UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended - December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ________ to _________
Commission File Number 0-24242
PRODUCTIVITY TECHNOLOGIES CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3764753
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
520 Madison Avenue, New York, New York 10022
-----------------------------------------------------------
(Address of principal executive offices)
(212) 843-1480
--------------
(Issuer's telephone number)
Not Applicable
----------------------------------------------
(Former name, former address and former fiscal
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of February 14, 1997: 2,125,000 shares $ .001 par value common stock.
<PAGE>
CONTENTS
Page
Part I : Financial Information for
Productivity Technologies, Inc. (PTC) and
Subsidiary Atlas Technologies, Inc. (Atlas)
Item 1. Interim Financial Statements 3
Consolidated Balance Sheets of PTC and Atlas 4-5
Consolidated Statements of Operations of PTC and Atlas
Company and Statements of Operations of the Predecessor (Atlas) 6
Consolidated Statements of Stockholders' Equity of the Company 7
Consolidated Statements of Cash Flows of PTC and Atlas and
Statement of Cash Flows of the Predecessor (Atlas) 8-9
Notes to Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. ( Atlas) 16-18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARY
PART I: FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with instruction to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from the accompanying interim financial statements. The
information furnished in the accompanying balance sheets, statements of
operations, stockholders' equity and cash flows, reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods. Operation results
for the six months ended December 31, 1996, are not necessarily indicative of
the results that may be expected for the year ending June 30, 1997.
The aforementioned consolidated financial statements should be read in
conjunction with Productivity Technologies Corp. and Subsidiary's Form 10-K for
the fiscal year ended June 30, 1996. Information provided includes the
consolidated audited financial statements, including footnotes for the year
ended June 30, 1996 and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
3
<PAGE>
Consolidated Balance Sheet of PTC and Atlas and
the Balance Sheet of the Predecessor
<TABLE>
<CAPTION>
Consolidated
Assets December 31, 1996 June 30, 1996
(Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents ...................... $ 447,969 $ 512,179
Short-term investments, including accrued 4,205,732 965,255
interest
Contracts receivable ........................... 7,178,332 7,958,159
Notes receivable ............................... 201,614 240,606
Costs and estimated earnings in excess of
billings on uncompleted contracts ............ 8,868,701 7,593,003
Inventories .................................... 766,247 720,947
Prepaid expenses and other ..................... 78,851 220,494
Deferred income taxes .......................... 480,000 480,000
- --------------------------------------------------------------------------------
Total Current Assets ............................... 22,227,446 18,690,643
- --------------------------------------------------------------------------------
Property and Equipment
Land ........................................... 659,014 216,000
Buildings and improvements ..................... 2,136,796 2,132,388
Machinery and equipment ........................ 2,021,606 1,888,479
Transportation equipment ....................... 31,500 31,500
Building construction in progress .............. 1,503,830
- --------------------------------------------------------------------------------
Total Fixed Assets ......................... 6,352,746 4,268,367
Less Accumulated Depreciation .............. 222,854 27,928
- --------------------------------------------------------------------------------
Net Property and Equipment ......................... 6,129,892 4,240,439
- --------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization ...... 2,542,322 2,593,803
Noncompetition agreement, net of amortization .. 219,583 228,083
Other assets ................................... 816,809 270,803
- --------------------------------------------------------------------------------
Total Other Assets ................................. 3,578,714 3,092,689
- --------------------------------------------------------------------------------
Total Assets ....................................... $31,936,052 $26,023,771
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Financial Statements.
4
<PAGE>
Consolidated Balance Sheet of PTC and Atlas and
the Balance Sheet of the Predecessor
<TABLE>
<CAPTION>
Consolidated
December 31, 1996 June 30, 1996
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities
Accounts payable ............................... $ 2,166,064 $ 2,444,411
Line-of-credit (see pg.17) .................... -- 7,188,558
Accrued liabilities
Payroll, executive bonuses and
related withholdings ........................ 815,720 1,192,052
Federal and State income taxes ................. 221,790
Other accrued liabilities ...................... 1,516,699 1,596,485
Billings in excess of costs and estimated
earnings on uncompleted contracts ........... 957,382 534,963
Current maturities of long term debt ........... 271,212 464,393
- --------------------------------------------------------------------------------
Total Current Liabilities .......................... 5,727,077 13,642,652
- --------------------------------------------------------------------------------
Deferred Income Taxes .............................. 779,000 779,000
Long Term Debt Less Current Maturities ............. 15,934,494 2,228,786
- --------------------------------------------------------------------------------
Total Liabilities .................................. 22,440,571 16,650,438
- --------------------------------------------------------------------------------
Stockholders' Equity
Preferred Stock, .001 par value, 1,000,000 -- --
authorized and none outstanding
Common Stock, .001 par value, 20,000,000
shares authorized and 2,125,000 outstanding . 2,125 2,125
Additional paid-in capital .................. 9,177,488 9,177,488
Retained earnings ........................... 315,868 193,720
- --------------------------------------------------------------------------------
Total Stockholders' Equity ......................... 9,495,481 9,373,333
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ......... $31,936,052 $26,023,771
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Financial Statements.
5
<PAGE>
Consolidated Statements of Operations of PTC and Atlas
and Statements of Operations of the Predecessor (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Consolidated Predecessor Consolidated Predecessor
Dec 31, 1996 Dec 31, 1995 Dec 31, 1996 Dec 31, 1995
<S> <C> <C> <C> <C>
Net Sales $9,386,486 $8,019,804 $17,812,784 $16,918,421
- ------------------------------------------------------------------------------------------------- -------------------
Cost of Sales 7,156,886 5,293,517 13,482,236 11,403,448
- ------------------------------------------------------------------------------------------------- -------------------
Gross Profit 2,229,600 2,726,287 4,330,548 5,514,973
Selling, General and Administrative
expenses, including officers' bonuses 1,885,507 2,396,004 3,798,125 4,825,924
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations 344,093 330,283 532,423 689,049
- ---------------------------------------------------------------------------------------------------------------------
Other Income ( Expenses)
Interest income 17,877 11,054 37,034 22,826
Interest expense (208,174) (136,544) (396,027) (288,900)
Miscellaneous 14,516 17,300 33,715 21,106
- ---------------------------------------------------------------------------------------------------------------------
Total Other Expenses (175,781) (108,190) (325,278) (244,968)
- ------------------------------------------------------------------------------------------------- -------------------
Income (Loss) Before Income Taxes 168,312 222,093 207,145 444,081
Income Taxes 60,500 96,531 85,000 195,315
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 107,812 125,562 122,145 248,766
- ------------------------------------------------------------------------------------------------- -------------------
Net Income Per Share of
Common Stock $0.05 $0.06 $0.06 $0.12
- ------------------------------------------------------------------------------------------------- -------------------
Weighted Average Common
Shares Outstanding 2,125,000 2,125,000 2,125,000 2,125,000
- ------------------------------------------------------------------------------------------------- -------------------
</TABLE>
See accompanying notes to Financial Statements.
6
<PAGE>
Consolidated Statements of Stockholders' Equity of the Company (Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996 2,125,000 $2,125 $9,177,488 $193,720 $9,373,333
Net Income - - - $122,145 $122,145
------------ -------- ------------ ---------- ------------
Balance, December 31, 1996 2,125,000 $2,125 $9,177,488 $315,865 $9,495,478
- -------------------------- ----------------------------- --------------- -----------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Consolidated Statements of Cash Flows of Atlas and PTC
and Statement of Cash Flows of the Predecessor (Unaudited)
<TABLE>
<CAPTION>
Consolidated Predecessor
Six Months Ended Six Months Ended
December 31, 1996 December 31, 1995
<S> <C> <C>
Cash Flow From Operating Activities
Net Income $122,148 $251,063
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation 194,926 165,714
Amortization (122,561) 8,500
Deferred income tax (109,647) 92
Changes in operating assets and liabilities
Contracts receivable 779,827 (3,056,733)
Inventories, prepaid expenses and other 96,343 (44,233)
Costs and estimated earnings in excess of (853,279) 1,295,033
billings on uncompleted contracts
Accounts payable, accrued expenses and other (956,255) 164,449
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Operating Activities (848,498) (1,216,115)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompaying notes to financial statements.
8
<PAGE>
Consolidated Statement of Cash Flows of Atlas and PTC
and Statement of Cash Flows of the Predecessor (Unaudited)
<TABLE>
<CAPTION>
Consolidated Predecessor
Six Months Ended Six Months Ended
December 31, 1996 December 31, 1995
(Unaudited) (Audited)
<S> <C> <C>
Cash Flows From Investing Activities
Collection of Notes Receivable 38,992 104,159
Investment of US Securities (3,240,477) 0
Expenditures for property and equipment (2,084,378) (264,282)
Increase in notes receivable (253,818) (139,824)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities (5,539,680) (299,947)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net borrowings (payments) - line of credit (7,188,558) 1,896,620
(Payments) or Borrowings on long term (193,181) (14,875)
debt, capital leases and notes payable
Proceeds from additional long-term debt 13,705,708 413,471
Distribution to former stockholders (700,000)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 6,323,969 1,595,216
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash (64,210) 79,154
equivalents
Cash and Cash equivalents at the beginning of 512,179 17,253
the period
- ------------------------------------------------------------------------------------------------------------
Cash and Cash equivalents at the end of the 447,969 96,407
period
- ------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid during the period for:
Interest $396,027 $288,900
Income Taxes $85,000 $195,315
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompaying notes to financial statements.
9
<PAGE>
Notes to Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements at December 31, 1996 have
and for the three months and six months then ended have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The consolidated balance sheet at June 30, 1996 has been derived from
the audited consolidated financial statements at that date. Operating results
for the second quarter ended December 31, 1996 are not necessarily indicative of
the results that may be expected for the year ended June 30, 1997 or any other
interim period. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996.
2. Summary of Significant Accounting Policies
Formation 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 originally selected
March 31 as its fiscal year-end. The Company completed an initial public
offering ("Offering") of common stock in July 1994 and raised net proceeds of
approximately $9.0 million. In May 1995 The Company changed its name to
Productivity Technologies Corp. (PTC), and acquired through merger Atlas
Technologies, Inc. (Atlas) as a wholly owned subsidiary.
The accompanying financial statements presented for the second quarter
ended December 31, 1996 include the consolidated accounts of PTC and Atlas. All
significant inter-company accounts and transactions have been eliminated upon
consolidation.
The accompanying financial statements presented for the second quarter
ended December 31, 1995 represent the financial statements of Atlas (the
"Predecessor").
10
<PAGE>
Nature of Business
Atlas Technologies, Inc. is Productivity Technologies Corp's sole operating
subsidiary. Atlas is a leading innovator and supplier of quick die change,
flexible transfer, and stacking/destacking equipment used to automate automotive
and appliance metal stamping operations. Atlas operates two manufacturing plants
and three sales and engineering offices. The main plant is located in Fenton,
Michigan with an additional plant operating in nearby Linden, Michigan.
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 sales during the past two years.
Revenue and Cost Recognition
Contract 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. 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 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.
11
<PAGE>
Net Income Per Common Share
Net income per common share for the second quarter ended December 31, 1996
has been computed based on the weighted average number of common and diluted
common equivalent shares outstanding.
3. Commitments
(1) In connection with the merger agreement, Atlas has entered
into employment agreements which changed the compensation of two
executive officers of Atlas. The employment agreements in regards to
annual compensation are identical, except that one agreement expires
on December 31,1998, and the other expires on December 31, 2001. Each
agreement requires the executive to devote substantially all of his
business time and attention to the affairs of the Company. Annual
compensation under each agreement is $195,052, subject to cost of
living increases after December 31, 1997.
The Employment agreements also provide for two bonus calculations
based on the earnings of Atlas before interest and taxes (as defined).
Under one of the bonus arrangements, each of the two executives
mentioned in the above paragraph will be paid $208,333 for each of the
six years beginning January 1, 1996 in which the "Adjusted Earnings"
of Atlas (as defined in the related agreements) exceeds $2,000,000.
Under the second bonus arrangement, if during the five years
beginning January 1, 1996, the "Average Adjusted Earnings" (as defined
in the related agreements) are at least $2,626,000, each executive
will be paid, at the end of the fifth year (December 31, 2000), an
amount equal to the amount by which such average earnings exceed
$2,626,000. Both bonus arrangements are also subject to various
conditions described in the related agreements. The bonus arrangements
do not terminate in the event of death of the executive, but payments
will be reduced by the amount of insurance benefits paid to the
executive's estate pursuant to life insurance in effect.
12
<PAGE>
4. Contingencies
(1) Atlas has received a "Demand For Arbitration" dated October
1, 1996 by a former customer who alleges, among other issues, a
$15,400,000 claim for damages resulting from a breach of contract and
breach of warranties related to the design and manufacture of certain
industrial equipment. Atlas believes the lawsuit is without merit and
will vigorously defend its position. Further, with respect to the
alleged damages, the total purchase amount on this contract was
$1,360,000. The former customer has acknowledged receiving Atlas's
standard terms and conditions. These terms and conditions provide in
pertinent part that Atlas will not, in any event, be liable for any
incidental or consequential damages, including loss of profits.
Further, the Atlas warranty policy states that the buyer's sole remedy
is limited to either repair or replacement of the equipment or
defective parts, or, after negotiated settlement, return of the goods
to seller. While the final outcome of the litigation cannot be
determined at this early date in the proceedings, management believes
that the final outcome will not have a material adverse effect on the
Company's results of operations or its financial position. Neither
Atlas nor the Company is involved as a defendant in any other
substantial litigation. The arbitration was initially reported in the
Companys' Report on Form 10-K for the year ended June 30, 1996.
(2) Atlas is undergoing a Federal tax audit by the Internal
Revenue service for the fiscal year ended June 30, 1995 and on January
21, 1997 received the auditor's initial findings. The main areas of
review are research and experimentation tax credits Atlas has
calculated and filed over the past several years. The IRS has
disqualified $306,600 and assessed $38,700 in interest for the fiscal
year ended June 30, 1995. Atlas also had additional research tax
credits which were to be carried forward and used to reduce federal
taxes up to $481,400 and applied against 1996 and 1997 alternative
minimum federal income tax payments. This has been disqualified at
this time. Atlas believes this issue is a matter of interpretation of
the research and experimentation regulations and is vigorously
opposing these findings and will contest the disqualification. This
development may had an adverse effect on the Company's cash flow and
future financial statements which is dependent on the appeals process
and its outcome. Pursuant to the Merger Agreement, $1,000,000 of the
merger consideration payable to the two former principal stockholders
of Atlas is being held in escrow to secure repayment of amounts by
which the net worth of the Company at December 31, 1995 is below
$3,196,084. Any prospective disallowance by the IRS of the credit for
periods ending prior to that date would be taken into account in
determining such net worth. If the amount of all such adjustments is
in excess of $1,000,000, the two former stockholders are obligated to
refund the excess to the Company.
13
<PAGE>
5. Pro Forma Condensed Consolidated Statement of Operations
The following unaudited pro forma condensed statement of operations for
the second quarter ended December 31, 1995 is presented as if the
Company had completed the merger of Atlas on July 1, 1995.
This unaudited pro forma financial statement is not necessarily
indicative of the actual results if operations of Atlas would have been
merged on July 1, 1995. In management's opinion, all adjustments
necessary to reflect the formation of the Company and the effects of
the Offering have been made. These adjustments include the following:
(1) The unaudited pro forma consolidated statement of operation is
presented assuming that no PTC stockholders would request conversion
of their shares. No such requests were made.
(2) The excess of the purchase price over the book value of Atlas'
stockholders equity is allocated to property and equipment (based on a
recent appraisal) and to goodwill. Additional depreciation of property,
plant and equipment based on a 20-year life and amortization of
goodwill based on a 25-year life has been charged to operations.
(3) Pro forma amounts payable to Atlas senior management under new
employment agreements after the merger (based on Atlas operating
income, as adjusted).
(4) The elimination of interest income on the portion of PTC's investment
in US government security bonds.
(5) Consolidated income tax provision at an effective rate of 40% on
taxable income after adding back non-deductible amortization of
goodwill.
14
<PAGE>
Unaudited Proforma Statement of Operations of the Predecessor
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Consolidated Consolidated
Quarter Ended Six Months Ended
Dec. 31, 1995 Dec. 31, 1995
<S> <C> <C>
Sales $8,019,804 $16,918,421
Cost of Sales 5,293,518 11,403,448
- --------------------------------------------------------------------------------------------------
Gross Profit 2,726,286 5,514,973
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES 2,431,477
Officers' Bonus Expense 574,347 954,489
Selling, General and Administrative 1,704,652 4,312,385
- --------------------------------------------------------------------------------------------------
Income from Operations 447,287 1,202,588
- --------------------------------------------------------------------------------------------------
Other Income ( Expenses)
Interest Income 25,095 58,926
Interest Expense (136,544) (288,900)
Miscellaneous 17,300 21,106
- --------------------------------------------------------------------------------------------------
Total Other Income (Expenses) (94,149) (208,868)
- --------------------------------------------------------------------------------------------------
Income Before Income Taxes 353,137 993,719
Income Taxes 170,700 434,700
- --------------------------------------------------------------------------------------------------
Net Income 182,437 559,019
- --------------------------------------------------------------------------------------------------
Net Income per Share of Common Stock $0.09 $0.26
- --------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding 2,125,000 2,125,000
- --------------------------------------------------------------------------------------------------
</TABLE>
Proforma illustrates the acquisition of Atlas (Predecessor) having been
made at July 1, 1995. Officers' expense calculated using employment contract and
a reduction of interest income for PTC's capital invested in the purchase of
Atlas.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective May 23, 1996, the Company entered into a Merger Agreement with
Atlas Technologies, Inc. whereby Atlas became a wholly-owned subsidiary of the
Company. Financial statements after that date are those of the new reporting
entity and are not fully comparable to pre-merger periods.
Unaudited sales revenues for the quarter ended December 31, 1996 were
$9,386,486, up 17% from the quarter ended December 31, 1995 of $8,019,804, and
revenues for the six months ended December 31,1996 were $17,812,784, up 5% from
$16,918,421 for the six months ended December 31, 1995. Increased sales were
primarily due to higher levels of business. The order backlog as of December 31,
1996 was $18.5 million, down 15% from the December 31, 1995 backlog of $21.8
million, mainly due to increased production for the period and average closing
of new orders. The volume of new business quotes, both domestic and foreign, is
good.
Costs of products sold for the quarter ended December 31, 1996 were
$7,156,886, up 35% from $5,293,517 for the quarter ended December 31, 1995. Cost
of products sold for the six months ended December 31, 1996 were $13,482,236, up
18% from $11,403,448 for the six months ended December 31, 1995. The 18%
increase in cost of sales resulted from significant development expenses during
the first two periods for a series of new large destackers, which are estimated
to be 85% complete. Revenues on this specific contract accounted for over 27% of
the sales volume and 34% of the cost of product sold. As this order moves into
the final completion phase, cost of sales is expected to improve.
Higher cost of sales resulted in an 18% reduction in gross profit for the
quarter ended December 31, 1996 of $2,229,600, compared to $2,726,287 for the
quarter ended December 31, 1995. Gross profits for the six months ended December
31,1996 were $4,330,548, down 21% from $5,514,973 for the six months ended
December 31, 1995, due primarily to the high cost of development on a series of
new large destackers and development cost incurred in designing and installing
product for foreign customers.
Consolidated selling, general and administrative (SG&A) expenses, including
officers' bonuses during the quarter ended December 31, 1996, were $1,885,507,
down 21% from $2,396,004 for the quarter ended December 31, 1995. For the six
months ended December 31,1996, SG&A expenses were $3,798,125, down 21% from
$4,825,924 for the six months then ended December 31, 1995. Primary factors for
the SG&A decrease were lower executive compensation expenses and bonus accruals,
as well as reduced legal and accounting expenses as compared to higher
professional fees incurred by both PTC and Atlas in the first quarter of fiscal
1995 related to the acquisition of Atlas by PTC.
Consolidated earnings from operations (net income before interest and
income taxes) for the quarter ended December 31, 1996 were $344,093, up 4% from
$330,283 for the quarter ended December 31, 1995. For the six months ended
December 31,1996 earnings from operations were $532,423, down 23% from $689,049
for the six months ended December 31, 1995. This 23% reduction is due primarily
to the development costs for the new destacker units.
Net (consolidated) income for the quarter ended December 31, 1996 was
$107,812, down 14% from the (predecessor's) net income of $125,562 for the
quarter ended December 31, 1995. Net income for the six months ended December
31, 1996 was $122,145, down 51% from the (predecessor's) net income of $248,766
for the six months then ended December 31, 1995. The decrease in net income was
partially caused by increased interest expense of $107,127 and amortization of
goodwill of $51,480.
16
<PAGE>
Liquidity and Capital Resources
Atlas believes its principal long-term capital requirement has been and is
expected to continue to be the funding of capital expenditures to improve and
expand Atlas' facility and marketing efforts and the financing of day-to-day
Atlas operations.
During the quarter ended December 31, 1996, Atlas had entered into a new
debt financing agreement with First of Chicago NBD. The bank consolidated all of
Atlas' long and short term debts, bundling the various notes and lines of credit
into one new two year committed line of credit, with increased maximum debt
usage of $14,500,000 based on collateral of the company's receivables,
work-in-process, and assets. Interest rates have been reduced to the bank prime
rate and a revised amortization of certain asset based debt to quarterly
payments of $62,500 which has reduced the overall annual principal payments
requirements, improving the current ratio and working capital.
As of December 31, 1996, Atlas also entered into an agreement with First of
Chicago NBD to fund the construction of the new building and equipment through
the sale of $4,500,000 in tax exempt Industrial Revenue Bonds (IRB). The
proceeds are being used for the construction, furnishing and equipping of the
new 59,000 sq. ft. manufacturing building. The unused portion has been invested
and earns interest until spent. The bonds are state and federal tax exempt.
Consequently, the floating rate of interest is significantly reduced compared to
conventional construction or real-estate financing.
Terms: 1997 Interest only
1998 $400,000 annual payment plus quarterly interest payments.
1999 $400,000 annual payment plus quarterly interest payments
2000 $400,000 annual payment plus quarterly interest payments
2001 - 2011 $300,000 annual payment plus quarterly interest payments
IRB closing costs of $184,409 have been incurred and were booked as a long
term asset. These are being amortized over the 15 year life of the Industrial
Revenue Bonds.
At December 31, 1996, Atlas had financed debt of $11,637,590 under the line
of credit, $4,500,000 under the Industrial Revenue Bond, payable over 15 years,
and other debt of $68,155, compared to the June 30, 1996 total combined long
term debt financing and line of credit balance of $9,881,737.
The Company believes that, as a result of the new loan facility, its
short-term credit availability is adequate to support its business operation at
current and near-term anticipated sales levels.
Working capital at December 31, 1996 was $16,500,369 and the current ratio
was 3.9 to 1, compared to $5,047,991 and 1.4 to 1, respectively, for the company
at June 30, 1996. This improvement resulted from the Company's consolidating the
PTC and Atlas balance sheets, securing a committed line of credit for 24 months
and reclassifying the total debt as long term debt. Atlas has retained the
proceeds from the Industrial Revenue Bond. Under certain arbitrage guidelines,
Atlas is able to invest the IRB proceeds in US securities until the funds are
completely spent on the building and equipment.
Management believes Atlas is reaching capacity at its present manufacturing
facilities. Construction on Atlas' third manufacturing plant, located near its
main manufacturing facility in Fenton, Michigan, is presently underway.
Construction is expected to be completed early in May of 1997. The expansion
will increase plant capacity by approximately 80% and will incur certain one
time relocation and start up expenses in late June through August of 1997 .
17
<PAGE>
Risks and Uncertainties
Except for any historical information contained herein, the matters
discussed in this 10-Q contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. Such risks and uncertainties
include the possibility that changes in economic conditions could adversely
affect the demand for the Company's products by its customers, outcome of the
IRS audit for year ending June 30, 1995 and higher than anticipated start-up
expenses or delays for the new manufacturing facility.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule (filed electronically only).
B. Reports on Form 8-K -- None
19
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRODUCTIVITY TECHNOLOGIES CORP.
Date: February 14, 1997 By: /s/ Samuel N. Seidman
Samuel N. Seidman, President
Date: February 14, 1997 By: /s/ Jesse Levine
Jesse Levine, Chief Financial Officer
20
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 447,969
<SECURITIES> 4,205,732
<RECEIVABLES> 7,345,431
<ALLOWANCES> (167,100)
<INVENTORY> 766,247
<CURRENT-ASSETS> 22,227,446
<PP&E> 6,352,746
<DEPRECIATION> (222,854)
<TOTAL-ASSETS> 31,936,052
<CURRENT-LIABILITIES> 5,727,077
<BONDS> 0
<COMMON> 2,125
0
0
<OTHER-SE> 9,495,481
<TOTAL-LIABILITY-AND-EQUITY> 31,936,052
<SALES> 17,812,784
<TOTAL-REVENUES> 17,883,533
<CGS> 13,482,236
<TOTAL-COSTS> 13,482,236
<OTHER-EXPENSES> 3,798,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396,027
<INCOME-PRETAX> 207,145
<INCOME-TAX> 85,000
<INCOME-CONTINUING> 122,145
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<EXTRAORDINARY> 0
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<NET-INCOME> 122,145
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