------- ----------------- ------------ ------------
Non-compete
agreements $ 348,750 $ 266,052 $ 82,698 $ 348,750 $ 230,292 $ 118,458
IRB closing fees 138,785 138,785 - 138,785 62,194 76,591
ML Closing fees 154,603 24,550 130,053 - - -
----------------- ------------- ------------- ----------------- ------------ ------------
Total other $ 642,138 $ 429,387 $ 212,751 $ 487,535 $ 292,486 $ 195,049
----------------- ------------- ------------- ----------------- ------------ ------------
Total $ 1,215,270 $ 745,626 $ 469,644 $ 1,060,667 $ 511,234 $ 549,433
================= ============= ============= ================= ============ ============
On an annual basis the Company evaluates its patents and other intangible assets
for impairment. At June 30, 2002, the Company determined that the Westland
patent carrying amount is not recoverable and its carrying amount exceeds its
fair value. The impairment loss is a result of a lack of sales opportunities
afforded by the patent and a lack of corresponding cash flows generated by the
patent. As a result, an impairment loss of $491,868 has been recognized in the
statement of operations in the caption "Impairment of Intangible Assets" for the
year ended June 30, 2002. No impairment charge was recognized for the year ended
June 30, 2004 and 2003.
All of the Company's patents and other intangible assets are subject to
amortization. Amortization expense totaled $237,841, $142,444 and $103,119,
respectively for the years ended June 30, 2004, 2003 and 2002. Estimated
aggregate amortization expense for each of the next five years is approximated
as follows:
Fiscal year Amount
- ----------------------------------------- ---------------------
2005 $ 198,000
2006 178,000
2007 53,000
2008 41,000
2009 -
Thereafter -
---------------------
$ 470,000
=====================
F-24
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
2004 2003
-------------- -------------
Revolving line of credit with financial institution, Merrill Lynch Business Financial
Services, Inc. ("MLB"), with interest payable monthly at the 2.85% above 30-day
LIBOR (1.32% at June 30, 2004), due December 2004. This debt has maximum
borrowings up to $4,000,000 and is secured by substantially all assets of Atlas $ 3,998,177 $ -
Note payable, MLB, due in monthly installments of $19,444 through December 2010,
plus interest at 3.15% above the 30-day LIBOR. The note is secured by substantially all
assets of Atlas. 3,402,780 -
Note payable, MLB, due in monthly installments of $13,889 through December 2006,
plus interest at 3.15% above the 30-day LIBOR. The note is secured by substantially
all assets of Atlas. 430,555 -
Credit facility with financial institution (Spectrum), with interest due monthly at the
bank's prime rate (4.0% at June 30, 2004) plus 5.2%, due December 2005. The facility
allows maximum borrowings up to $1,250,000, based on eligible accounts receivable
and is collateralized by substantially all assets of Westland. 695,167 -
Note payable to a financial institution, due in monthly installments of principal plus
interest at the banks prime rate plus 3.0%, due February 2005. This debt is secured by
substantially all assets of Westland. The entire amount of this debt has been classified
as a current liability. 2,212,583 2,178,148
Convertible debentures, net of a discount of $20,000, payable to a financial institution
(Cornell Capital Partners), with interest accruing at 5% and payable upon maturity. The
debt mature June 2007 and is secured by all real property of the Company. 180,000 -
Commercial mortgage loan payable to a financial institution (Bank One), with monthly
installments of $25,000 plus interest at the banks prime rate plus 1.25%, originally due
December 2012, repaid during fiscal 2004. - 2,700,000
Bank one revolving line of credit repaid during fiscal 2004 - 4,467,770
Note payable to former owner of Westland with a original maturity of January 2006.
This note was repaid in fiscal 2004, net of $125,000 gain on extinguishment. - 775,000
-------------- -------------
$ 10,919,262 $ 10,120,918
Less - current maturities 7,305,936 8,385,918
-------------- -------------
$ 3,613,326 $ 1,735,000
============== =============
F-25
In connection with these financing transactions, the Company, Atlas and Westland
retired the remaining obligations to Thomas Lee, in consideration of a payment
of $525,000, resulting in a gain on the extinguishment of debt of approximately
$125,000. Under agreements entered into with Bank One in January 1999, Ronald
Prime, formerly an owner and executive officer of Atlas, and Michael Austin,
formerly an owner and executive officer of Atlas and currently a director of the
Company, agreed to subordinate their rights to receive payments for deferred
executive compensation obligations of approximately $974,000 (which were
originally scheduled to be paid during the period from July 2000 through July
2002). These executives agreed to continue to subordinate their right to payment
to MLB.
In June 2004, Cornell Capital ("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.
The Company accounted for the conversion features of the convertible debentures
in accordance with Emerging Issues Task Force (EITF) No. 00-27, "Application of
Issue 98-5 to Certain Convertible Instruments". As of June 30, 2004 there is no
beneficial conversion option as the conversion price is equal to or less than
the fair value of the common stock. Therefore, no intrinsic value has been
assigned to the conversion option.
The aggregate maturities of long-term debt are as follows:
Fiscal year Amount
- ----------------------------------------- ---------------------
2005 $ 7,305,936
2006 400,000
2007 330,555
2008 413,333
2009 233,333
Thereafter 2,236,105
---------------------
$ 10,919,262
=====================
F-26
NOTE 6 SHAREHOLDERS' EQUITY
On July 5, 1994, PTC (under its prior name Production Systems Acquisition Corp.)
consummated its Offering of 1,700,000 units (425,000 shares had been previously
issued for $25,000). Each unit consisted of one share of the Company's common
stock, $0.001 par value, and two warrants. (These warrants and other identical
warrants issued to investors expired unexercised in fiscal 2002.)
The Company is authorized to issue 1,000,000 shares of preferred stock ($.001
par value) with such designations, voting and other rights and preferences as
may be determined from time-to-time by the Board of Directors. As of June 30,
2004, no preferred stock has been issued by the Company.
In 2001, the Company's common stock was de-listed for trading on the NASDAQ
Small Cap Market. At that time, the Company's common stock became listed for
quotation on the NASD's Over the Counter Bulletin Board (OTCBB). In October
2003, due to a delay in the Company's filing its annual report on Form 10-K for
the fiscal year ended June 30, 2003, the Company's quotation on the OTCBB was
suspended. The Company's common stock then was traded through the Pink Sheets
LLC. In August 2004, the Company's common stock was relisted for quotation on
the OTCBB.
NOTE 7 EMPLOYEE BENEFIT AND OPTION PLANS
The Company has a 401(k) plan covering substantially all employees. The Plan
allows for eligible employees to defer a portion of their salary. In addition,
discretionary contributions may be made by the Company. The Company made no
contributions for the years ended June 30, 2004, 2003 and 2002.
PTC adopted a Performance Equity Plan in 1996 to enable the Company to offer to
selected personnel an opportunity to acquire an equity interest in the Company
through the award of incentives such as stock options, stock appreciation rights
and/or other stock-based awards. The total number of shares of common stock
reserved and available for distribution under the Plan is 530,000 shares. The
Company has adopted SFAS No. 148 and the disclosure-only provisions of SFAS No,
123, "Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized for the Plan in 2004, 2003 and 2002.
A summary of the status of the Company's stock options for the years ended June
30, 2004, 2003 and 2002 are as follows:
Weighted
Weighted Average
Average Exercise
Shares Price
--------------- ----------------
Outstanding and exercisable at June 30, 2002 289,167 $ 3.00
Granted - -
Expired - -
Exercised - -
--------------- ----------------
Outstanding and exercisable at June 30, 2003 289,167 $ 3.00
Granted 256,000 0.15
Expired 86,167 5.00
Exercised - -
--------------- ----------------
Outstanding and exercisable at June 30, 2004 459,000 $ 0.76
=============== ================
F-27
The following summarizes information regarding stock options outstanding and
exercisable at June 30, 2004, 2003 and 2002:
Weighted Average
------------------------------------
Options Remaining
Range of Outstanding and Contractual Exercisable
Exercise Prices Exercisable Life Price
- ----------------------- ----------------------- ---------------- ----------------
$0.15 - $1.88 459,000 2.56 $ 0.76
NOTE 8 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
June 30,
-------------------------------------------
2004 2003
-------------------- -------------------
Current
Warranty accrual $ 77,000 $ 85,000
Inventory net realizable value reserve 17,000 51,000
Other 79,000 154,000
-------------------- -------------------
Net current deferred tax asset $ 173,000 $ 290,000
==================== ===================
Non-Current
Depreciation and basis of assets $ (967,000) $ (796,000)
Impairment of intangible assets 542,500 542,500
Research credit carryforward 1,165,000 1,165,000
Net operating loss carryforwards 1,999,000 2,024,400
Executive deferred compensation agreement 331,500 331,500
Other 38,500 38,700
Valuation allowance (2,387,500) (2,876,100)
-------------------- -------------------
Net non-current deferred tax asset $ 722,000 $ 430,000
==================== ===================
At June 30, 2004, the Company had aggregated net operating losses of
approximately $5,879,700 for income tax purposes, which begin to expire in 2020.
In addition, the Company had tax research credit carry forwards of approximately
$1,165,000 which will begin to expire in 2012.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during periods in which
those temporary differences become deductible. Management considers the
scheduled reversals of deferred taxes, projected future taxable income, and tax
planning strategies in making this assessment.
F-28
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance at June 30, 2004. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The significant components of income tax expense (benefit) is as follows:
June 30,
----------------------------------------------------
2004 2003 2002
------------ ------------ -----------
Federal
Current $ 117,000 $ 8,000 $ (39,672)
Deferred (292,000) (37,981) 588,000
------------ ------------ -----------
Total income taxes (benefit) $ (175,000) $ (29,981) $ 548,328
============ ============ ============
The reconciliation of income tax computed at the federal statutory rate (34%) to
income tax expense benefit is as follows:
June 30,
----------------------------------------------------
2004 2003 2002
------------- ------------- --------------
Tax expense (benefit) at statutory rate $ 185,482 $ 112,402 $ (1,217,000)
Valuation allowance, tax research credit
valuation and other non-deductible items (385,085) (146,206) 1,781,000
Other - net 24,603 3,823 (15,672)
------------- ------------- --------------
Total income tax (benefit) expense $ (175,000) $ (29,981) $ 548,328
============= ============= ==============
NOTE 9 OPERATING LEASE COMMITMENT
The Company is obligated for a building lease expiring June 2006 for its
Westland Subsidiary. Rent expense for the years ended June 30, 2004, 2003 and
2002, totaled $223,768, $214,867 and $275,486, respectively. Minimum rental
payments under this non-cancelable lease at June 30, 2004, are as follows:
Fiscal year Amount
- ------------------------------ -------------------
2005 $ 214,867
2006 214,867
F-29
NOTE 10 EXPORT SALES
A breakdown of export sales, based on shipment destination, is as follows:
June 30,
----------------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
United States $ 22,192,991 $ 24,202,585 $ 19,053,264
France 227,958 535,831 1,217,595
Brazil 424,666 206,074 1,569,391
China 3,951,055 1,455,650 1,464,331
Mexico 57,185 45,977 769,624
England 238,827 49,689 443,691
Germany 119,452 25,051 136,726
Canada 943,064 2,529,235 109,586
Other foreign countries - 450 3,447
-------------- -------------- --------------
Total $ 28,155,198 $ 29,050,542 $ 24,767,655
============== ============== ==============
F-30
NOTE 11 DEFERRED COMPENSATION
As part of the purchase of Atlas, the Company entered into deferred compensation
agreements with Ronald Prime and Mike Austin, former owners and executives of
Atlas. This deferred compensation was originally scheduled to be paid over a
period from July 2000 through July 2002. The former owners agreed to defer
receipt of their respective compensation under a subordinate agreement as part
of debt financing arrangements entered into by the Company and MLB. Included in
the accompanying consolidated financial statements for the years ended June 30,
2004 and 2003 related to these amended agreements are the following:
June 30,
----------------------------------------
2004 2003
------------------ ------------------
Payable under executive deferred
compensation agreements $ 974,933 $ 974,933
================== ==================
NOTE 12 LEGAL PLEADINGS
The Company is a party to routine litigation matters in the ordinary course of
its business. No such pending matters, individually or in the aggregate, if
adversely determined, are believed by management to be material to the business
or financial condition of the Company.
NOTE 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present Productivity Technologies Corp. and Subsidiaries
condensed operating results for each of the eight fiscal quarters for the period
ended June 30, 2004. The information for each of these quarters is unaudited. In
the opinion of management, all necessary adjustments, which consists only of
normal and recurring accruals, have been included to fairly present the
unaudited quarterly results. This data should be read together with Productivity
Technologies Corp. and Subsidiaries consolidated financial statements and the
notes thereto, the Independent Auditors Report and Management's Discussions and
Analysis of Financial Condition and Results of Operations.
Three months ended (In thousands)
-------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2004 2004 2003 2003 2003 2003 2002 2002
-------------------------------------------------------------------------------------------
Revenues $ 7,113 $ 5,639 $ 7,839 $ 7,564 $ 8,034 $ 6,663 $ 7,617 $ 6,737
Cost of revenues 4,815 4,281 6,491 5,950 6,179 4,955 5,900 5,163
Net income (loss) 500 (16) 23 214 194 107 153 (93)
Net income (loss)
per share:
Basic 0.20 (0.01) 0.01 0.09 0.09 0.04 0.06 (0.04)
Diluted 0.17 (0.01) 0.01 0.09 0.09 0.04 0.06 (0.04)
Shares used in
computing per
share amounts:
Basic 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475
Diluted 2,731 2,475 2,475 2,475 2,475 2,475 2,475 2,475
F-31
NOTE 14 SUBSEQUENT EVENT
In June 2004, 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) 80% 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) 80% 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 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.
F-32
We have not authorized any dealer, salesperson or other
person to provide any information or make any
representations about Productivity Technologies Corp.
except the information or representations contained in
this prospectus. You should not rely on any additional
information or representations if made.
-----------------------
a solicitation of an offer to buy any securities: ---------------------
? except the common stock offered by this PROSPECTUS
prospectus; ---------------------
? in any jurisdiction in which the offer or
solicitation is not authorized;
? in any jurisdiction where the dealer or other 8,173,600 Shares of Common Stock
salesperson is not qualified to make the offer
or solicitation;
? to any person to whom it is unlawful to make the PRODUCTIVITY TECHNOLOGIES CORP.
offer or solicitation; or
? to any person who is not a United States
resident or who is outside the jurisdiction of
the United States.
The delivery of this prospectus or any accompanying sale ______________, 2004
does not imply that:
? there have been no changes in the affairs of
Productivity Technologies Solutions after the
date of this prospectus; or
? the information contained in this prospectus is
correct after the date of this prospectus.
-----------------------
Until _________, 2004, all dealers effecting transactions
in the registered securities, whether or not
participating in this distribution, may be required to
deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting
as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include an indemnification provision under
which we have agreed to indemnify directors and officers of Productivity
Technologies from and against certain claims arising from or related to future
acts or omissions as a director or officer of Productivity Technologies. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of Productivity
Technologies pursuant to the foregoing, or otherwise, Productivity Technologies
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. Productivity Technologies will pay all expenses in connection with
this offering.
Securities and Exchange Commission Registration Fee $ 704.20
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 16,795.80
TOTAL $ 85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
During the past three years the registrant has issued the following
securities without registration under the Securities Act of 1933:
On June 21, 2004, Cornell Capital Partners entered into a securities
purchase agreement with Productivity Technologies under which Cornell Capital
Partners agreed to purchase the total amount of $300,000 of convertible
debentures. Cornell Capital purchased $200,000 of convertible debentures on June
21, 2004, purchased $50,000 on June 30, 2004 upon a Form 211 being filed on
behalf of Productivity Technologies with the National Association of Securities
Dealers and purchased $50,000 in additional debentures in September 2004. 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) 80% 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 Productivity Technologies. 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, Productivity
Technologies 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) 80% of the
average of the three lowest closing bid prices of the common stock for thirty
trading days immediately preceding the conversion date. No principal payments
are due prior to maturity. Cornell Capital Partners is entitled to a 10%
discount from the purchase price of the convertible debentures and, therefore,
the net proceeds received by the Company is 10% less than the face amount of the
convertible debentures.
ITEM 27. EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.2 Amendment to Certificate of Incorporation of the Company filed
May 28, 1996 (2)
II-1
3.3 By-laws of the Company (1)
4.1 Form of common stock Certificate of the Company (1)
5.1 Opinion of Counsel (10)
10.1 1996 Performance Equity Plan of the Company (3)
10.2 WCMA Loan and Security Agreement dated as of November 25, 2003
between Atlas Technologies, Inc. and Merrill Lynch Business
Financial Services Inc. (4)
10.3 Term Loan and Security Agreement dated as of November 25, 2003
between Atlas Technologies, Inc. and Merrill Lynch Business
Financial Services Inc. (4)
10.4 Term Loan and Security Agreement dated as of November 25, 2003
between Atlas Technologies, Inc. and Merrill Lynch Business
Financial Services Inc. (4)
10.5 General Credit and Security Agreement dated as of December 3,
2003 between WCS Acquisition Corp. and Spectrum Commercial
Services Company. (4)
10.6 Guarantor Payment Agreement dated as of December 10, 2003 between
WCS Acquisition Corp. and Bank One, NA. (4)
10.7 Standby Equity Distribution Agreement dated June 21, 2004 between
the Registrant and Cornell Capital Partners LP(7)
10.8 Registration Rights Agreement dated June 21, 2004 between the
Registrant and Cornell Capital Partners, LP(7)
10.9 Securities Purchase Agreement dated June 21, 2004 among the
Registrant and the Buyers(7)
10.10 Debenture dated June 21, 2004 between the Registrant and Cornell
Capital Partners L.P.(7)
10.11 Investor Registration Rights Agreement dated June 21, 2004
between the Registrant and the Investors(7)
10.12 Placement Agent Agreement dated June 21, 2004 among the
Registrant, Newbridge Securities Corporation and Cornell Capital
Partners LP(7)
10.13 Termination Agreement dated December 23, 2004 between the
Registrant and Cornell Capital Partners LP (8)
10.14 Standby Equity Distribution Agreement dated December 23, 2004
between the Registrant and Cornell Capital Partners LP(8)
10.15 Registration Rights Agreement dated December 23, 2004 between the
Registrant and Cornell Capital Partners, LP(8)
10.16 Placement Agent Agreement dated December 23, 2004 among the
Registrant, Newbridge Securities Corporation and Cornell Capital
Partners LP(8)
10.17 Debenture dated June 30, 2004 between the Registrant and Cornell
Capital Partners LP(7)
16.1 Letter regarding change in BDO Seidman, LLP as certifying
accountant (5)
16.2 Letter regarding change in Doeren Mayhew as certifying accountant
(6)
21.1 List of Subsidiaries (4)
II-2
23.1 Consent of Kirkpatrick & Lockhart LLP(10)
23.2 Consent of Follmer Rudzewicz PLC(9)
23.3 Consent of Doeren Mayhew(9)
(1) Filed as an exhibit to Registration Statement on Form S-1, No. 33-78188,
and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K filed June 7, 1996 and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for fiscal year ended March 31,
1996 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-Q for quarter ended March 31, 2004
and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 8-K dated July 31, 2001 and
incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 8-K dated March 31, 2003 and
incorporated herein by reference.
(7) Filed as an exhibit to Form S-1 dated July 23, 2004 and incorporated herein
by reference.
(8) Filed as an exhibit to Report on Form 8-K dated December 23, 2004 and
incorporated herein by reference.
(9) Provided herewith.
(10) To be filed by amendment.
II-3
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) Include any additional or changed material information on
the plan of distribution;
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on our behalf by the undersigned, on December 27, 2004.
Date: December 27, 2004 PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
-----------------------------------
Name: Samuel N. Seidman
Title: President and
Chief Executive Officer
Date: December 27, 2004 By: /s/ Jesse A. Levine
-----------------------------------
Name: Jesse A. Levine
Title: Chief Financial Officer
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/ Samuel N. Seidman
- -------------------------------- Date: December 27, 2004
Samuel N. Seidman
Director
/s/ Jesse A. Levine
- -------------------------------- Date: December 27, 2004
Jesse A. Levine
Director
/s/ Alan H. Foster
- -------------------------------- Date: December 27, 2004
Alan H. Foster
Director
II-5