==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 1998
--------------
[ ] 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 of 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 May 12, 1998
- ------------------ -----------------------------------------
Common Stock 5,007,718
==============================================================================
<PAGE>
LIBERTY TECHNOLOGIES, INC.
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Operations -
Three months ended March 31, 1998 and 1997............................ 3
Consolidated Balance Sheets -
March 31, 1998 and December 31,1997................................... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997............................ 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 8
PART II OTHER INFORMATION
Item 5. Other information......................................................... 12
Item 6. Exhibits and Reports on Form 8-K.......................................... 12
Signatures................................................................ 13
</TABLE>
<PAGE>
PART I. Financial Information
Item 1. Consolidated Financial Statements
LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Revenues:
Product ................................................. $ 3,347 $ 4,091
Service ................................................. 1,030 2,435
------- -------
4,377 6,526
------- -------
Cost of revenues:
Product ................................................. 1,689 1,521
Service ................................................. 863 1,759
------- -------
2,552 3,280
------- -------
Gross profit ................................. 1,825 3,246
------- -------
Operating expenses:
Engineering and product development ..................... 879 973
Selling, general and administrative ..................... 2,194 2,321
------- -------
3,073 3,294
------- -------
Operating loss ............................... (1,248) (48)
Interest income (expense), net ............................. 58 (51)
------- -------
Loss before taxes, minority interest and
discontinued operations .................... (1,190) (99)
Income tax benefit ......................................... (465) --
------- -------
Loss before minority interest and discontinued
operations ................................. (725) (99)
Minority interest in loss of joint venture ................. 51 72
------- -------
Loss before discontinued operations .......... (674) (27)
Loss from discontinued operations, net of tax .............. -- (186)
------- -------
Net loss ................................................... $ (674) $ (213)
------- -------
Basic and diluted loss per share:
Continuing operations ................................. $ (0.13) $ (0.01)
Discontinued operations ............................... -- (0.03)
------- -------
$ (0.13) $ (0.04)
======= =======
Weighted average shares outstanding ........................ 5,018 4,995
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 1,440 $ 2,444
Accounts receivable, net ............................... 4,827 6,307
Inventories ............................................ 3,891 3,568
Escrow receivable, net ................................. 1,385 1,385
Refundable income taxes ................................ 607 611
Deferred income taxes .................................. 805 340
Prepaid expenses and other ............................. 149 181
-------- --------
Total current assets ......................... 13,104 14,836
Property and equipment, net ................................ 2,025 2,154
Goodwill, net .............................................. 97 103
Deferred income taxes ...................................... 246 246
Other assets ............................................... 1,080 1,095
-------- --------
$ 16,552 $ 18,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................... $ 15 $ 37
Accounts payable ....................................... 1,891 1,938
Accrued compensation and benefits ...................... 558 638
Other accrued expenses ................................. 481 1,232
Unearned revenue ....................................... 300 303
Income taxes payable ................................... 637 872
-------- --------
Total current liabilities .................... 3,882 5,020
-------- --------
Long-term debt ............................................. 240 245
-------- --------
Due to minority shareholder ................................ -- 44
-------- --------
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, 5,027,987 and 5,027,987 shares issued,
and 5,004,136 and 5,020,239 outstanding ............. 50 50
Additional paid-in capital ............................. 17,201 17,215
Accumulated deficit .................................... (4,749) (4,075)
Treasury stock at cost ................................. (74) (40)
Cumulative translation adjustment ...................... 2 (25)
-------- --------
Total shareholders' equity ................... 12,430 13,125
-------- --------
$ 16,552 $ 18,434
======== ========
</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 three months ended March 31,
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (674) $ (213)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................. 290 530
Deferred income taxes ..................................... (465) 56
Minority interest in loss of joint venture ................ (51) (72)
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable ........................... 1,480 (624)
Inventories ................................... (324) (83)
Prepaid expenses and other .................... 36 (223)
Other assets .................................. -- (53)
Increase (decrease) in:
Accounts payable ............................. (47) (51)
Accrued expenses ............................. (318) 395
Income taxes payable ......................... (235) (88)
Unearned revenue ............................. (3) 13
------- -------
Net cash used in operating activities .............. (311) (413)
------- -------
Cash flows from investing activities:
Purchases of property and equipment ........................... (133) (79)
Payments related to sale of NDE Business ...................... (513)
Other ......................................................... -- (84)
------- -------
Net cash used in investing activities .............. (646) (163)
------- -------
Cash flows from financing activities:
Payments of long-term debt .................................... (28) (26)
Net borrowings under line of credit ........................... -- 1,450
Decrease in book overdraft .................................... -- (324)
Proceeds from Employee Stock Purchase Plan .................... 8 15
Purchase of treasury shares ................................... (54) --
------- -------
Net cash provided by (used in) financing activities (74) 1,115
------- -------
Effect of foreign exchange rate changes on cash .................. 27 2
------- -------
Net increase (decrease) in cash and cash equivalents ............. (1,004) 541
Cash and cash equivalents, beginning of year ..................... 2,444 324
------- -------
Cash and cash equivalents, end of period ......................... $ 1,440 $ 865
======= =======
</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. Basis of Presentation
The consolidated financial statements as of March 31, 1998 and for the
three month periods ended March 31, 1998 and 1997 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
Company has reclassified the presentation of certain prior year information
to conform to the current year presentation format.
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, 1997. 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.
2. Inventories
Inventories are summarized as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials $ 3,322,000 $ 3,125,000
Finished goods 569,000 443,000
--------------- ---------------
$ 3,891,000 $ 3,568,000
=============== ===============
3. Supplemental Cash Flow Disclosure
Cash paid for income taxes for the three months ended March 31, 1998 and
1997 was approximately $198,000 and $17,000, respectively, all of which
pertained to payment of prior year taxes. Cash paid for interest for the
three months ended March 31, 1998 and 1997 was $0 and $124,000,
respectively.
4. Earnings per Share
In 1997, the Company adopted SFAS No. 128, "Earnings per Share". This
statement requires that the Company report basic and diluted earnings
(loss) per share for all periods reported. Basic net income (loss) per
share is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period, adjusted for
the dilutive effect of common stock equivalents, consisting of dilutive
common stock options using the treasury stock method. For all period
presented,
6
<PAGE>
common stock options are not included in the computation as they would be
anti-dilutive.
5. Sale of NDE Business
On October 30, 1997, the Company completed the sale of substantially all of
the assets of its nondestructive testing and evaluation services business
(the "NDE Business"), a division of Liberty Technical Services, Inc., to a
subsidiary of General Electric Company ("GE") for $13,500,000 and the
assumption of certain associated liabilities totaling approximately
$1,340,000. For the three months ended March 31, 1998, the Company made
payments totaling $513,000 related to the NDE Business, including a payment
to GE of $399,000 related to a final working capital adjustment. At March
31, 1998, $1,385,000 of the proceeds from the sale are held in escrow to
secure certain indemnification obligations of the Company to the buyer. The
escrow is due to be received in October 1998.
For the three months ended March 31, 1997, the results of operations of the
NDE Business are reported as discontinued operations. For the three months
ended March 31, 1997 the NDE Business generated service revenues of
$3,230,000.
6. New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), which requires that all components
of comprehensive income be reported in the financial statements. SFAS No.
130 become effective for fiscal years beginning after December 15, 1997,
with initial application as of the beginning of the Company's 1998 fiscal
year. SFAS No. 130 requires reclassification of prior period financial
statements to reflect application of the provisions of the new standard.
For the three months ended March 31, 1998 and 1997, comprehensive income
was as follows:
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Net loss $ (674,000) $ (213,000)
Foreign currency translation adjustments 27,000 (2,000)
----------- ------------
Comprehensive income $ (647,000) $ (215,000)
============ ============
</TABLE>
As of March 31, 1998, the accumulated balance of other comprehensive income
consisted of the Company's cumulative translation adjustment and totaled
$2,000.
7
<PAGE>
LIBERTY TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement
When used in this Quarterly Report on Form 10-Q and in other written or oral
public statements by the Company and Company officers and management, the words
"estimate," "project," "intend," "believe," "anticipate" and similar expressions
are intended to identify forward-looking statements regarding events and
financial trends which may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) the Company's ability to
identify appropriate acquisition candidates, complete acquisitions on
satisfactory terms, or successfully integrate acquired business; (ii) the
Company's ability to obtain financing on satisfactory terms and the degree to
which the Company is leveraged, including the extent to which currently
outstanding options are exercised; (iii) the sensitivity of the Company's
business to general economic conditions; (iv) the timely development, production
and acceptance of new products; (v) continued acceptance in the marketplace,
competition and buying patterns of customers; (vi) the timing of orders from,
and shipments to , major customers; (vii) changes in product/service revenue
mix; (viii) the absence of a significant order backlog; (ix) factors associated
with international sales such as the relative strength of the dollar when
compared to the currencies of the countries into which the Company exports
products; (x) the Company's ability to remain in compliance with the numerous
environmental, health and safety requirements to which it is subject; (xi)
changes in accounting principles, policies or guidelines; and (xii) other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Additional factors
are described in the Company's other public reports filed with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any revisions
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997:
Total Revenues. Total revenues decreased from $6,526,000 to $4,377,000, or 33%,
from the first quarter of 1997 to the first quarter of 1998. Product revenues
decreased from $4,091,000 to $3,347,000, or 18%,. Revenues for the first quarter
of 1997 included a large shipment of valve diagnostic equipment to the Company's
joint venture partner, Electricite de France. There was no corresponding sale in
the first quarter of 1998. Service revenues decreased from $2,435,000 to
$1,030,000, or 58%, principally as a
8
<PAGE>
result of lower nuclear service revenues due to the timing of scheduled
maintenance outages by utilities which were delayed into the second quarter of
1998.
Cost of Revenues. Cost of revenues decreased from $3,280,000 to $2,552,000, or
22%, from the first quarter 1997 to the first quarter 1998. As a percentage of
total revenues, cost of revenues increased from 50% to 58% on a mix of lower
margin products and services. Cost of product revenues increased as a percentage
of product sales from 37% in 1997 to 50% in 1998. Cost of service revenues
increased as a percentage of service revenues from 72% in 1997 to 84% in 1998.
Gross profit decreased from $3,246,000 to $1,825,000 from the first quarter of
1997 to the first quarter of 1998. As a percentage of total revenues, gross
profit decreased from 50% to 42%. The Company expects that cost of revenues and
gross profit margin will vary from quarter to quarter depending on the mix and
volume of products and services sold.
Operating Expenses. Operating expenses decreased 7%, from $3,294,000 to
$3,073,000 from the first quarter of 1997 to the first quarter of 1998,
primarily due to a reduction in internally funded development.
Income Taxes. The Company's effective income tax rate was 39% in the first
quarter of 1998. Consistent with a valuation allowance recorded against the
Company's deferred tax asset in 1996, no tax benefit was recorded against the
loss in the first quarter of 1997.
Loss from Continuing Operations. Loss from continuing operations increased from
$27,000, or $0.01 per share, in the first quarter of 1997 to $674,000, or $0.13
per share, in the first quarter of 1998, primarily as a result of the reduction
in revenues.
Loss per share. Loss per share increased from $0.04 in the first quarter of 1997
to $0.13 in 1998. The loss for the first quarter of 1997 includes a loss per
share of $0.03 from the operations of the NDE Business. The loss for the first
quarter of 1997, exclusive of the NDE Business, was $0.01 per share. The number
of shares used in calculating loss per share increased from 4,995,000 in 1997 to
5,018,000 in 1998 due to the issuance of shares in connection with the exercise
of stock options and the sale of stock through the Company's Employee Stock
Purchase Plan, partially offset by a purchase of treasury shares in the first
quarter of 1998.
Liquidity and Capital Resources
During 1998, the Company has financed its working capital requirements and
capital expenditures primarily through the use of its cash reserves. During
1997, the Company financed its working capital requirements and capital
expenditures primarily through borrowings against its revolving credit facility.
At March 31, 1998, the Company had cash and cash equivalents aggregating
$1,440,000 compared to $2,444,000 at December 31, 1997, reflecting the cash used
by operating and investing activities.
9
<PAGE>
Net cash used by operations decreased from $413,000 during the first quarter of
1997 to $311,000 during the first quarter of 1998. The change was principally
attributable to a decrease in accounts receivable, offset by an increase in
deferred taxes and a decrease in accrued expenses.
Net cash used in investing activities increased from $163,000 in the first
quarter 1997 to $646,000 in the first quarter 1998. This increase resulted from
payments totaling $513,000 related to the sale of the NDE Business.
Net cash provided by financing activities in the first quarter 1997 was
$1,115,000 compared to cash used of $74,000 in the first quarter of 1998. The
1997 amount reflects net borrowings of $1,450,000 against the revolving credit
facility, offset by a decrease of $324,000 in the book overdraft. There is no
such corresponding source of funds during 1998.
In March 1998, a commercial bank offered to provide the Company with a two-year
line of credit of up to $5.0 million. The line of credit is subject to the
Company's acceptance of the Bank's proposed commitment letter and to the
finalization of the appropriate loan documents. Borrowing under the line would
be limited to 80% of qualified accounts receivable, as defined, and would be
collateralized by a pledge of substantially all of the Company's assets.
Additionally, the Company would be required to maintain compliance with certain
financial and non-financial covenants, as defined. Borrowings under this
facility would bear interest at the bank's prime rate plus 1.5%.
The Company anticipates finalizing this credit facility in the second quarter of
1998.
During 1997 the Company had a $7,500,000 line of credit facility with a
commercial bank (the "Bank"). The line was fully repaid with a portion of the
proceeds from the sale of the NDE Business.
The Company believes that its current cash and cash equivalents and borrowing
availability under the proposed line of credit will be sufficient to fund the
Company's operations, debt and lease obligations and expected capital
expenditures during 1998. Additional financing may be required for the Company
to consummate any material business acquisitions, none of which are currently
contemplated.
Inflation
Inflation has not had a significant impact on the Company.
Year 2000 Compliance
The Company has been evaluating its information technology infrastructure for
year 2000 compliance. The Company has been informed by its external vendors that
the majority of its internal information systems are fully compliant and will
function properly beyond the year 1999. The Company has been communicating with
suppliers, financial institutions and others to determine the current level of
compliance and to coordinate conversion to systems which are year 2000 compliant
wherever necessary. To the extent the
10
<PAGE>
Company's significant suppliers, financial institutions and customers do not
successfully achieve year 2000 compliance on a timely basis, the Company's
business or operations could be adversely affected. The total cost of the
software and implementation of any changes that may be required is estimated to
be immaterial and will be expensed as incurred.
Computer software is an integral part of many of the Company's products. The
Company has evaluated each of its products and has determined that the majority
of them will function properly beyond the year 1999. Several of the Company's
products require modifications to insure their functionality in the year 2000.
The projects to insure compliance are scheduled to be completed at dates
starting in the second quarter of 1998, with final completion of all projects by
the end of 1998. The cost of completing these projects is estimated to be less
than $100,000 and will be expensed as incurred.
11
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other information
1. Liberty Technologies, Inc. has announced that its Board of Directors is
considering strategic alternatives to enhance shareholder value, and
that such alternatives may include the sale or restructuring of all or
part of the Company.
Item 6. Exhibits and Reports on Form 8-K
1. No reports on Form 8-K were filed during the quarter ended March 31,
1998.
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: May 12, 1998
LIBERTY TECHNOLOGIES, INC.
(Registrant)
/s/ Nim Evatt
------------------------------
R. Nim Evatt, President and
Chief Executive Officer
/s/ Daniel G. Clare
------------------------------
Daniel G. Clare, V.P. Finance and
Chief Financial Officer (principals
financial and accounting officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Consolidated Balance Sheets at March 31, 1998 and the
Consolidated Statement of Operations for the three months ended
March 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,440
<SECURITIES> 0
<RECEIVABLES> 4,827
<ALLOWANCES> 100
<INVENTORY> 3,891
<CURRENT-ASSETS> 13,104
<PP&E> 2,025
<DEPRECIATION> 2,844
<TOTAL-ASSETS> 16,552
<CURRENT-LIABILITIES> 3,882
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 12,380
<TOTAL-LIABILITY-AND-EQUITY> 16,552
<SALES> 4,377
<TOTAL-REVENUES> 4,377
<CGS> 2,552
<TOTAL-COSTS> 2,552
<OTHER-EXPENSES> 3,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (58)
<INCOME-PRETAX> (1,190)
<INCOME-TAX> (465)
<INCOME-CONTINUING> (674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (674)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
