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 - March 31, 1997
[ ] 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 May 14, 1997: 2,125,000 shares $ .001 par value common stock.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part I : Financial Information for 3
Productivity Technologies Corp. (PTC) and
Subsidiary Atlas Technologies, Inc. (Atlas)
Item 1. Financial Statements
Consolidated Balance Sheets of PTC and Atlas 4-5
Consolidated Statement of Operations of PTC and Atlas 6
Company and Statement of Operations of the Predecessor (Atlas)
Consolidated Statement of Stockholders' Equity of the Company 7
Consolidated Statement of Cash Flows of PTC and Atlas and 8-9
Statement of Cash Flows of the Predecessor (Atlas)
Notes to Financial Statements 10-13
Unaudited Proforma Statement of Operations of the Predecessor 14
Item 2. Management's Discussion and Analysis of Financial Condition 15-17
and Results of Operations.
Item 3 Management's Outlook for the remaining fiscal year ending
June 30, 1997 and uncertainties. 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARY
PART I: FINANCIAL INFORMATION
ITEM 1. 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 nine months ended March 31, 1997 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. Report on 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 Predecessor
Unaudited Audited
Assets March 31, 1997 June 30, 1996
<S> <C> <C>
Current Assets
Cash and cash equivalents $400,746 $512,179
Short-term investments, including accrued interest 3,036,305 965,255
Contracts receivable 6,165,910 7,958,159
Notes receivable 240,606
Costs and estimated earnings in excess of
billings on uncompleted contracts 8,609,712 7,593,003
Inventories 781,628 720,947
Prepaid expenses and other 295,922 220,494
Deferred income taxes 479,790 480,000
Total Current Assets 19,770,013 18,690,643
- ------------------------------------------------------------------------------------------------------------
Property and Equipment
Land 659,014 216,000
Buildings and improvements 2,136,795 2,132,388
Machinery and equipment 2,437,917 1,888,479
Transportation equipment 31,500 31,500
Building construction in progress 2,486,564
Total Fixed Assets 7,751,790 4,268,367
Less Accumulated Depreciation 327,663 27,928
- ------------------------------------------------------------------------------------------------------------
Net Property and Equipment 7,424,127 4,240,439
- ------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization 2,516,582 2,593,803
Non-competition agreement, net of amortization 215,333 228,083
Investment in subsidiary
Merger related expenses net of amortization
Deferred income taxes
Other assets 871,883 270,803
Total Other Assets 3,603,798 3,092,689
- ------------------------------------------------------------------------------------------------------------
Total Assets $30,797,938 $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 Predecessor
Unaudited Audited
March 31, 1997 June 30, 1996
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $1,236,683 $2,444,411
Line-of-credit -- 7,188,558
Accrued liabilities
Payroll, executive bonuses and
related withholdings 1,112,082 1,192,052
Federal and State income taxes 455,672 221,790
Other accrued liabilities 893,561 1,596,485
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,305,724 534,963
Current maturities of long term debt 312,216 464,393
Total Current Liabilities 5,315,938 13,642,652
Deferred Income Taxes 779,000 779,000
Long Term Debt Less Current Maturities 15,059,205 2,228,786
Total Liabilities 21,154,143 16,650,438
- ---------------------------------------------------------- ------------------------- -- -------------------
Stockholders' Equity
Preferred Stock, .001 par value, 1,000,000 authorized -- --
authorized and non 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 464,183 193,720
Total Stockholders' Equity 9,643,796 9,373,333
- ---------------------------------------------------------- ------------------------- -- -------------------
Total Liabilities and Stockholders' Equity $30,797,939 $26,023,771
- ---------------------------------------------------------- ------------------------- -- -------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Consolidated Statement of Operations of PTC and Atlas (unaudited)
and Statements of Operations of the Predecessor (audited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
Consolidated Predecessor Consolidated Predecessor
Mar 31,1997 Mar 31,1996 Mar 31,1997 Mar 31,1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $7,565,805 $8,922,629 $25,378,589 $25,841,050
- ------------------------------------------------------------------------------------------------- -------------------
Cost of Sales 5,206,821 6,610,439 18,689,057 18,013,887
- ------------------------------------------------------------------------------------------------- -------------------
Gross Profit 2,358,984 2,312,190 6,689,532 7,827,163
Selling, General and Administrative
Expenses, including officers' bonuses 1,888,519 1,877,302 5,686,644 6,703,226
- ------------------------------------------------------------------------------------------------- -------------------
Income (Loss) From Operations 470,465 434,888 1,022,888 1,123,937
- ------------------------------------------------------------------------------------------------- -------------------
Other Income ( Expenses)
Interest income 73,057 9,479 110,091 32,305
Interest expense (310,132) (122,009) (706,159) (410,910)
Miscellaneous 5,928 18,001 39,643 39,107
- ------------------------------------------------------------------------------------------------- -------------------
Total Other Expenses (231,147) (94,529) (556,425) (399,497)
- ------------------------------------------------------------------------------------------------- -------------------
Income (Loss) Before Income taxes 239,318 340,359 446,463 784,440
Income Taxes 91,000 182,620 176,000 375,637
- ------------------------------------------------------------------------------------------------- -------------------
Net Income (Loss) 148,318 157,739 270,463 408,802
- ------------------------------------------------------------------------------------------------- -------------------
Net Income Per Share of
Common Stock $0.07 $0.07 $0.13 $0.19
- ------------------------------------------------------------------------------------------------- -------------------
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 Statement of Stockholders' Equity of PTC (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 $270,463 $270,463
- ----------------------------------------------------------------------------------------------------------------------
Balance, 2,125,000 $2,125 $9,177,488 $464,183 $9,643,796
March 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Consolidated Statement of Cash Flows of Atlas and PTC (unaudited)
and Statement of Cash Flows of the Predecessor (audited)
<TABLE>
<CAPTION>
Consolidated Predecessor
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996
<S> <C> <C>
Cash Flow From Operating Activities
Net Income $270,463 $251,063
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation 299,735 265,152
Amortization (386,304) 12,750
Deferred income tax 210 (12,564)
Changes in operating assets and liabilities:
Contracts receivable 1,792,249 (1,586,267)
Inventories, prepaid expenses and other (136,109) (329,120)
Costs and estimated earnings in excess of (245,948) (1,036,334)
billings on uncompleted contracts
Accounts payable, accrued exp. and other (1,756,740) 602,812
Net Cash Provided by (Used In) Operating Activities (162,444) (1,832,508)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
Consolidated Statement of Cash Flows of Atlas and PTC (unaudited)
and Statement of Cash Flows of the Predecessor (audited)
<TABLE>
<CAPTION>
Consolidated Predecessor
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996
<S> <C> <C>
Cash Flows From Investing Activities
Collection of Notes Receivable 240,606 346,119
Investment of US Securities (2,071,050) 0
Expenditures for property and equipment (3,483,422) (357,611)
Increase in notes receivable (124,806) (121,506)
Net Cash Provided by (Used In) Investing Activities (5,438,672) (132,998)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net borrowings (payments) - line of credit (7,188,558) 2,307,820
(Payments) or Borrowings on long term (152,177) (14,875)
debt, capital leases and notes payable
Proceeds from additional long-term debt 12,830,419 278,790
Distribution to former stockholders (542,260)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 5,489,684 2,029,475
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash equivalents (111,433) 63,969
Cash and Cash equivalents at the beginning of the period 512,179 17,253
- ------------------------------------------------------------------------------------------------------------
Cash and Cash equivalents at the end of the period 400,746 81,222
- ------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid during the period for:
Interest $706,159 $410,909
Income Taxes $176,000 $375,637
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
Notes to Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements for the third quarter ended
March 31, 1997 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 third quarter ended March 31,
1997 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 period ended June 30, 1996.
2. Summary of Significant Accounting Policies
Formation of the Company and Basis of Presentation
The Company, Production Systems Acquisition Corporation, was incorporated in
June 1993 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 third quarter ended
March 31, 1997 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 third quarter ended
March 31, 1996 represent the financial statements of Atlas (the "Predecessor").
10
<PAGE>
Notes to Financial Statements (Unaudited)
Nature of Business
Atlas Technologies, Inc. is Productivity Technologies Corporation's sole
operating subsidiary at this time. 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
three manufacturing plants and three sales and engineering offices. The two main
plants are 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.
Net Income Per Common Share
Net income per common share for the third quarter ended March 31, 1997 has been
computed based on the weighted average number of common and diluted common
equivalent shares outstanding.
11
<PAGE>
Notes to Financial Statements (Unaudited)
3. Commitments
In connection with the merger agreement, Atlas 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 on
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.
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 the Company's
standard terms and conditions. These terms and conditions provide in pertinent
part that the Company will not, in any event, be liable for any incidental or
consequential damages, including loss of profits. Further, the Company 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 the 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. Initial
arbitration was reported in PTC's 10-K for the year ended June 30, 1996. Atlas
is not involved as a defendant in any other substantial litigation.
12
<PAGE>
Notes to Financial Statements (Unaudited)
(2) Atlas is undergoing an Internal Revenue Service audit for the fiscal
year ended June 30, 1995. The main area of review is a research and
experimentation tax credit the Company has calculated and filed for over the
past six years. The Company had applied $383,000 of credit towards Federal Taxes
due for the fiscal period ended June 1995 and had a carry forward of $481,400
expected to be used as a reduction in the calculation of 1996 and 1997
alternative minimum tax payments. Management and Atlas' accountants believe this
issue is a matter of interpretation of the research and experimentation
regulations. Management believes that the IRS may seek a reduction in the amount
of credit calculated which may have an adverse effect to the financial
statements of the Company. The Company is entitled to indemnification (subject
to certain exclusions and limitations) from the former principal stockholders of
Atlas for amounts it may be required to pay as a result of such audit. Also, to
the extent any such amounts have the effect of reducing the net worth of Atlas
at December 31, 1995 below a specified amount, the Company is entitled to
reimbursement from the former stockholders of Atlas and has secured such
reimbursement obligation through a $1,000,000 escrow account.
5. Pro Forma Condensed Consolidated Statement of Operations
The following unaudited pro forma condensed statement of operations for
last year's third quarter ended March 31, 1996 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.
6. Historic Pro Forma Operations of the Predecessor
(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 U.S. 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.
13
<PAGE>
Unaudited Proforma Statement of Operations of the Predecessor
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Consolidated Consolidated
Quarter Ended Nine Months Ended
Mar. 31, 1996 Mar. 31, 1996
<S> <C> <C>
Sales $8,922,629 $25,841,050
Cost of Sales 6,610,439 18,013,887
- --------------------------------------------------------------------------------------------------
Gross Profit 2,312,190 7,827,163
OPERATING EXPENSES
Officers' Bonus Expense 164,745 1,119,234
Selling, General and Administrative 1,905,342 5,263,238
Income from Operations 242,103 1,444,691
- --------------------------------------------------------------------------------------------------
Other Income ( Expenses)
Interest Income 26,179 85,105
Interest Expense (122,009) (410,909)
Miscellaneous 18,001 39,107
Total Other Income (Expenses) (77,829) (286,697)
- --------------------------------------------------------------------------------------------------
Income Before Income Taxes 164,274 1,157,994
Income Taxes 40,700 475,400
Net Income 123,574 682,594
- --------------------------------------------------------------------------------------------------
Net Income per Share of Common Stock $0.06 $0.33
- --------------------------------------------------------------------------------------------------
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. Officer's bonus expense was calculated using employment contracts
and a reduction of interest income for PTC's capital invested in the purchase
of Atlas.
14
<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 March 31, 1997 were $7,565,805,
down 15% from $8,922,629 for the quarter ended March 31, 1996. The decrease in
sales revenue was due to customer delays in accepting shipments of a new line of
large destackers, which has reduced production capacity and new unit builds
until the new facility is opened in the fourth quarter of fiscal 1997. Revenues
for the nine months ended March 31, 1997 were $25,378,589, down 2% from
$25,841,050 for the nine months then ended March 31, 1996. The order backlog as
of March 31, 1997 was $20.4 million, up 9% from the March 31, 1996 back-log of
$18.7 million. The increase in backlog was due to decreased shipments in the
third quarter and new orders. Foreign (non-US) net new order bookings for the
nine month period increased to 34% of total orders, a significant increase over
the previous nine month period's 14%. This significant increase in foreign
orders is due to several contracts that were awarded to Atlas from various
foreign companies primarily located in the U.K. Business activity remains strong
in both domestic and foreign markets.
Cost of products sold for the quarter ended March 31, 1997 were $5,206,821, down
21% from $6,610,439 for the quarter ended March 31, 1996. The significant
reduction in cost was primarily due to the 15% lower revenues, but a significant
improvement in gross margin also helped to reduce costs during the quarter. Cost
of products sold for the nine months ended March 31, 1997 were $18,689,057, up
4% compared to $18,013,887 for the nine months ended March 31, 1996. The 4%
increase in cost resulted from significant development expenses during the first
two quarters for a series of new large destackers.
The reduction in cost of products sold resulted in an 2% improvement in gross
profit for the quarter ended March 31, 1997 of $2,358,984, compared to
$2,312,190 for the quarter ended March 31, 1996. Gross profits for the nine
months ended March 31, 1997 were $6,689,532, down 14% from $7,827,163 for the
nine months ended March 31, 1996, primarily due to significant development
expense in the first two quarters for a series of new large destackers.
Consolidated selling, general and administrative (SG&A) expenses, including
officers' bonuses, during the quarter ended March 31, 1997, were $1,888,519, a
modest change from $1,877,302 for the quarter ended March 31, 1996. For the nine
months ended March 31, 1997, SG&A expenses were $5,686,644, down 15% from
$6,703,226 for the nine months then ended March 31, 1996. Primary factors for
the year-to-date SG&A decrease were lower executive compensation expenses and
bonus accruals, as well as the elimination of certain legal and accounting
expenses associated with the acquisition of Atlas by PTC.
Consolidated earnings from operations ( net income before interest and income
taxes ) for the quarter ended March 31, 1997 were $470,465, up 8% from $434,888
for the quarter ended March 31, 1996. The 8% increase this quarter was due to
reduced charges associated with the new large destacker development. For the
nine months ended March 31, 1997 earnings from operations were $1,022,888, down
11% from $1,123,937 for the nine months ended March 31, 1996. This 11% decrease
is due to significant development expenses during the first two quarters of this
fiscal year for a series of new large destackers.
15
<PAGE>
Interest expenses for the quarter ended March 31, 1997 were $310,132, up 154%
from $122,009 for the quarter ended March 31, 1996. For the nine months ended
March 31, 1997 interest expenses were $706,159, up 72% from $410,910 for the
nine months ended March 31, 1996. The significant increase in interest expense
for both periods was caused by higher utilization of the line of credit to
finance work-in-process, increased accounts receivable, and new asset
acquisitions associated with the new plant construction.
Unaudited net (consolidated) income for the quarter ended March 31, 1997 was
$148,318, down 6% from $157,739 for the predecessor's quarter ended March 31,
1996. For the nine months ended March 31, 1997, earnings from operations were
$270,463, down 33% from the predecessor's net income of $408,802 for the nine
months ended March 31, 1996.
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 this fiscal year ending June 30, 1997, Atlas 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 has reduced the overall annual principal payments
requirements, improving the current ratio and working capital.
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, so the floating rate of interest is
significantly reduced compared to conventional construction or real-estate
financing. Terms are as follows:
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 March 31, 1997, Atlas had financed debt of $10,808,665 under the line of
credit and $4,500,000 under the Industrial Revenue Bond, payable over 15 years,
and other debt of $62,756, 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 operations at current
and near-term anticipated sales levels.
16
<PAGE>
Working capital at March 31, 1997 was $14,454,075 and the current ratio was 3.7
to 1, compared to $5,047,991 and 1.4 to 1, respectively, for the Company at June
30, 1996. This improvement was possible by the consolidation of the balance
sheets of PTC and Atlas, 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 U.S. securities until the funds are
completely spent on the new 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 in May of 1997. The expansion will
increase plant capacity by approximately 80%.
Building construction in process at March 31, 1997 resulted in an increase in
fixed assets of $2,486,564. While under construction no depreciation has been
charged.
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, an unfavorable
outcome of the IRS audit for year ending June 30, 1995, potentially higher than
anticipated start-up expenses or delays for the new manufacturing facility, and
potential unforeseen other factors.
17
<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
18
<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: May 14, 1997 By: /s/ Samuel N. Seidman
---------------------------
Samuel N. Seidman, President
Date: May 14, 1997 By: /s/ Jesse Levine
----------------------
Jesse Levine, Chief Financial Officer
19
<PAGE>
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