-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EyGKnI1T9V5+Gm24N7GdWelf9ZvCofyu/Ap2+5RHRWmFCMUPnAjUiJr7b2QQqCwx 1r/EWXcaORQ8ghDUog3PbQ== 0000903594-97-000052.txt : 19970704 0000903594-97-000052.hdr.sgml : 19970704 ACCESSION NUMBER: 0000903594-97-000052 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970530 FILED AS OF DATE: 19970703 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIRONMENTAL TECTONICS CORP CENTRAL INDEX KEY: 0000033113 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 231714256 STATE OF INCORPORATION: PA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-10655 FILM NUMBER: 97636047 BUSINESS ADDRESS: STREET 1: COUNTY LINE INDUSTRIAL PARK CITY: SOUTHAMPTON STATE: PA ZIP: 18966 BUSINESS PHONE: 2153559100 MAIL ADDRESS: STREET 1: COUNTYLINE INDUSTRIAL PARK CITY: SOUTHAMPTON STATE: PA ZIP: 18966 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL TECHNOLOGY CORP DATE OF NAME CHANGE: 19730208 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 30, 1997 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 No. 1-10655 ENVIRONMENTAL TECTONICS CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-1714256 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) COUNTY LINE INDUSTRIAL PARK SOUTHAMPTON, PENNSYLVANIA 18966 (Address of principal executive offices) (Zip Code) (215) 355-9100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No The number of shares outstanding of the registrant's common stock as of June 30, 1997 is: 2,983,001 PART I - Financial Information Item 1. Financial Statements: ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS 3 Months Ended ($000's, except per share data, Unaudited) May 30, 1997 May 31, 1996 Net Sales $6,644 $4,509 Cost of goods sold 4,684 3,114 Gross profit 1,960 1,395 Operating expenses: Selling and administrative 1,130 904 Research and development 40 52 1,170 956 Operating income 790 439 Other expenses: Interest expense 217 226 Letter of credit fees 16 7 Other, net 11 31 244 264 Income before income taxes 546 175 Provision for income taxes 186 55 Net income $ 360 $ 120 Earnings per common share Primary $ .11 $ .04 Fully diluted $ .10 $ .04 See notes to consolidated financial statements. ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000's, Unaudited) ASSETS May 30, 1997 February 28, 1997 Current assets: Cash and cash equivalents $ 129 $ 189 Cash equivalents restricted for letters of credit 259 665 Accounts receivable, net 10,304 11,352 Costs and estimated earnings in excess of billings on uncompleted long-term contracts 4,910 3,345 Inventories 2,576 2,719 Prepaid expenses and other current assets 608 92 Total current assets 18,786 18,362 Property, plant, and equipment, at cost, net 2,460 2,480 Software development costs, net of accumulated amortization of $3,394 at May 30 and $3,244 at February 28, 1997 1,370 1,430 Other assets 197 37 Total assets $22,813 $22,309 See notes to consolidated financial statements.
ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000's, Unaudited) LIABILITIES May 30, 1997 February 28, 1997 Current liabilities: Current portion of long-term debt $ 119 $ 119 Convertible notes payable-related parties 800 1,300 Accounts payable - trade 974 1,799 Billings in excess of costs and estimated earnings on uncompleted long-term contracts 2,519 2,051 Customer deposits 1,202 1,746 Accrued income taxes 244 271 Net arbitration award 34 109 Accrued liabilities 1,559 1,419 Total current liabilities 7,451 8,814 Long-term debt, less current portion Credit facility payable to banks 2,234 6,714 Subordinated Debt 3,202 Other 256 283 5,692 6,997 Deferred income taxes 89 89 Total liabilities 13,232 15,900 Redeemable Cumulative Preferred Stock, $100 par and re- demption value: authorized - 25,000 shares; issued and outstanding - 25,000 shares at May 30, 1997 2,292 - STOCKHOLDERS' EQUITY Common stock - authorized 10,000,000 shares $.10 par value; 2,972,001 and 2,963,083 shares issued and outstanding at May 30, 1997 and February 28, 1997, respectively 297 296 Capital contributed in excess of par value of common stock 2,564 2,007 Retained earnings 4,428 4,106 Total stockholders' equity 7,289 6,409 Total liabilities and stockholders' equity $22,813 $22,309
See notes to consolidated financial statements.
ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 3 Months Ended ($000's, Unaudited) May 30, 1997 May 31, 1996 Cash flows from operating activities: Net income $ 360 $ 120 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 301 290 Increase in allowance for doubtful accounts 25 - (Increase) decrease in assets: Accounts receivable 1,023 1,176 Costs and estimated earnings in excess of billings on uncompleted long-term contracts (1,565) (430) Inventories 143 (398) Prepaid expenses and other current assets (516) (78) Other assets (184) - (Decrease) increase in liabilities: Accounts payable (825) 532 Billings in excess of costs and estimated earnings on uncompleted long-term contracts 468 (778) Customer deposits (544) (95) Accrued income taxes (27) 21 Net arbitration awards 214 - Other accrued liabilities (87) 35 Payments under settlement agreements (75) (250) Net cash (used in) provided by operating activities (1,289) 145 Cash flows from investing activities: Acquisition of equipment (87) (58) Software development costs capitalized (90) (149) Net cash used in investing activities (177) (207) Cash flows from financing activities: Borrowings under credit facility 2,234 Proceeds from subordinated debt, net 3,190 Proceeds from preferred stock, net 2,292 Net payments under credit facility (6,714) (175) Decrease in cash equivalents restricted for letters of credit 406 215 Decrease in notes payable - related party (500) - Net principal payments of other long-term debt (27) (5) Proceeds from issuance of common stock/warrants 557 - Other (32) - Net cash provided by (used in) financing activities 1,406 35 Net increase (decrease) in cash and cash equivalents (60) (27) Cash and cash equivalents at beginning of period 189 31 Cash and cash equivalents at end of period $ 129 $ 4 Supplemental schedule of cash flow information: Interest paid 265 128 Income taxes paid 213 34
See notes to consolidated financial statements. ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ($000's) 1. The information in this report reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Certain reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. The Company's effective tax rate for the year ended February 28, 1997, reflected the impact of significant bookings for inventory and receivable reserves and software amortization. The estimated effective tax rate incorporated in the fiscal quarter ended May 30, 1997, has been adjusted to reflect current forecasts for fiscal 1998 activity. 2. Under the Company's 1988 Incentive Stock Option Plan, 500,000 shares of the Company's common stock are currently reserved for issuance in connection with the exercise of options, and options to acquire 87,500 shares were currently outstanding as of May 30, 1997. 3. Earnings per common share are based on net income divided by the number of common and common stock equivalent shares (shares issuable upon the exercise of stock options and warrants and the conversion of notes payable and preferred stock) outstanding. Weighted average number of common shares and equivalents outstanding were approximately 3,138,000 (primary) and 3,465,000 (fully diluted) at May 30, 1997 and 2,922,000 (primary and fully diluted) at May 31, 1996. The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. It is not known at this time what impact this statement will have on reported earnings per share. 4. Inventories consist of the following: May 30, 1997 February 28, 1997 Raw Materials $ 417 $ 417 Work in Process 2,159 2,302 Finished Goods - - $2,576 $2,719 5. The components of accounts receivable are as follows: May 30, 1997 February 28, 1997 U. S. Government receivables billed and unbilled contract costs subject to negotiation $ 5,039 $ 5,284 U.S. receivables billed 613 2,477 International receivables billed 4,914 3,828 10,566 11,589 Less allowance for doubtful accounts (262) (237) $10,304 $11,352 U.S. Government receivables billed and unbilled contract costs subject to negotiation: Unbilled contract costs subject to negotiation represent claims made or to be made against the U.S. Government under a contract for a centrifuge. These costs were recorded during fiscal years 1994 and 1995. The Company has recorded claims, amounting to $2.8 million, including $150 recorded in the current quarter, to the extent of contract costs incurred. These costs have been incurred in connection with U.S. Government-caused delays, errors in specifications and designs, and other unanticipated causes and may not be received in full during fiscal 1998. In accordance with generally accepted accounting principles, revenue recorded by the Company from a claim does not exceed the incurred contract costs related to the claim. The Company currently has approximately $8.6 million in claims filed with the U.S. Government. The U.S. Government has responded to the claims with either denials or deemed denials that the Company has appealed. In the current quarter, the Company recorded an additional $150 in claims revenue reflecting additional expenditures on the centrifuge contract that will be incorporated into additional claims to be filed with the U.S. Government. Additional amounts are currently under review for the period November 1995 through October 1996 to determine what, if any, additional amounts above the $150 recorded in the current quarter can be filed as supplemental claims. Such claims are subject to negotiation and audit by the U.S. Government. In November 1996, the Company invoiced the balance due under the centrifuge contract; at May 30, 1997, approximately $1.7 million was included in U.S. Government receivables. Given the U.S. Government's lack of response, on June 27, 1997, a claim was submitted to the Contracting Officer in an attempt to expedite payment of most of the outstanding amount still open under the centrifuge contract. Collectability of these amounts may be dependent upon the resolution of the above claims. International receivables billed: International receivables billed includes $1.3 million related to a certain contract with the Royal Thai Air Force (see Note 6). 6. Contingencies: Claims and Litigation: In October 1993, the Company was notified by the Royal Thai Air Force ("RTAF") that the RTAF was terminating a certain $4.6 million simulator contract with the Company. Although the Company had performed in excess of 90% of the contract, the RTAF alleged a failure to completely perform. In connection with this termination, the RTAF made a call on a $229,000 performance bond, as well as a draw on an approximately $1.1 million of advance payment letter of credit. Work under this contract had stopped while under arbitration, but on October 1, 1996, the Thai Trade Arbitration Counsel rendered its decision under which the contract was reinstated in full and the Company was given a period of nine months to complete the remainder of the work. Upon completion of the contract, the RTAF will pay the Company the open receivables balance, consisting of the performance bond and the advance payment, plus the 10% due on the balance of the contract. Except as noted in the award, the rights and obligations of the parties remain as per the original contract. Should the Company fail to perform under the contract in the time period allotted, the RTAF could invoke penalties against the Company, including termination of the contract and delay penalties. Based on the progress to date and recent discussions with the RTAF, the Company estimates it will probably exceed the nine-month contract completion period due to an extended delay in obtaining an export license for certain hardware required to complete the job. This license has been cleared and the hardware is in the country. The Company has submitted a request for a contract extension under the "force majeure" clause of the RTAF contract, and the customer has agreed to an extension to complete the installation and training. A lawsuit was commenced against the Company in April 1997 in the United States District Court for the District of Puerto Rico by an employee of a customer who claims to have been injured as a result of an alleged malfunction of a sterilizer manufactured by the Company. The plaintiff is seeking $3 million in damages. The Company has up to $10 million of products liability coverage, subject to a $100,000 deductible. The outcome of this litigation is not currently predictable. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, after consultation with legal counsel, all such matters are reserved for or adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial position or results of operations of the Company if disposed of unfavorably. Item 2. Management's Discussion and Analysis: ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY 30, 1997 ($000) Material Changes in Financial Condition On March 27, 1997, the Company executed a revolving credit agreement (the "Credit Agreement") with a new bank, establishing a credit facility of $10 million. The facility bears interest at the bank's prime rate and expires on May 31, 1999. Substantially all of the Company's short-term financing is provided by this bank. Additionally, the Company issued $4 million of subordinated debentures, bearing interest at 12% per annum, due March 27, 2004 to a financial investor. In connection with the subordinated debentures, warrants were issued to acquire 166,410 shares of the Company's common stock at an exercise price of $1.00 per share. $499 of the proceeds from the sale of the debentures was allocated to the warrants and will be charged to retained earnings over the term of the debentures. The Company also issued 25,000 shares of 11%, redeemable convertible preferred stock for $2.5 million. Each share of preferred stock is convertible, at the option of the shareholder, into 13.33 shares of the Company's common stock at a price of $7.50 per share. Total financing fees amounted to approximately $849, of which $311 and $208 was netted against the proceeds from the subordinated debt and the preferred stock, respectively. The proceeds from these transactions were used to repay amounts outstanding under the Credit Facility with a prior lender. As a result of recognizing a net loss of $20 for the fiscal year ended February 28, 1997, as of June 6, 1997, the bank made all credit availability under the Credit Agreement subject to specific prior approval by the bank pending a review of the Company's financial condition. On July 1, 1997, this restriction was lifted. In connection with the 1996 extension of the old credit facility to March 31, 1997, the Company issued to the former bank warrants to purchase 100,000 shares of the Company's common stock at a price equal to $5.18. Pursuant to the antidilution provisions of the warrants, the number of shares covered by the warrants has increased to 106,433 shares and the exercise price has been reduced to $4.87. The Company has filed a registration statement with the Securities and Exchange Commission (the "SEC") to register the common stock issuable upon exercise of the warrants. If the registration statement is not effective prior to July 15, 1997, the Company will forfeit a $375,000 escrow to the former bank. The Company has been notified by the SEC that the Registration Statement has been accorded "no review" status and, therefore, the Company, pursuant to its request, expects the SEC to declare the Registration Statement effective prior to July 15, 1997. The Company anticipates return of the $375,000 escrow shortly after the Registration Statement is declared effective by the SEC. Cash decreased $60 in the three months ended May 30, 1997. Net cash from operations was a use of $1,289. Uses of cash primarily included an increase of costs and estimated earnings in excess of billings on uncompleted long-term contracts as manufacturing costs were expended in the production cycle, increased prepaid expenses (primarily financing costs associated with the Company's refinancing in March, 1997), a reduction of accounts payable and a reduction of customer deposits. Partially affecting these uses was net cash provided from financing activities. Borrowing under the Company's new credit facility, and net proceeds from the subordinated debt and preferred stock were only partially offset by repaying the open balance on the previous bank facility and $500 in related party notes. Material Changes in Results of Operations Net sales of approximately $6,644 for the three months ended May 30, 1997, increased $2,135, or 47%, over the prior year's period. Increases were evidenced across all product lines except sterilizers with Aircrew Training Systems up 156% and Simulation up 92%. Sterilizer sales suffered from delayed bookings beginning the fiscal year because a significant amount of new sterilizer contracts were not entered into until February, 1997. The increase in sales resulted in a significant increase in overall gross margin because the volume increase was only partially offset by a slightly reduced gross margin rate as a percent of sales. The majority of the reduction in gross margin resulted from booking an accrual of $64 (net of additional claims revenue) for an arbitration award to one of the Company's subcontractors associated with the Company's outstanding claim with the U.S. Navy. The Company is currently reviewing expenditures made through October 1996 on the centrifuge project claims to determine which, if any, additional amounts will be added to the existing claims. Operating expenses increased $214 or 22%, but as a percent of sales decreased from 21% in the prior period to 18% in the current period. The increase in expenditure primarily reflected increased commissions expense on the higher sales, a higher mix of commissionable sales and higher accruals for professional fees. Interest expense decreased due to lower bank interest. This resulted from a lower balance at a reduced rate. Other expenses increased slightly on higher net letter of credit fees. The Company's sales backlog at May 30, 1997 and february 28, 1997 for work to be performed, training and maintenance contracts, and prospective revenue to be recognized after that date under written agreements was approximately $42,900,000 and $30,900,000, respectively. Part II - Other Information Item 1. Legal proceedings: See Note 6 in Part I. Item 6. Exhibits and Reports on Form 8-K: a. Exhibits Exhibit 27 - Financial Data Schedule b. Reports on Form 8-K On April 10, 1997, a Form 8-K was filed with the Securities and Exchange Commission. The Form 8-K reported under Item 5 a recapitalization arrangement with First Union National Bank, and Sirrom Capital Corporation of Nashville, Tennessee. No financial statements were included with the filing. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENVIRONMENTAL TECTONICS CORPORATION (Registrant) By: /S/ Duane Deaner Duane Deaner, Chief Financial Officer (authorized officer and principal financial officer) Date: July 2, 1997 EX-27 2
5 3-MOS FEB-27-1998 MAY-30-1997 388,000 0 10,566,000 262,000 2,576,000 18,786,000 8,814,000 6,354,000 22,813,000 7,451,000 5,781,000 2,292,000 0 297,000 6,992,000 22,813,000 6,644,000 6,644,000 4,684,000 4,684,000 1,170,000 0 244,000 546,000 186,000 360,000 0 0 0 360,000 .11 .10
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