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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q/A Amendment No. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________
Commission File Number 1-11729
Liberty Technologies, Inc.
--------------------------
(Exact name of registrant as specified in its Charter)
Pennsylvania 23-2295708
- -------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
--------------------------
Lee Park
555 North Lane
Conshohocken, PA 19428
610-834-0330
--------------------------
(Address, including zip code, and telephone number
(including area code) of registrant's principal
executive office)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. YES X NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Shares Outstanding at August 14, 1997
- ------------------ ----------------------------------------
Common Stock 5,010,339
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<PAGE>
LIBERTY TECHNOLOGIES, INC.
INDEX
PART I FINANCIAL INFORMATION
----------------------------
Item 1. Consolidated Financial Statements (unaudited): Page No.
--------
Consolidated Statements of Operations
Three months and six months ended June 30,
1997 and 1996.......................... .............. 3
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996.................... 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996............... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 9
PART II OTHER INFORMATION
-------------------------
Item 6. Exhibits and Reports on Form 8-K............................ 13
Signatures................................................... 14
Exhibit Index................................................ 15
Exhibit - Calculation of Earnings Per Share.................. 16
2
<PAGE>
PART I. Financial Information
<TABLE>
Item 1. Consolidated Financial Statements
LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
(Unaudited) (Unaudited)
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product ............................................. $ 3,473 $ 2,850 $ 7,563 $ 5,944
Service ............................................. 7,456 7,211 13,122 12,408
-------- -------- -------- --------
10,929 10,061 20,685 18,352
-------- -------- -------- --------
Cost of revenues:
Product ............................................. 1,294 1,086 2,815 2,027
Service ............................................. 4,591 4,498 8,450 7,750
-------- -------- -------- --------
5,885 5,584 11,265 9,777
-------- -------- -------- --------
Gross profit ............................. 5,044 4,477 9,420 8,575
-------- -------- -------- --------
Operating expenses:
Engineering and product development ................. 1,177 947 2,285 1,947
Selling, general and administrative ................. 3,493 3,380 6,962 6,514
-------- -------- -------- --------
4,670 4,327 9,247 8,461
-------- -------- -------- --------
Operating income ......................... 374 150 173 114
Interest expense, net .................................. (214) (21) (298) (71)
Other income ........................................... -- 25 -- 25
-------- -------- -------- --------
Income (loss) before taxes
and minority interest ............... 160 154 (125) 68
Income taxes ........................................... -- 64 -- 23
-------- -------- -------- --------
Income (loss) before
minority interest ................... 160 90 (125) 45
Minority interest ...................................... (33) (12) (105) 67
-------- -------- -------- --------
Net income (loss) ...................................... $ 193 $ 102 $ (20) $ (22)
======== ======== ======== ========
Net income (loss) per share ............................ $ 0.04 $ 0.02 $ 0.00 $ 0.00
======== ======== ======== ========
Shares used in computing net income (loss)
per share ........................................ 5,064 5,310 5,000 4,964
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
ASSETS June 30, December 31,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 506 $ 324
Accounts receivable, net ............................... 9,455 8,499
Inventories ............................................ 3,746 3,742
Deferred income taxes .................................. 327 385
Prepaid income taxes ................................... 263 230
Prepaid expenses and other ............................. 974 414
-------- --------
Total current assets ......................... 15,271 13,594
Property and equipment, net ................................ 4,261 4,612
Goodwill, net .............................................. 4,800 4,961
Deferred income taxes, net ................................. 367 367
Minority interest .......................................... 50 --
Other assets ............................................... 1,323 1,483
-------- --------
$ 26,072 $ 25,017
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit ......................................... $ 7,145 $ 5,725
Current maturities of long-term debt ................... 58 66
Book overdraft ......................................... 247 472
Accounts payable ....................................... 2,901 2,728
Accrued compensation and benefits ...................... 1,118 1,250
Unearned revenue ....................................... 50 12
Income taxes payable ................................... -- 137
Other accrued expenses ................................. 399 376
-------- --------
Total current liabilities .................... 11,918 10,766
-------- --------
Long-term debt ............................................. 197 217
-------- --------
Minority interest .......................................... -- 61
-------- --------
Shareholders' equity:
Series A Preferred stock, $.001 par value, 10,000 shares
authorized, none issued ............................. -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 5,022,987 and 5,018,987 shares issued,
and 5,004,615 and 4,989,915 outstanding ............. 50 50
Additional paid-in capital ............................. 17,222 17,242
Accumulated deficit .................................... (3,198) (3,178)
Treasury stock at cost ................................. (94) (149)
Cumulative translation adjustment ...................... (23) 8
-------- --------
Total shareholders' equity ................... 13,957 13,973
-------- --------
$ 26,072 $ 25,017
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
LIBERTY TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
(Unaudited)
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (20) $ (22)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ........................................... 1,056 1,018
Deferred income taxes ................................................... 58 --
Minority interest in income (loss) of joint venture ..................... (105) 67
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable ......................................... (957) (732)
Inventories ................................................. (170) (522)
Prepaid expenses and other .................................. (332) 71
Other assets ................................................ (130) (165)
Increase (decrease) in:
Accounts payable ........................................... 173 315
Accrued expenses ........................................... (109) (529)
Income taxes payable ....................................... (154) (64)
Unearned revenue ........................................... 38 (308)
------- -------
Net cash used in operating activities ............................ (652) (871)
------- -------
Cash flows from investing activities:
Purchases of property and equipment ......................................... (269) (892)
Purchases of licenses ....................................................... -- (100)
Patent costs ................................................................ -- (177)
Other ....................................................................... (26) 21
------- -------
Net cash used in investing activities ............................ (295) (1,148)
------- -------
Cash flows from financing activities:
Payments of long-term debt .................................................. (28) (58)
Net borrowings under line of credit ......................................... 1,420 1,800
Decrease in book overdraft .................................................. (225) --
Proceeds from Employee Stock Purchase Plan .................................. 28 33
Exercise of options and warrants ............................................ 7 67
Investment from minority shareholder in joint venture ....................... (42) 23
------- -------
Net cash provided by (used in) financing activities .............. 1,160 1,865
------- -------
Effect of foreign exchange rate changes on cash ................................ (31) (22)
------- -------
Net increase (decrease) in cash and cash equivalents ........................... 182 (176)
Cash and cash equivalents, beginning of year ................................... 324 356
------- -------
Cash and cash equivalents, end of period ....................................... $ 506 $ 180
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Item 1 -- Financial Statements -- Cont'd.
LIBERTY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation
of the financial position and operating results for the interim periods.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. The results of the Company's operations for
any interim period are not necessarily indicative of results of the
Company's operations for any other interim period or for the full year.
Going Concern
As indicated in the financial statements contained in the Company's Annual
Report on Form 10-K/A Number 2, the Company has incurred losses during the
last three years. Additionally, for the six months ended June 30, 1997 the
Company incurred a net loss of $20,000. During 1996 and 1997, the Company's
primary source of financing has been borrowings under its line of credit.
During 1997, the Company continues to experience limitations on its ability
to borrow. Additionally, in 1997, the Company was in violation of certain
loan covenants that give the lenders the right to accelerate the due date
of the loan. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In April 1997, the Company's line of credit facility was amended to extend
the line through March 1998 (see Note 6). As of September 17, 1997, the
Company is in violation of certain loan covenants under the loan agreement
with its bank. Additionally, since June 30, 1997, the Company's outstanding
principal balance under the credit facility has exceeded the line's
borrowing base. These events constitute events of default under the
Company's loan agreement with its bank. The bank has reserved the right not
to make any further advances under the facility in excess of the borrowing
base and any future advances are at the discretion of the bank. The
Company's maximum borrowing availability, notwithstanding the borrowing
base limitations, decreases to $6,500,000 at September 30, 1997 from
$7,500,000 at June 30, 1997. At August 31, 1997, approximately $6,900,000
was outstanding under the line. These events of default may have a material
adverse effect on the Company.
On July 25, 1997, the Company entered into an agreement to sell
substantially all of the assets of its nondestructive testing and
evaluation services business (the NDE Business) to a subsidiary of General
Electric Company (GE) for $13,600,000 (subject to a dollar-for-dollar
reduction based on the amount of working capital and the amount of fixed
assets of the NDE Business on the closing date) and the assumption of
certain associated liabilities not to exceed $1,390,000. Approximately 10%
of the cash portion of the purchase price will be held in escrow to secure
certain indemnification obligations of the Company to the buyer.
Consummation of the transaction is subject to, among other things, the
approval of the Company's shareholders. If approved and the other
conditions are satisfied it is currently expected that the transaction will
close by October 31, 1997. The Company intends to use the proceeds from the
sale of the NDE Business to repay its bank debt, to invest in the existing
product business and for other corporate purposes.
There can be no assurance that the Company will consummate the sale of the
NDE Business. If the sale of the NDE Business is not completed, the Company
would need to pursue alternative financing such as a private placement.
Management is unable to estimate the amount and timing of funding required,
if any, from these alternative sources.
These financial statements do not include any adjustments relating to the
recoverablility and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
2. Inventories are summarized as follows:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $3,207,000 $3,171,000
Finished goods 539,000 571,000
---------- ----------
$3,746,000 $3,742,000
========== ==========
3. Cash payment of income taxes for the six months ended June 30, 1997 and
1996 were approximately $79,000 and $83,000, respectively, all of which
pertained to payment of prior year taxes. Interest paid for the six months
ended June 30, 1997 and 1996 was $286,000 and $95,000, respectively.
4. Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share," which supersedes ABP Opinion No. 15, "Earnings per Share," was
issued in February, 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share (EPS) for complex capital structures on the face
of the statement of operations. Basic EPS is computed by dividing income or
loss by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options. SFAS 128
is required to be adopted for year-end 1997; earlier application is not
permitted. Management does not expect the basic or diluted EPS measured
under SFAS 128 to be materially different than the Company's primary or
fully-diluted EPS measured under APB No. 15. The Company will present both
EPS measures on the face of the statement of operations.
6
<PAGE>
5. After June 30, 1997, borrowings under the Company's revolving credit
facility with a commercial bank (the Bank) are limited to 85% of eligible
receivables and 25% of eligible inventory. The Company's outstanding
principal balance under the credit facility exceed the borrowing base,
which constitutes an Event of Default. The Bank has reserved the right not
to make any further advances under the facility in excess of the borrowing
base and any future advances are at the discretion of the Bank.
6. At June 30, 1997 the Minority Interest in the Company's joint venture,
Liberty M.P., S.A. (LMP), was in a receivable balance. Since that date the
minority partner in LMP has made additional contributions that would
eliminate the receivable balance.
7
<PAGE>
LIBERTY TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended
June 30, 1996:
Total Revenues. For the three and six month comparative periods ended June 30,
1996 and 1997, total revenues increased from $10,061,000 to $10,929,000, or 9%,
and from $18,352,000 to $20,685,000, or 13%, respectively.
Service revenues increased from $7,211,000 to $7,456,000, or 3%, for the three
months ended June 30, 1996 and 1997, respectively, and from $12,408,000 to
$13,122,000, or 6%, for the six months ended June 30, 1996 and 1997,
respectively, principally as a result of stronger nuclear and industrial service
revenues. This increase was partially offset by lower non-destructive evaluation
(NDE) service revenues.
Product revenues increased from $2,850,000 to $3,473,000, or 22%, for the three
months ended June 30, 1996 and 1997, respectively, on higher sales of industrial
condition monitoring products to domestic power and international industrial
customers. Product revenues increased from $5,944,000 to $7,563,000, or 27%, for
the six months ended June 30, 1996 and 1997, respectively, on higher sales of
both industrial condition monitoring products and RADView(TM).
Cost of Revenues. Cost of revenues increased from $5,584,000 to $5,885,000, or
5%, for the three months ended June 30, 1996 and 1997, respectively, and from
$9,777,000 to $11,265,000, or 15%, for the six months ended June 30, 1996 and
1997, respectively, as a result of higher sales volume. For the three month
comparative period, overall costs of revenues decreased as a percentage of total
revenues from 56% to 54%. For the six month comparative period, overall cost of
revenues as a percentage of revenues increased from 53% to 54%.
Gross Profit. Gross profit increased from $4,477,000 to $5,044,000 and from
$8,575,000 to $9,420,000 for the three and six month periods ended June 30, 1996
and 1997, respectively. For the three month comparative period, gross profit as
a percentage of total revenues increased from 44% to 46%. For the six month
comparative period, gross profit as a percentage of revenues decreased from 47%
to 46%. The Company expects that gross profit margin will vary from quarter to
quarter depending on the mix and volume of products and services sold.
8
<PAGE>
Operating Expenses. Operating expenses increased 8%, from $4,327,000 to
$4,670,000 and 9%, from $8,461,000 to $9,247,000, respectively, for the three
and six month periods ended June 30, 1996 and 1997. Increased operating expenses
were attributable to Liberty Maintenance Predictive (LMP), which was not fully
operational in 1996 and which had operating expenses of $198,000 and $497,000
for the six months ended June 30, 1996 and 1997, respectively. RADView operating
expenses increased from $847,000 to $1,103,000 for the same period.
Additionally, there were $203,000 of favorable restructuring reserve adjustments
in 1996, with no such corresponding adjustments in 1997.
Interest expense, net. Net interest expense increased from $21,000 to $214,000
and from $71,000 to $298,000 for the three and six months ended June 30, 1996
and 1997, respectively, as a result of higher average borrowings against the
Company's bank line of credit and an increase in the average interest rate
charged for this facility, from an average of 6.5% in 1996 to an average of 8.1%
in 1997.
Income taxes. The Company's effective income tax rate was 42% and 34%,
respectively for the three and six month periods ended June 30, 1996. Consistent
with the valuation allowance recorded against the Company's deferred tax asset
in 1996, no tax benefit was recorded against the loss for the six months period
ended June 30, 1997. This tax benefit would be recoverable from any future
earnings, including any gains to be recognized on the sale of the assets of the
Company's NDE business described below.
Net income (loss). Net income increased from $102,000, or $0.02 per share, to
$193,000, or $0.04 per share for the three month comparative period. Net loss
decreased from $22,000 to $20,000 for the six month comparative period. The
improvement in earnings for the three month comparative period is attributable
primarily to higher operating income and no income tax expense, partially offset
by higher interest expense.
The number of shares used in calculating loss per share decreased from 5,310,000
to 5,064,000 in the three month comparative period, and increased from 4,964,000
to 5,000,000 in the six month comparative period. The decrease in shares in the
three month period resulted primarily from the lower dilutive effect of options
because of the change in stock price. The increase in shares in the six month
period resulted from the exercise of stock options under the Company's 1988 and
1992 Stock Option Plans and the sale of stock through the Company's Employee
Stock Purchase Plan.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its working capital requirements and capital
expenditures primarily through borrowings against its revolving credit facility.
At June 30, 1997, the Company had cash and investments aggregating $506,000
compared to $324,000 at December 31, 1996, reflecting the cash provided by
financing activities.
9
<PAGE>
Net cash used in operations decreased from $871,000 during the first half of
1996 to $652,000 during the first half of 1997. The change was principally
attributable to a lower increase in inventories and higher increases in accrued
expenses and unearned revenue, offset by an increase in accounts receivable and
an increase in prepaid and other assets, and further offset by lower accounts
payable and income taxes payable.
Net cash used in investing activities decreased from $1,148,000 in the first
half of 1996 to $295,000 in the first half of 1997. This decrease resulted from
lower capital additions, no purchases of licenses and no additional patent
costs.
Net cash provided by financing activities decreased from $1,865,000 during the
first half of 1996 to $1,160,000 in the first half of 1997. Net borrowings
against the Company's bank line of credit increased $1,800,000 in 1996 compared
to an increase of $1,420,000 in 1997. The additional borrowings in 1997 are
offset by a decrease of $225,000 in the book overdraft.
The Company amended its revolving credit facility with a commercial bank
effective April 3, 1997. The amended facility provides availability of
$9,000,000 through June 30, 1997; $7,500,000 through September 30, 1997;
$6,500,000 through December 31, 1997; and $5,500,000 through March 31, 1998.
After June 30, 1997, borrowings under the line are limited to 85% of eligible
receivables and 25% of eligible inventory, as defined. Beginning October 1,
1997, the borrowing base will be limited solely to 85% of eligible receivables,
as defined. The interest rate on the facility varies, based on the ratio of the
Company's debt to equity, from the Eurodollar rate plus 1.50% to the bank's
prime rate plus 1.00% and is payable at the maturity of each draw against the
facility. The line of credit expires on March 31, 1998. The balance outstanding
was $7,145,000 and $5,725,000 at June 30, 1997 and 1996, respectively.
The Company's primary source of financing in 1996 and 1997 has been borrowings
under its line of credit. Since the original filing of this report, the Company
has failed to perform certain covenants contained in its line of credit,
resulting in it being in default thereunder, an event which was reported in the
original filing of its Form 10-Q for the quarter ended June 30, 1997. To date,
the Company has been permitted by its lenders to continue to borrow moneys from
time to time under the credit facility, up to the maximum $7,500,000,
notwithstanding the existing default. However, no assurance can be given that
the lenders will continue to permit such additional borrowings in the future or
will not accelerate all outstanding amounts under the line of credit. As a
result of such default, Arthur Andersen LLP, the Company's independent auditors,
modified its report to the consolidated financial statements of the Company and
its subsidiaries for the year ended December 31, 1996, which revised report is
filed on Form 10-K/A Number 2.
Sale of the Nondestructive Testing and Evaluation Services Business
- -------------------------------------------------------------------
In the financial statements reported on Form 10-K/A Number 2, the modified
opinion of Arthur Andersen, LLP indicates that the Company (i) has incurred
losses during the last three years and has continued to incur losses in 1997
(ii) continues to experience limitations on its ability to borrow and (iii) is
in violation of certain loan covenants that give the lenders the right to
accelerate the due date of he loan. These factors create a substantial doubt
about the Company's ability to continue as a going concern and an uncertainty as
to the recoverability and classification of recorded asset amounts and the
amounts and classification of liabilities.
10
<PAGE>
On July 25, 1997, the Company entered into an agreement with General Electric
Company (GE) to sell substantially all of the assets of the Company's
nondestructive testing and evaluation services business (the NDE Business) for
$13.6 million in cash, subject to downward adjustment based upon the closing
balance sheet. An amount equal to 10% of the purchase price must be held in an
escrow account for a period of one year from the closing date. The Company
intends to use the proceeds from the sale of the NDE Business to repay its bank
debt, to invest in the products business and for other general corporate
purposes. The sale of the NDE Business is subjet to the approval of the
Company's shareholders, among other things. There can be no assurance that the
Company will consummate the sale of the NDE Business. If the sale of the NDE
Business is not completed, the Company would need to pursue alternative
financing such as a private placement. Management is unable to estimate the
amount and timing of funding required, if any, from these alternative sources.
The Company believes that its current cash and short-term investment resources,
cash provided by the anticipated sale of the NDE Business and availability under
its current and anticipated line of credit will be sufficient to fund the
Company's operations, debt and lease obligations and expected capital
expenditures for the next twenty-four months and to the best belief of
management on a longer term basis. Additional financing may be required for the
Company to consummate any material business acquisitions.
As a result of the sale of the NDE Business, the Company's revenues, operating
income and cash flow would decrease. However, the cash generated from the sale
would allow the Company to repay its line of credit and would provide additional
working and investment capital to support its Products Businesses, which
consists of the following: (1) performance and condition monitoring products and
service, including dynamic testing services, (2) RADView(TM) imaging systems and
(3) international business development.
11
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
1. No reports on Form 8-K were filed during the quarter ended June 30, 1997.
12
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 18, 1997
LIBERTY TECHNOLOGIES, INC.
(Registrant)
/s/ R. Nim Evatt
----------------------------------
R. Nim Evatt, President and
Chief Executive Officer
/s/ Daniel G. Clare
----------------------------------
Daniel G. Clare, V.P. Finance and
Chief Financial Officer (principal
financial and accounting officer)
13
<PAGE>
