U.S. 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _______________________
Commission file number 0-24242
PRODUCTIVITY TECHNOLOGIES CORP.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3764753
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
509 Madison Avenue, New York, New York 10022
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(Address of Principal Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 843-1480
--------------------------
Not Applicable
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 17, 1998 -- 2,125,000 shares, $ .001 par value common
stock.
<PAGE>
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION............................................3
ITEM 1. INTERIM FINANCIAL STATEMENTS.....................................3
Unaudited and Audited Consolidated Balance Sheets.........................4
Unaudited Consolidated Income Statements..................................6
Unaudited Consolidated Statement of Stockholders' Equity..................7
Unaudited Consolidated Statement of Cash Flows............................8
Notes to Financial Statements (Unaudited).................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................11
PART II: OTHER INFORMATION................................................14
ITEM 2. LEGAL PROCEEDINGS................................................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................14
SIGNATURES................................................................15
2
<PAGE>
PRODUCTIVITY TECHNOLOGIES CORP. AND SUBSIDIARY
PART 1. 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 nine months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998.
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, 1997. Information provided includes the
consolidated audited financial statements, including footnotes for the year
ended June 30, 1997 and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
3
<PAGE>
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Unaudited Audited
March 31, June 30,
1998 1997
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<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $875,501 $843,709
Short-term investments and accrued interest 2,661,476 929,204
Contracts receivable 7,889,808 9,199,302
Notes Receivable -- -- 160,631
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,364,267 8,640,731
Inventories 651,642 619,242
Prepaid expenses and other 121,230 675,070
Deferred income taxes 622,000
Assets held for sale -- -- 937,549
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Total Current Assets 18,942,677 22,627,438
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Property and Equipment
Land 591,514 591,514
Buildings and improvements 4,848,505 1,329,113
Construction in progress -- -- 4,142,725
Machinery and equipment 3,392,151 1,909,879
Transportation equipment 31,500 31,500
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Total Fixed Assets 8,863,670 8,004,731
Less accumulated depreciation 724,131 337,350
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Net Property and Equipment 8,139,539 7,667,381
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Other Assets
Goodwill, net of accumulated amortization 2,413,622 2,490,842
of $209,982 and $67,838
Non-competition agreement, net of amortization 198,333 211,083
Other assets 680,461 412,988
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Total Other Assets 3,292,416 3,114,913
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Total Assets $30,374,632 $33,409,732
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</TABLE>
4
<PAGE>
Productivity Technologies Corp. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Unaudited Audited
March 31, June 30,
1998 1997
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<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $1,352,053 $2,472,828
Accrued expenses
Executive bonus agreement 810,000 1,254,842
Commission payable 558,064 437,185
Payroll and related withholdings 281,743 271,930
Other 605,290 968,220
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,385,733 1,165,271
Current maturities of long-term debt 1,127,330 714,140
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Total Current Liabilities 6,120,213 7,284,416
Deferred Income Taxes 832,000 832,000
Long Term Debt less current maturities 13,422,759 15,327,253
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Total Liabilities 20,374,972 23,443,669
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Stockholders' Equity
Preferred Stock, $.001 par value, 1,000,000 authorized
and none outstanding
Common Stock, $.001 par value, 20,000,000
shares authorized, 2,425,000 and 2,125,000 outstanding 2,425 2,125
Additional paid-in capital 10,410,938 9,177,488
Retained earnings (413,703) 786,450
Total Stockholders' Equity 9,999,660 9,966,063
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Total Liabilities and Stockholders' Equity $30,374,632 $33,409,732
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</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Productivity Technologies Corp. and Subsidiary
Unaudited Consolidated Income Statements
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
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March 31, March 31, March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $9,097,216 $7,565,805 $29,786,043 $25,378,589
Cost of sales 7,006,476 5,206,821 21,515,345 18,689,057
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Gross profit 2,090,740 2,358,984 8,270,698 6,689,532
Selling, general and administrative
expenses, excluding officers' bonuses 2,324,258 1,629,979 6,605,101 5,291,989
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Income (loss) operations (233,518) 729,005 1,665,597 1,397,543
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Other income ( expenses)
Interest income 28,641 73,057 91,093 110,091
Interest expense (251,763) (310,132) (825,949) (706,159)
Miscellaneous (26,856) 5,928 118,165 39,643
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Total other expenses (249,978) (231,147) (616,691) (556,425)
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Income (loss) officers' before bonuses and unusual
bonus restructuring charges (483,496) 497,858 1,048,906 841,118
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Officers' Bonuses and unusual bonus restructuring
charges 2,868,059 258,540 2,868,059 394,655
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Income (loss) before income taxes (3,351,555) 239,318 (1,819,153) 446,463
Income taxes (901,500) 91,000 (619,000) 176,000
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Net income (loss) ($2,450,055) $148,318 ($1,200,153) $270,463
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Net income (loss) per share of
common stock $(1.15) $0.07 $(0.56) $0.13
Weighted average number of
common shares outstanding 2,128,226 2,125,000 2,126,099 2,125,000
</TABLE>
6
See accompanying notes to financial statements.
<PAGE>
Unaudited Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,125,000 $2,125 $9,177,488 $ 786,450 $9,966,063
Net Income, July 1 -March 31, 1998 ($1,200,153) ($ 1,200,153)
Partial Bonus settlement 300,000 $300 $1,233,450 $ 1,233,750
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Balance, March 31, 1998 2,425,000 $2,425 $10,410,938 ($413,703) $9,999,659
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</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Productivity Technologies Corp. and Subsidiary
Unaudited Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
March 31, March 31,
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities
Net Income ($1,200,154) $270,463
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 386,781 299,735
Amortization 89,969 (386,304)
Deferred income tax (756,753) 210
Changes in operating assets and liabilities
Contract receivable 1,309,494 1,792,249
Inventories, prepaid expenses and other 521,441 (136,109)
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,496,926 (245,948)
Accounts payable, accrued expenses and other (2,217,924) (1,756,740)
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Net cash provided by (used in) operating activities $1,629,779 $(162,444)
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Cash Flows From Investing Activities
Collection of notes receivable $160,631 $240,606
Maturity of US securities in deposited trust fund (1,732,272) (2,071,050)
Expenditures for property and equipment 78,610 (3,483,422)
Increase in notes receivable 152,598 (124,806)
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Net cash Provided by (used in) investing Activities $(1,340,433) $(5,438,672)
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Cash Flows From Financing Activities
(Payments) borrowings on long-term debt, (7,188,588)
capital leases and notes payable 413,190 (152,177)
Proceeds from additional long-term debt (1,904,494) 12,830,419
Stock distribution Bonus Restructuring 1,233,750 --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used In) financing activities $(257,554) $5,489,684
Net increase (decrease) in cash and cash equivalents $31,792 $(111,433)
Cash and cash equivalents at the beginning of the period 843,709 512,179
Cash and cash equivalents at the end of the period $875,501 $400,746
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Supplemental cash flow information
Cash paid during the period for
Interest $825,949 $706,159
Income Taxes ($619,000) $176,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
Unaudited Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements for the third quarter ended
March 31, 1998 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, 1997 has been derived from the audited consolidated financial
statements at that date. Operating results for the third quarter ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1998 or any other interim period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report for the period ended June 30, 1997.
2. Summary of Significant Accounting Policies
History of the Company and Basis of Presentation
Production Systems Acquisition Corporation (PSAC) was incorporated in June 1993
with the objective of acquiring an operating business engaged in the production
systems industry. PSAC completed an initial public offering ("Offering") of
common stock in July 1994 and raised net proceeds of approximately $9.0 million.
In May 1996, PSAC changed its name to Productivity Technologies Corp. ("PTC" or
the "Company") and acquired Atlas Technologies, Inc. ("Atlas") as a wholly owned
subsidiary.
The accompanying financial statements presented for the third quarter ended
March 31, 1998 include the consolidated accounts of PTC and Atlas. All
significant inter-company accounts and transactions have been eliminated upon
consolidation.
Nature of Business
Atlas, PTC's sole operating subsidiary, is a leading designer and manufacturer
of quick die change, robotic transfer and stacking/destacking equipment for
automation of metal stamping operations, primarily in the automotive and
appliance industries. Atlas operates three manufacturing plants and has sales
offices in Michigan, Georgia, Europe and China. Two plants are owned by Atlas
and are located in Fenton, Michigan. Atlas leases a portion of a third plant 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 three years.
Revenue and Cost Recognition
Contract revenues from fixed price contracts are recognized using the
percentage-of-completion method. Under that method, during the applicable
accounting period, the percentage of completion is developed for each contract
by comparing the cost incurred with the projected total cost of the completed
contract. The resulting percentage is applied to the total contract price to
provide commensurate revenue recognition. For these purposes, the projected
total cost of each contract is assumed to be the estimated cost upon which the
contract price was quoted until contract work has progressed to a point at which
cost of remaining work can be estimated with reasonable accuracy.
9
<PAGE>
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, revenue recognition 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, 1998 has been
computed based on the new number of common and diluted common equivalent shares
outstanding after the bonus restructuring agreement between PTC and executives
of Atlas.
3. Commitments
In connection with the merger agreement through which Atlas was acquired, and as
revised under the bonus restructuring agreement referred to below, Atlas entered
into employment agreements, which established the compensation of the two senior
executive officers of Atlas. The employment agreements require the executives to
devote substantially all of their business time and attention to the affairs of
PTC. Annual base compensation under each agreement is currently $198,588,
subject to annual cost of living increases.
4. Unusual Onetime Bonus Restructuring Charges Incurred During the Quarter Ended
March 31, 1998.
Effective in the third quarter, PTC and the two senior executive officers of
Atlas agreed to restructure the bonus agreements which were a part of the
original employment agreements executed when PTC purchased Atlas in May, 1996.
The structure and terms of the bonus payments under the original employment
agreements have been described in detail in prior 10K reports filed by the
Company.
From January 1, 1996 through December 31, 1997, PTC accrued or paid bonuses
approximating $2,133,000 to the two senior executives, comprising the following
amounts: (1) Approximately $208,000 and $418,000 were paid under one of the
bonus arrangements to the two senior executives during the six month period
ended June 30, 1996 and the year ended June 30, 1997, respectively. (2) An
additional $208,000 was accrued under this bonus arrangement but was not paid
for the six month period from July 1, 1997 through December 31, 1997. (3)
Finally, approximately $1,300,000 was accrued but not paid under a second bonus
arrangement for the period from January 1, 1996 through December 31, 1997.
During the third quarter ended March 31, 1998, the PTC board of directors
negotiated with the two senior executives a bonus restructuring plan by which
the bonuses are to be paid in one lump sum rather than over a period from the
present through December 31, 2001. The bonus restructuring plan was intended to
(1) pay the executives an amount equal, on a present value basis, to what future
bonuses might be worth to PTC and the executives if PTC and the executives did
not modify the prior bonus arrangements, (2) allow PTC earnings in future
periods to grow unencumbered by bonus payments to the executives, and (3)
continue providing a performance-based incentive to the senior executives of
Atlas to increase future earnings
10
<PAGE>
Under the bonus restructuring, PTC agreed to pay to the senior executives the
following: (1) 300,000 shares of common stock restricted from transfer or resale
for a period of three years, (2) deferred compensation of $1,660,564 which is to
be paid in four equal annual installments in arrears, and (3) cash of $810,000,
of which $560,000 is to be placed in an escrow account. Although the 300,000
shares under the bonus restructuring have not been issued, they have been
treated as being outstanding as of the end of the third quarter because of the
contractual obligation relating to their issuance. It is expected that part or
all of the balance in the escrow account will be distributed at a later date to
the senior executives, depending upon the future resolution of a dispute between
Atlas and the Internal Revenue Service related to research and experimentation
credits claimed by Atlas for the fiscal years ended June 30, 1991 through 1995.
See Contingencies paragraph immediately following.
5. Contingencies
Atlas is undergoing an Internal Revenue Service audit primarily related to
research and experimentation tax credits claimed for the 1991 through 1995
fiscal years. Atlas had applied $383,000 of credit towards federal taxes due for
the fiscal period ended June 1995 and had carried forward $481,400 with the
intention of applying the credits in payment of alternative minimum taxes for
1996 and 1997. In the event that the IRS should seek a reduction in the amount
of eligible credits, and prevail upon appeal, there may be an adverse effect
upon the financial statements of PTC. Due to the $560,000 escrow funded by the
Atlas senior executives and discussed in the immediately preceding paragraph,
PTC believes Altas has a maximum potential exposure of $187,000 plus interest in
the event of an adverse IRS ruling in connection with the research and
experimentation credits. The Company believes that Atlas has strong evidence
which supports the level of research and experimentation credits claimed in
prior years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
For the quarter ended March 31, 1998, PTC experienced an operating loss (before
taxes and onetime bonus restructuring charges) of $483,496, compared with an
operating profit of $497,858 for the quarter ended March 31, 1998. Income from
operations was $1,048,906 for the nine months ended March 31, 1998 compared with
$841,118 for the nine months ended March 31, 1997. The operating loss for the
current quarter included charges in excess of $600,000 in legal settlement
expenses and defense fees.
The net consolidated loss income after taxes and unusual onetime bonus
restructuring charges for the quarter ended March 31, 1998 was $2,450,055,
compared with net income of $148,318 for the quarter ended March 31, 1997. The
net loss was $1,200,153 for the nine months ended March 31, 1998 compared with
net income of $270,463 for the nine months ended March 31, 1997. The operating
loss for the nine months ended March 31, 1998 included legal settlement expenses
and defense fees of more than $500,000 and the onetime bonus restructuring
charge of $2,868,059.
Sales (Revenue Recognition)
Unaudited sales revenues for the quarter ended March 31, 1998 were $9,097,216,
up 20% from quarter ended March 31, 1997 revenues of $7,565,805. Revenues for
the nine months ended March 31, 1998 were $29,786,043, an increase of 17% from
nine months ended March 31, 1997 revenues of $25,378,589. Increased sales
resulted primarily from increased orders in the prior backlog and from Atlas
having greater production capacity as a result of the opening of a third plant
in June 1997. The order backlog as of March 31, 1998 was $11.7 million, down
from the March 31, 1997 backlog of $20.4 million. Atlas recently removed orders
in excess of $ 2.8 million from its backlog. The customers of the orders
currently are re-evaluating the projects for which the orders had been placed
with Atlas Atlas expected to process the customers' orders during the third and
fourth quarters of fiscal 1998, and their delay or cancellation had a material
adverse effect on third quarter earnings.
11
<PAGE>
Gross Margin
For the quarter ended March 31, 1998, the gross margin was 23.0% compared with
31.2% for the quarter ended March 31, 1997. For the nine months ended March 31,
1998, the gross margin was 27.8% compared with 26.4% for the nine months ended
March 31, 1997. The decline in gross margin during the third quarter was due to
cost overruns in certain projects in their final stages of completion. The delay
of two substantial orders which initially were scheduled into, then subsequently
removed from, production compounded difficulties in the production schedule and
also contributed to the gross margin declines associated with cost overruns on
certain existing work. The improvement in margins over the comparable nine month
period a year ago primary reflects a more profitable product mix and improved
product standardization efficiencies. In addition, the Company incurred research
costs during the nine month period in 1997 in connection with a launching of a
new Destacker product line. A similar level of research costs in connection with
a new product launch were not incurred during the nine month period in fiscal
1998.
Gross profit for the quarter ended March 31, 1998 was $2,090,740 a decrease of
11% compared with $2,358,984 for the quarter ended March 31, 1997. As with gross
margins discussed above, the decline in gross profit was due to cost overruns in
certain projects in their final stages of completion. The delay of two
substantial orders which initially were scheduled into, then subsequently
removed from, production compounded difficulties in the production schedule and
also contributed to the decline in gross profit during the quarter. Gross profit
for the nine months ended March 31, 1998 increased 24% to $8,270,698, compared
with $6,689,532 for the nine months ended March 31, 1997. The increase in gross
profit compared with the nine month period one year ago is principally due to a
more profitable product mix and improved product standardization efficiencies
during fiscal 1998.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative (SG&A) expenses during the
quarter ended March 31, 1998, were $2,324,258, up 43% from the quarter ended
March 31, 1997 of $1,629,979. SG&A expenses of $6,605,101 for the nine months
ended March 31, 1998 increased by 25% compared with $5,291,989 for the nine
months ended March 31, 1997. Factors for the increase in SG&A expenses include a
significant increase in international travel, higher volume-related sales
commissions, legal defense expenses and a legal settlement incurred in the third
quarter in excess of $600,000, relocation costs in connection with the opening
and move to a new production facility, higher expenses associated with a sales
office overseas, and the launch of new flex finger tooling products.
Officers' bonuses during the quarter ended March 31, 1998, were restructured.
Under the bonus restructuring, PTC is to pay to the senior executives the
following: (1) 300,000 shares of common stock restricted from transfer or resale
for a period of three years, (2) deferred compensation of $1,660,564 which will
be paid in four equal annual installments in arrears, and (3) cash of up to
$810,000, of which $560,000 will be placed in an escrow account. It is expected
that part or all of the balance in the escrow account will be distributed at a
later date to the senior executives, depending upon the future resolution of a
dispute between Atlas and the Internal Revenue Service related to research and
experimentation credits claimed by Atlas for the fiscal years ending June 30,
1991 through 1995.
Interest expense for the quarter ended March 31, 1998 was $251,763, down 19%
from $310,132 for the quarter ended March 31, 1997. For the nine months ended
March 31, 1998, interest expense of $825,949 increased by 17% compared with
$706,159 for the nine months ended March 31, 1997. Increased interest expense
was due to higher utilization of the line of credit to finance increased work in
process, and an increase in accounts receivable, primarily as a result of higher
volumes during 1998. Interest expenses also increased due to higher carrying
costs associated with the production plant opened in June, 1997.
12
<PAGE>
Losses from operations prior to federal income tax and the unusual onetime bonus
restructuring charges for the quarter ended March 31, 1998 were $483,496,
compared with a profit of $497,858 for the quarter ended March 31, 1997. For the
nine months ended March 31, 1998, earnings from operations of $1,048,906
increased 25% compared with $841,118 for the nine months ended March 31, 1997.
Increased earnings from operations resulted from the same factors as discussed
above relative to gross margin improvements and sales volumes, The increase in
earnings from operations would have been larger had the company not incurred the
one time legal defense and settlement expenses exceeding $600,000 during the
quarter.
Losses from operations after the unusual onetime bonus restructuring charges and
federal taxes (net income after bonus restructuring and income taxes) for the
quarter ended March 31, 1998 were $2,450,055, compared with a profit of $148,318
for the quarter ended March 31, 1997. For the nine months ended March 31, 1998,
losses from operations were $1,200,153 compared with a profit of $270,463 for
the nine months ended March 31, 1997. Losses from operations after the unusual
onetime bonus restructuring charges and income taxes resulted from one time
legal defense and settlement costs and the unusual onetime bonus restructuring
charges.
Liquidity and Capital Resources
Atlas believes its principal long-term capital requirement has been and will
continue to be the funding of working capital.
During the fiscal year ended 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 borrowings, bundling the various notes and lines of
credit into one new two-year committed line of credit, with increased maximum
debt of $14,500,000 based on collateral of the Company's accounts receivables,
work-in-process inventory, and other assets. Interest rates were reduced to the
bank prime rate and the amortization schedule of certain asset-based debt was
modified to quarterly payments of $62,500. These changes reduced the overall
annual principal payment requirements, improving the Company's current ratio and
working capital.
Atlas also entered into an agreement with First of Chicago NBD to fund the
construction of the new facility and equipment through the sale of $4,500,000 in
tax exempt Industrial Revenue Bonds (IRBs). The proceeds were used for the
construction, furnishing and equipping of the manufacturing facilitiy and the
adjacent offices. The IRBs are state and federal tax exempt, which results in a
floating interest rate paid by Atlas which is lower than that which would be
available with conventional construction or real estate financing. IRB terms are
as follows:
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 were incurred in 1996 and booked as a long-term
asset. These are being amortized over the 15-year life of the IRBs.
13
<PAGE>
At March 31, 1998, Atlas had debt of $8,200,365 under the line of credit,
$4,500,000 under the IRBs payable over 15 years, a deferred compensation plan of
$1,660,564 to be paid over four equal annual installments and other debt of
$189,160. The total combined long-term debt and line of credit balance was
$14.550,089 at March 31, 1998. The Company believes that future cash flow
requirements will be reduced due to the restructuring of the prior bonus
arrangements, and the Company is expected to report higher future cash flows.
Management believes that the current loan facility will provide adequate cash
resources to support operations at current and near-term future anticipated
sales levels.
Working capital at March 31, 1998 was $12,822,464 and the current ratio was 3.10
to 1, compared with $15,343,022 and 3.10 to 1, respectively, at June 30, 1997.
Forward-Looking Statements
When used in this and in future filings by the Company with the SEC, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "will likely
result," "expects," "plans," "will continue," "is anticipated," "estimated,"
"project'" or "outlook" or similar expressions ( including confirmations by an
authorized executive officer of the Company of any such expressions made by a
third party with respect to the Company) are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following; (a) an adverse
outcome from the IRS audit for the fiscal year ending June 30, 1995; (b)
competitive pressures in the production systems industry; and (c) general
economic conditions. The company has no obligation to publicly release the
result of any revisions, which may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances.
PART II: OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
During the third quarter of fiscal 1998, Atlas and the Steel of West Virginia
(SWVA) reached a settlement in connection with an outstanding legal dispute.
SWVA's initial claim under the dispute was for $15,300,000. The settlement
provided for a payment of $700,000 to SWVA, of which $210,000 was paid from
insurance proceeds.
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
14
<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 20, 1998 By: /s/ Samuel N. Seidman
---------------------------
Samuel N. Seidman, President
Date: May 20, 1998 By: /s/ Jesse Levine
----------------------
Jesse Levine, Chief Financial Officer
15
<PAGE>
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