-----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, M0N+zwzEB27gQU9JfBWdqIy5IAnAAiRifwX/3Ta6nQDr9gmXaEzhZ0UaKT/YR6Rl h9sRmO9nrSYDWuuRp6s7zA== 0000903594-98-000005.txt : 19980113 0000903594-98-000005.hdr.sgml : 19980113 ACCESSION NUMBER: 0000903594-98-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971128 FILED AS OF DATE: 19980112 SROS: AMEX 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: SEC FILE NUMBER: 001-10655 FILM NUMBER: 98505071 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. 50549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 28, 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 last 90 days. Yes X No The number of shares outstanding of the registrant's common stock as of January 7, 1998 was: 3,002,918 Environmental Tectonics Corporation Consolidated Income Statements (unaudited)
Three months ended Nine months ended November 28, November 29,* November 28, November 29,* 1997 1996 1997 1996 (thousands, except share and per share information) Net Sales $7,639 $5,568 $21,464 $14,974 Cost of goods sold 5,172 3,794 14,679 10,223 ------ ------ ------- ------- Gross profit 2,467 1,774 6,785 4,751 ------ ------ ------- ------- Operating expenses: Selling and administra- tive 1,246 1,041 3,620 2,924 Research and development 78 30 137 104 ------ ------ ------- ------- 1,324 1,071 3,757 3,028 ------ ------ ------- ------- Operating income 1,143 703 3,028 1,723 ------ ------ ------- ------- Other expenses: Interest expense 346 253 947 818 Letter of credit fees 32 10 56 21 Other, net 10 19 93 33 ------ ------ ------- ------- 388 282 1,096 872 ------ ------ ------- ------- Income before income taxes 755 421 1,932 851 Provision for income taxes 264 134 675 272 ------ ------ ------- ------- Net income $ 491 $ 287 $ 1,257 $ 579 ====== ====== ======= ======= Per share information: Income per share: primary $ 0.13 $ 0.10 $ 0.34 $ 0.20 Income per share: fully diluted $ 0.12 $ 0.09 $ 0.32 $ 0.19 Number of shares: primary 3,175,890 2,967,199 3,171,278 2,955,026 Number of shares: fully diluted 3,542,750 2,983,917 3,450,474 2,975,060
The accompanying notes are an integral part of the consolidated financial statements. * Reclassified to conform with current presentation. Environmental Tectonics Corporation Consolidated Balance Sheets (unaudited)
November 28, February 28, 1997 1997 Assets (amounts in thousands) Current assets: Cash and cash equivalents $ 346 $ 189 Cash equivalents restricted for letters of credit 25 665 Accounts receivable, net 12,621 11,352 Cost and estimated earnings in excess of billings on uncompleted long- term contracts 6,845 3,345 Inventories 2,588 2,719 Prepaid expenses and other current assets 365 92 22,790 18,362 Property, plant and equipment, at cost, net of accumulated depreciation of $6,599 at November 28 and $6,258 at February 28 2,741 2,480 Software development costs, net of accumulated amortization of $3,823 at November 28 and $3,244 at February 28 1,112 1,430 Other assets 153 37 Total assets $26,796 $22,309
The accompanying notes are an integral part of the consolidated financial statements. Environmental Tectonics Corporation Consolidated Balance Sheets (unaudited)
November 28, February 28, 1997 1997 Liabilities and Stockholders' Equity (amounts in thousands) Current liabilities: Current portion of long-term debt $ 148 $ 119 Convertible notes payable - related parties 800 1,300 Accounts payable - trade 1,288 1,799 Billings in excess of costs and estimated earnings on uncompleted long-term contracts 2,512 2,051 Customer deposits 1,291 1,746 Accrued income taxes 593 271 Accrued liabilities 1,421 1,528 Total current liabilities 8,053 8,814 Long-term debt, less current portion: Credit facility payable to banks 4,784 6,714 Subordinated debt 3,255 - Other 188 283 8,227 6,997 Deferred income taxes 89 89 Total liabilities 16,369 15,900 Redeemable cumulative preferred stock, $100 par and redemption value: 25,000 shares authorized; 25,000 shares issued and outstanding 2,319 - Stockholders' Equity Common stock; $.10 par value; 10,000,000 authorized; 3,002,918 and 2,963,083 issued and outstanding at November 28, 1997 and February 28, 1997, respectively 300 296 Capital contributed in excess of par value of common stock 2,635 2,007 Retained earnings 5,173 4,106 Total stockholders' equity 8,108 6,409 Total liabilities and stockholders' equity $26,796 $22,309
The accompanying notes are an integral part of the consolidated financial statements. Environmental Tectonics Corporation Consolidated Statements of Cash Flows (unaudited)
Nine months ended November 28, November 29,* 1997 1996 (amounts in thousands) Cash flows from operating activities: Net income $ 1,257 $ 579 Adjustments to reconcile income to net cash (used) provided by operating activities: Depreciation and amortization 1,055 953 Provision for losses on accounts receivable and inventories 319 225 Changes in operating assets and liabilities: Accounts receivable (1,344) (2,534) Costs and estimated earnings in excess of billings on uncompleted long-term contracts (3,500) 1,278 Inventories (272) (611) Prepaid expenses and other current assets (102) 110 Accounts payable (511) 594 Billings in excess of costs and estimated earnings on uncompleted long-term contracts (176) (349) Customer deposits 182 562 Accrued income taxes 322 116 Other accrued liabilities (107) (84) Payments under settlement agreements (90) (120) ------- ------- Net cash (used) provided by operating activities (2,967) 719 ------- ------- Cash flows from investing activities: Acquisition of equipment (443) (197) Capitalized software development costs (261) (422) ------- ------- Net cash used in investing activities (704) (619) ------- ------- Cash flows from financing activities: Borrowings under credit facility 4,784 - Payments under credit facility (6,714) (475) Proceeds from subordinated debt, net 3,255 - Proceeds from preferred stock, net 2,292 - Payment of dividends on preferred stock (163) - Decrease in cash equivalents restricted for letters of credit 640 504 Decrease in notes payable - related party (500) - Deferred financing costs (406) - Net increase of other long-term debt 8 38 Proceeds from issuance of common stock/warrants 632 49 ------- ------- Net cash provided by financing activities 3,828 116 ------- ------- Net increase (decrease) in cash and cash equivalents 157 216 Cash and cash equivalents at beginning of period 189 31 ------- ------- Cash and cash equivalents at end of period $ 346 $ 247 ======= ======= Supplemental schedule of cash flow information: Interest paid 848 516 Income taxes paid 285 0 Supplemental information on noncash operating and investing activities: The Company transferred $158,000 of inventory to property, plant and equipment and $637,000 of customer deposits to billings in excess of costs and estimated earnings on uncompleted long-term contracts during the nine month period ended November 28, 1997.
The accompanying notes are an integral part of the consolidated financial statements. * Reclassified to conform with current presentation. Environmental Tectonics Corporation Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements have been prepared by Environmental Tectonics Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended February 28, 1997. 2. Earnings per Share Net income per share of common stock is computed by dividing earnings applicable to common stock by the weighted average number of shares of common stock and common stock equivalents, if dilutive, outstanding during the three and nine month periods ended November 28, 1997 and November 29, 1996. Common stock equivalents include shares issuable under the exercise of dilutive common stock options, stock warrants and convertible related parties notes payable. Fully diluted earnings per share additionally assumes the conversion of preferred stock and related parties notes payable. Net earnings used in the computation of primary earnings per share are reduced by preferred stock dividend payments.
Three months ended Nine months ended November 28, November 29, November 28, November 29, 1997 1996 1997 1996 (amounts in thousands, except share and per share information) Primary earnings per share: Net income for primary earnings per share $491 $287 $1,257 $579 Preferred stock dividends (68) - (163) - ---------- ---------- ---------- ---------- Earnings applicable to common stock $423 $287 $1,094 $579 ========== ========== ========== ========== Weighted average shares outstanding 3,002,268 2,928,944 2,985,540 2,928,944 Common stock equivalents based on average market price 173,622 38,255 185,738 26,082 ---------- ---------- ---------- ---------- Total equivalent shares for primary computation 3,175,890 2,967,199 3,171,278 2,955,026 ========== ========== ========== ========== Per share amounts: Primary earnings per common share and common share equivalents $0.13 $0.10 $0.34 $0.20 ========== ========== ========== ========== Fully-diluted earnings per share: Net income for fully-diluted earnings per share $491 $287 $1,257 $579 Preferred stock dividends (68) - (163) - ---------- ---------- ---------- ---------- Earnings applicable to common stock $423 $287 $1,094 $579 ========== ========== ========== ========== Weighted average shares outstanding 3,002,268 2,928,944 2,985,540 2,928,944 Common stock equivalents based on average market price 540,482 54,973 464,934 46,116 ---------- ---------- ---------- ---------- Total equivalent shares for fully-diluted computation 3,542,750 2,983,917 3,450,474 2,975,060 ========== ========== ========== ========== Per share amounts: Fully-diluted earnings per common share and common share equivalents $0.12 $0.09 $0.32 $0.19 ========== ========== ========== ==========
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 46,175 shares were currently outstanding as of November 28, 1996. The Financial Accounting Standards Board (the "FASB") 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. 3. Accounts Receivable The components of accounts receivable are as follows:
November 28, February 28, 1997 1997 (amounts in thousands) U.S. Government receivables billed and unbilled contract costs subject to negotiation $ 5,000 $ 5,284 U.S. commercial receivables billed 2,067 2,477 International receivables billed 5,708 3,828 ------- ------- 12,775 11,589 Less allowance for doubtful accounts (154) (237) ------- ------- $12,621 $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, 1995 and 1998. The Company has recorded claims, amounting to $2.75 million, including $150,000 recorded in the first quarter of fiscal 1998, 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, revenues 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. During the first quarter of fiscal 1998, the Company recorded an additional $150,000 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 in fiscal 1998. Additional amounts are under review for the period November 1995 through October 1996 to determine what, if any, additional amounts above the $150,000 recorded in fiscal 1998 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 a contract with the U.S. Government. At November 28, 1997 approximately $1.7 million was in U.S. Government receivables. Collectibility of these amounts may be dependent upon the resolution of the above claims. In October 1997, the Company settled a long-standing claim with the U.S. Navy involving a contract for ATS equipment for Kuwait which was suspended by the Navy because of the Persian Gulf conflict. International receivables billed: 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 the termination, the RTAF made a call on a $229,000 performance bond, as well as a draw on an approximately $1.1 million 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 receivable balance ($1.3 million), consisting of the performance bond and the advance payment, plus 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 allotted, or should the RTAF not agree to any extension of the time allotted, the RTAF could invoke penalties against the Company, including termination of the contract and delay penalties. On December 22, 1997, the Company successfully performed acceptance testing and the unit passed with no discrepancy reports. At this point, the Company is not able to determine what, if any, impact the extended completion period and the current economic condition in Thailand will have upon final payment. 4. Inventories Inventories are valued at the lower of cost or market using the first-in, first out (FIFO) method and consist of the following: November 28, November 28, 1997 1997 (amounts in thousands) Raw materials $ 491 $ 417 Work in Process 2,097 2,302 $2,588 $2,719 5. Recapitalization On March 27, 1997, the Company entered into a revolving credit agreement (the "Credit Agreement") with a new bank, establishing a credit facility of $10 million through May 31, 1998, at which time the facility is reduced to $9 million. This facility bears interest at the bank's prime lending rate or adjusted LIBOR and expires on May 31, 1999. Substantially all of the Company's short-term financing is provided by this bank. The Company incurred $372,000 of financing fees related to origination of the Credit Agreement. This amount is included in prepaid expenses and other assets and will be charged to interest expense over the term of the agreement, which is two years. Additionally, the Company issued $4 million of subordinated debentures, bearing interest at 12% per annum, due March 27, 2004 to a financial institution, a director of which has been subsequently appointed and elected to the Company's Board of Directors. 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. $499,000 of the proceeds from the sale of the debentures was allocated to the warrants and credited to capital contributed in excess of par value of common stock. This amount, along with financing fees of $312,000, which were netted against the proceeds, will be amortized to interest expense over the term of the debentures, which is seven years. The Company also issued 25,000 shares of 11%, redeemable, convertible preferred stock for $2.5 million. Each share of convertible 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. Financing fees for the preferred stock were approximately $208,000, which were netted against the proceeds and will be accreted to retained earnings over five years. Total financing fees associated with the recapitalization were approximately $849,000. The proceeds from these transactions were used to repay, in full, amounts outstanding with a prior lender. The components of the subordinated debt and preferred stock at November 28, 1997 are as follows: Subordinated Preferred Debt Stock (amounts in thousands) Face value $4,000 $2,500 Value of warrants issued (499) - Amortization of warrants 36 - Deferred financing costs (312) (208) Amortization of finance costs 30 - Accretion of preferred stock - 27 Balance at November 28, 1997 $3,255 $2,319 6. Stockholders' Equity The components of stockholders' equity at February 28, 1997 and November 28, 1997 were as follows:
Common Stock Additional Retained Shares Amount Capital Earnings Total (amounts in thousands, except share information) Balance, February 28, 1997 2,963,083 $296 $2,007 $4,106 $6,409 Net income for nine month period ended November 28, 1997 1,257 1,257 Value of warrants issued in connection with issuance of subordinated debt 499 499 Dividend on preferred stock (163) (163) Accretion of preferred stock (27) (27) Shares issued in connection with employee stock purchase and stock option plans 39,835 4 129 133 --------- ---- ------ ------ ------ Balance at November 28, 1997 3,002,918 $300 $2,635 $5,173 $8,108 ========= ==== ====== ====== ======
7. Capital Structure In February 1997, the FASB issued SFAS No. 129, "Disclosure Information about Capital Structure." SFAS No. 129 summarizes previously issued disclosure guidance contained within APB Opinion No. 10 and 15, as well as SFAS No. 47. SFAS No. 129 is effective for fiscal years ending after December 15, 1997. The Company's current disclosures will not be affected by the adoption of SFAS No. 129. 8. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS No. 130 is effective for all periods beginning after December 15, 1997. Subsequent to the effective date, all prior-period amounts are required to be restated to conform to the provisions of SFAS No. 130. The adoption of SFAS No. 130 is not expected to have a material impact on the Company's financial position or results of operations. 9. Segments In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. SFAS No. 131 is effective for all periods beginning after December 15, 1997. The adoption of SFAS No. 131 will have no impact on the Company's financial position or results of operation. 10. Contingencies 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 product 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. Environmental Tectonics Corporation Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations: Three months ended November 28, 1997 compared to November 29, 1996 The Company had net income of $491,000 or $.12 per share, an increase of $204,000 or 71% over the third quarter of fiscal 1997. Operating income increased $440,000 or 63%. Sales were $7,639,000 for the quarter ended November 28, 1997, an increase of $2,071,000 or 37% compared to the same period a year ago. This increase primarily reflected higher sales of the Aeromedical Training Systems ("ATS") and Hyperbaric product lines (ATS more than doubled compared to the third quarter of fiscal 1997), which were partially offset by decreases in chamber sales for environmental process applications. Additionally, ATS results benefitted from the aforementioned settlement with the U.S. Navy Kuwait claim. (See Note 3 of Notes to Consolidated Financial Statements.) Gross profit increased $693,000 or 39% for the quarter ended November 28, 1997, due principally to the higher sales volume. As a percentage of sales, gross profit was 32% for the quarter ended November 28, 1997, equal to 32% for the prior year. Selling and administrative expenses increased $205,000 or 20% for the quarter ended November 28, 1997, due principally to variable costs related to the higher sales volume, principally commissions. As a percentage of sales, selling and administrative expenses were 16% for the quarter ended November 28, 1997, compared to 19% for the same period a year ago. This improvement was due, in part, to the fixed administrative costs being spread over the higher sales volume. Interest expense increased $93,000 or 37% for the quarter ended November 28, 1997, reflecting both higher borrowings (albeit at a lower rate) and increased amortization of various deferred financing fees associated with the new credit facility of March 1997. The Company's tax rate approximates the statutory rate. Nine months ended November 28, 1997 compared to November 29, 1996 The Company had net income of $1,257,000 or $.32 per share for the nine months ended November 28, 1997, an increase of $678,000 or 117% over the first nine months of fiscal 1997. Operating income increased $1,305,000 or 76% for the nine months ended November 28, 1997. Sales were $21,464,000 for the nine months ended November 28, 1997, an increase of $6,490,000 or 43%. This increase was due to higher sales of ATS and simulation products, partially offset by reduced sales primarily in the sterilizer division of the Company's process simulation group. As a percentage of the total, ATS activity for the nine months ended November 28, 1997 constituted 54% of total sales compared to 32% in the prior year corresponding period. Revenue recognized under contracts with the United Kingdom Royal Air Force accounted for $4.8 million or 23% of total sales and represented 53% of the Company's open backlog. Sales to international customers, principally government agencies, accounted for $13.0 million or 61% of total sales for the nine months ended November 28, 1997 compared to $10.6 million or 71% for the same period a year ago. Gross profit increased $2,034,000 or 43% for the nine months ended November 28, 1997, due principally to the higher sales volume. As a percentage of sales, gross profit was 32% for the nine months ended November 28, 1997, equal to 32% for the same period a year ago. Selling and administrative expenses increased $696,000 or 24% for the nine months ended November 28, 1997 due principally to variable costs related to the higher sales volume, primarily commissions expense which increased $343,000. Adjusted for the commission increase, selling and administrative expenses increased $353,000 or 14% for the nine months ended November 28, 1997 on a sales increase of 43%. As a percentage of sales, selling and administrative expenses were 17% for the nine months ended November 28, 1997, compared to 20% for the same period a year ago. This improvement was due, in part, to the fixed administrative costs being spread over the higher sales volume. Interest expense increased $129,000 or 16% for the nine months ended November 28, 1997, reflecting both higher borrowings (albeit at a lower rate) and increased amortization of various deferred financing fees associated with the new credit facility of March 1997. The Company's tax rate approximates the statutory rate. Liquidity and Capital Resources During the nine month period ended November 28, 1997, the Company used $2,967,000 for operating activities. This was primarily the result of an increase in costs and estimated earnings in excess of billings for uncompleted long-term contracts and an increase in accounts receivable. The Company expects to increase its billings for these contracts during the fourth quarter of fiscal 1998. These uses of cash were offset in part by net income and non-cash charges of depreciation and amortization, and increases in reserve balances and income tax accruals. Funds were provided to support these operating and investing activities from the Company's Credit Agreement. Investing activities were $704,000 used for capital expenditures and software development. The Company believes that cash generated from operating activities as well as available borrowings under its Credit Agreement will be sufficient to meet its obligations. At January 2, 1998, the Company had $4.6 million available under its Credit Agreement. The Company and its bank are currently in the process of clarifying certain financial covenants and definitions in the Credit Agreement, which the Company expects will lead to an amended Credit Agreement. These changes are not expected to affect the available borrowings, payment terms or interest rate. At November 28, 1997, the Company was in compliance with all the covenants per the existing Credit Agreement. Additionally, the Company on a pro-forma basis would have met any revised financial covenants currently under consideration. In reference to the Company's outstanding claim with the U.S. Government, to the extent the Company is unsuccessful in further recovering contract costs, such an event could have a material adverse effect on the Company's liquidity and results of operations. Historically, the Company has had good experience in that recoveries have exceeded claims. (See Note 3 of Notes to Consolidated Financial Statements) The Company's sales backlog at November 28, 1997 and February 28,1997 for work to be performed and revenue to be recognized under written agreements after such dates was approximately $35.7 million and $30.9 million, respectively. This report contains certain 'forward-looking statements' including, without limitation, statements containing the words 'believes', 'anticipates', 'intends', 'expects' and words of similar import relating to the Company's operations. There are important factors that could cause actual results to differ materially from those indicated by such forward-looking statements including contract cancellations, political unrest in customer countries, general economic conditions and the risk factors detailed from time to time in Environmental Tectonics Corporation's periodic reports and registration statements filed with the Securities and Exchange Commission, including, without limitation, Environmental Tectonics Corporations Annual Report on Form 10-KSB for the fiscal year ended February 28, 1997. Environmental Tectonics Corporation Form 10-QSB Part II Item 1. Legal Proceedings There were no material developments in the litigation previously described in the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28, 1997. Item 2. Changes in Securities The constituent instruments defining the rights of the holders of any class of securities were not modified nor were the rights evidenced by any class of registered securities materially limited or qualified during the period covered by this report. Item 3. Defaults Upon Senior Securities No defaults occurred during the period covered in this report. Item 4. Submission of Matters to Vote of Security Holders At the Company's Annual Meeting of Stockholders held on September 17, 1997, the following proposal was adopted by the vote specified below: Proposal: To elect five directors to serve until successors have been elected and qualified. (by holders of Common Stock) Nominee For Withheld Richard E. McAdams 2,745,044 260 William F. Mitchell 2,745,304 - Pete L. Stephens 2,745,304 - Phillip L. Wagner 2,745,304 - Craig MacNab 2,745,304 - (by holders of Convertible Series A Preferred Stock) Nominee For Withheld Craig MacNab 25,000 - Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Articles of Incorporation 3.2 Bylaws 27 Financial Data Schedule (b) Reports on Form 8-K None Signatures Pursuant to the requirements of the Securities 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) Date: January 12, 1998 By:/s/ Duane Deaner Duane Deaner Chief Financial Officer (authorized officer and principal financial officer) EXHIBIT INDEX 3.1 Articles of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended February 28, 1997). 3.2 Bylaws (Incorporated herein by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 25, 1994). 27 Financial Data Schedule. EX-27 2
5 1,000 9-MOS FEB-27-1998 NOV-28-1997 371 0 12,775 154 2,588 22,790 9,340 6,599 26,796 8,053 0 0 2,319 2,935 0 26,796 21,464 21,464 14,679 3,757 149 0 947 1,932 675 1,257 0 0 0 1,257 0.34 0.32
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