-----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, CS3HhI6FQunTtM+5FuIVtpZZNkaqmGxy2Zm0D/WPCIb/yqyyvXuJbGaGXwX6e/Qx 8/bpZCzgzIeoynl4gmbyzw== 0000950116-00-001349.txt : 20000526 0000950116-00-001349.hdr.sgml : 20000526 ACCESSION NUMBER: 0000950116-00-001349 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000225 FILED AS OF DATE: 20000525 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: 10-K SEC ACT: SEC FILE NUMBER: 001-10655 FILM NUMBER: 643645 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 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934 For the fiscal year ended February 25, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [no fee required] For the transition period from ____________ to ____________. Commission File Number 1-10655 ENVIRONMENTAL TECTONICS CORPORATION ----------------------------------- (Exact name of small business issuer in its charter) Pennsylvania 23-1714256 - ------------------------------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) County Line Industrial Park Southampton, Pennsylvania 18966 - ---------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (215) 355-9100 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.05 per share -------------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of May 19, 2000, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $32,852,000. As of May 19, 2000, there were 7,088,646 shares of Registrant's common stock, $0.05 par value per share, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of Registrant's 2000 Annual Report to Stockholders (the "Annual Report") are incorporated by reference in Part II, Items 5, 6, 7, and 8. Proxy statement to be used with the Registrant's annual meeting to be held August 31, 2000, is incorporated by reference in response to Item 11 of Part 3 hereof. Transitional Small Business Disclosure Format: Yes ___ No x --- Certain statements under Item 1 and Item 7 contained herein or as may otherwise be incorporated by reference herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to: statements regarding future product development, technological advances and market acceptance of products. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Environmental Tectonics Corporation (the "Company"), or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, general economic and business conditions, competition, technological advances, political unrest in customer countries, contract cancellations and other risk factors that are detailed in this document and in other periodic reports and registration statements filed by Environmental Tectonics Corporation with the Securities and Exchange Commission. All forward-looking statements included in this document are based on information available to the company on the date hereof, and the Company assumes no responsibility to update any such forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. PART I Item 1. Description of Business (a) Business Development Environmental Tectonics Corporation ("ETC" or the "Company"), a Pennsylvania corporation, incorporated in 1969, is principally engaged in the design, manufacture and sale of software driven products used to A) create and monitor the physiological effects of motion on humans and equipment and B) control, modify, simulate and measure environmental conditions. These products include aircrew training systems, entertainment products, sterilizers, environmental and hyperbaric chambers, and other products which involve similar manufacturing techniques and engineering technologies. Since February 26, 1999, there has been no material change in the Company's mode of conducting business. (b) Business of the Company The company operates in two primary business segments, Aircrew Training Systems and Industrial Group. Aircrew Training Systems. This segment includes three primary product groups. The Company's aircrew training devices are used for medical research, advanced flight training, and for the indoctrination and testing of military and commercial pilots. The major devices sold in this product area are commercial flight simulators, night vision trainers, water survival training equipment, disorientation training equipment, human centrifuges, ejection seat trainers and vehicle and tank simulators. The Company provides operation and maintenance services for installed equipment it manufactures as well as equipment produced by others. The Company's entertainment products consist of motion-based simulation rides and other products. The Company's Disaster Management Systems line includes real-time interactive training programs that allow instruction on various disaster situations. 2 The aircrew training system class of products as a whole represented 75%, 84% and 75% of consolidated revenues of the Company for the years ended February 25, 2000, February 26,1999 and February 27, 1998, respectively. Industrial Group. This segment includes three primary product groups: Sterilizers. The Company manufactures steam and gas sterilizers used for various industrial and pharmaceutical applications. The Company concentrates on marketing the larger custom-designed sterilizers to the pharmaceutical and medical device industries. Environmental Systems and Other Products. The Company's environmental systems business consists of the design and fabrication of sampling and analysis systems, and test equipment and systems. The simulation systems generally consist of an enclosed chamber with instrumentation and equipment which enable the customer to control and modify such environmental factors as temperature, pressure, humidity, wind velocity and gas content to produce desired conditions. These products include controlled air systems for automotive companies and environmental chambers The Company's Hyperbaric line includes monoplace and multiplace chambers for decompression and wound care applications. Sales in this class of products were 25%, 16% and 25% of consolidated revenues of the Company for the years ended February 25,2000, February 26, 1999 and February 27, 1998, respectively. The Company also provides control operator repair and upgrades and maintenance service for its own and other manufacturers' equipment. Marketing The Company currently markets its products and services primarily through its sales offices and employees. At February 25, 2000, approximately 19 employees were committed to sales and marketing functions. The Company uses branch offices in the United Kingdom, the Middle East, and Asia as well as the services of approximately 100 independent sales organizations in seeking foreign orders for its products. 3 Product Development New products and improvements in existing products are being continually developed in response to inquiries from customers and to management's determination that particular products should be produced or significantly improved. Although the Company does not have a separate research and development group, there are a few technical personnel whose main activity is the development and integration of new technologies into our existing products. These personnel include the Vice-President of Engineering and the Vice-President of New Product Development whose additional activity is the introduction of product extensions and new applications of existing technology. Within the Aircrew Training Segment, product development emphasizes enhancing control systems and software graphics and exploring commercial possibilities. The Company's product development efforts will be focused on three areas: - Disaster Management Simulation. The Company is in production of a major contract from the City of Chicago to develop, install and maintain a computer-based Incident Command Simulator. The company will continue to explore product applications and extensions to this Intelligent Virtual Reality product. - G-force and Disorientation trainers. The Company is updating all software to a windows based platform. - Entertainment. The Company is evaluating product extensions to motion based amusement rides. On April 16, 1999, the Company formed a new wholly owned subsidiary, Entertainment Technology Corporation, to handle all of the Company's future entertainment projects. Product development in this class will emphasize entertainment applications of our proven ATS simulation technology. The Company reported research and development costs of $920,000, $397,000 and $148,000 for the years ended February 25,2000, February 26, 1999 and February 27, 1998, respectively. However, the majority of the Company's research and development efforts are not separately identified and recorded. Instead, they are expressed as part of project job costs in the cost of sales. 4 Supplies The components being used in the assembly of systems and the parts used to manufacture the Company's products are purchased from equipment manufacturers, electronics supply firms and others. To date, the Company has had no difficulty in obtaining supplies. Further, all raw materials, parts, components, and other supplies used by the Company in the manufacture of its products can be obtained at competitive prices from alternate sources should existing sources of supply become unavailable. Patents and Trademarks The Company has no patents or trademarks which it considers significant to its operations, except a patent on the GYROLAB Spatial Disorientation Trainer which expires in December 2004. Customers In the current year and recent past, it has been the Company's experience that a substantial portion of sales are made to a small number of customers that vary within any given year. The Company's business does not depend upon repeat orders from these same customers. Sales of aircrew training systems are made principally to U.S. and foreign governmental agencies. Sales of sterilizers and environmental systems are made to commercial and governmental entities worldwide. In fiscal 2000, the Company's major customers included Mend's International $8,107,000, the United Kingdom Ministry of Defense $4,821,000, and the Walt Disney companies, $3,681,000. These companies do not have any relationship with the Company other than as customers. Foreign and Domestic Operations and Export Sales During the years ended February 25,2000, February 26, 1999 and February 27, 1998, approximately $1,587,000 (5%), $1,158,000 (4.0%) and $2,936,000 (10%), respectively, of the Company's net revenues were attributable to contracts with agencies of the U.S. Government or with other customers who had prime contracts with agencies of the federal government. During the years ended February 25,2000, February 26, 1999 and February 27, 1998, $23,907,000 (69%), $22,876,000 (78%) and $17,490,000 (60%), respectively, of the Company's net revenues were attributable to export sales or sales for export. (See Note 11 to the Company's consolidated financial statements incorporated herein by reference to the Annual Report.) On export sales, customers' obligations to the Company are normally secured by irrevocable letters of credit based on the credit worthiness of the Customer. 5 The Company does not believe that the distribution of its sales for any particular period is necessarily indicative of the distribution expected for any other period. A large portion of the Company's sales are under long-term contracts requiring more than one year to complete. The Company accounts for sales under long-term contracts on the percentage of completion basis. (See Note 1 to consolidated financial statements incorporated herein by reference to the annual report). The Company's U.S. Government contracts contain standard terms permitting termination for the convenience of the Government. In the event of termination of such contracts, the Company is entitled to receive reimbursement on the basis of work completed (cost incurred plus a reasonable profit), recording the amounts anticipated to be recovered from termination claims in income as soon as those amounts can be reasonably determined rather than at the time of final settlement. All costs applicable to a termination claim are charged as an offsetting expense concurrently with the recognition of income from the claim. Backlog The Company's sales backlog at February 25, 2000, and February 26, 1999, for work to be performed and revenue to be recognized under written agreements after such dates was approximately $44,146,000 and $32,141,000, respectively. In addition, the Company's training and maintenance contracts backlog at February 25, 2000 and February 26, 1999, for work to be performed and revenue to be recognized after that date under written agreements was approximately $1,288,000 and $1,311,000, respectively. Of the February 25,2000 backlog, approximately $38,725,000 is under contracts for aircrew training systems and maintenance support including $25,755,000 for the Walt Disney companies. Approximately 64% of the February 25, 2000, backlog is expected to be completed prior to February 23, 2001. 6 Competition The Company's business strategy in recent years has been to seek niche markets in which there are not numerous competitors. However, in some areas of its business the Company competes with well-established firms, some of which have substantially greater financial and personnel resources. Some competitor firms have technical expertise and production capabilities in one or more of the areas involved in the design and production of physiological flight training equipment, environmental systems, and other specially designed products, and compete with the Company for this business. The competition for any particular project generally is determined by the technological requirements of the project, with consideration also being given to a bidder's reliability, product performance, past performance, and price. The Company faces particularly intense competition from a number of firms in the sale of hospital sterilizers but faces less competition in the sale of the larger custom-designed industrial sterilizers. The Company believes that it is a significant participant in the markets in which it competes, especially in aircrew training systems in which the Company believes it is a principal provider of this type of equipment and training in its market area. Compliance with Environmental Laws The Company has not incurred during fiscal 2000 nor does it anticipate incurring during fiscal 2001 any material capital expenditures to maintain compliance with Federal, state and local statutes, rules and regulations concerning the discharge of materials into the environment, nor does the Company anticipate that compliance with these provisions will have a material adverse effect on its earnings or competitive position. Employees On February 25, 2000, the Company had 292 full-time employees, of whom 6 were employed in executive positions, 109 were engineers, engineering designers, or draftspeople, 67 were administrative (sales, accounting, etc.) and clerical personnel, and 110 were engaged principally in production and operations. 7 Item 2. Description of Property The Company owns its executive offices and principal production facilities located on a 5-acre site in the County Line Industrial Park, Southampton, Pennsylvania in an approximately 70,000 square foot steel and masonry building. Approximately 55,000 square feet are devoted to manufacturing, and 15,000 square feet to office space. The original building was erected in 1969 and additions were made in 1973, 1976, 1985 and 1991. This property serves as collateral for the Company's revolving credit facility. Additionally, the Company rents office space at various sales and support locations throughout the world and at its Polish subsidiary. The Company considers its machinery and plant to be in satisfactory operating condition. It plans to construct an addition to its main building in Southampton, PA, in fiscal 2001. Increases in the level of operations beyond that expected in the current fiscal year might require the Company to obtain additional facilities and equipment. Item 3. Legal Proceedings 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, all such matters are reserved for or are 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 of the Company if disposed of unfavorably. Item 4. Submission of Matters to a Vote of Security Holders None. 8 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters See information appearing under the heading "Market for the Registrant's Common Stock and Related Stockholder Matters" in the Annual Report, attached hereto as Exhibit 13 and incorporated herein by reference. Item 6. Selected Financial Data See information appearing under the heading "Financial Review" in the annual report, attached hereto as Exhibit 13 and incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations See information appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, attached hereto as Exhibit 13 and incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements See the information appearing under the headings "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" in the Annual Report, attached hereto as Exhibit 13 and incorporated herein by reference. 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant; The following table sets forth certain information with respect to the directors and executive officers of the Registrant: Served as Principal Occupations Director and Positions and or Officer Offices with the Name Age Since(1) Company - ---- --- ---------- --------------------- William F. Mitchell(2) 58 1969 Chairman of the Board, President and Director Richard E. McAdams(3) 64 1985 Executive Vice President and Director Philip L. Wagner, Ph.D.(4) 63 1993 Director Pete L. Stephens, M.D.(5) 62 1974 Director Craig Macnab(6) 44 1997 Director Duane D. Deaner(7) 52 1996 Chief Financial Officer - -------------------- (1) Directors serve one-year terms. (2) Mr. Mitchell has been Chairman of the Board, President and Chief Executive Officer of the Company since 1969, except for the period from January 24, 1986 through January 24, 1987, when he was engaged principally in soliciting sales for the Company's products in the overseas markets. (3) Mr. McAdams has been with the Company since 1970. He became a Vice President in 1978 with responsibility for contract administration. Mr. McAdams became Executive Vice President of the Company in 1990. (4) Dr. Wagner is an organic chemist with over 30 years of diversified experience managing research and development and new business development at E.I. du Pont de Nemours & Company and thereafter founded Chadds Ford Technologies, Inc., a consulting firm. He is currently President of Chadds Ford Technologies, Inc. (5) Dr. Stephens has been a physician engaged in the private practice of medicine for 30 years. (6) Mr. Macnab has served as Director of the Company since June 1997. Since January 1997, Mr. Macnab had been the President of Tandem Capital, Inc. which makes investments in micro-cap public companies. On February 24, 1999, Mr. Macnab tendered his resignation from the Board of Directors as a designee of Sirrom Capital Corporation, following which he then accepted the Board's invitation to serve as an independent member of the Board. Subsequent to fiscal year end Mr. Macnab terminated his position with Tandem Capital Corporation. From 1993 to 1996, Mr. Macnab served as the general partner of MacNiel Advisors, Inc., the general partner of three private funds that invested in the publicly traded securities of small public companies. From 1987 to 1993, Mr. Macnab was a partner of J.C. Bradford & Co., a regional brokerage firm, jointly responsible for the merger and acquisition department and a private mezzanine capital fund. From 1981 to 1987, Mr. Macnab was employed by Lazard Freres & Co. Mr. Macnab is also a director of JDN Realty, Smart Choice Automotive Group and Teltronics, Inc. (7) Mr. Deaner has served as Chief Financial Officer of the Company since January 1996. Mr. Deaner served as Vice President of Finance for Pennfield Precision Incorporated from September 1988 to December 1995. 10 Committees of the Board of Directors During the year ended February 25, 2000, the Company had an Audit Committee consisting of the following directors: Messrs. Mitchell, Philip L. Wagner and Dr. Pete L. Stephens. The independent outside directors also served on the Company's Compensation Committee during the year ended February 25, 2000. The Audit Committee is charged with reviewing and overseeing the Company's financial systems and internal control procedures and conferring with the Company's independent accountants with respect thereto. The Compensation Committee is charged with reviewing the compensation and incentive plans of officers and key personnel. During the year ended February 25, 2000, the Board of Directors held 3 meetings and the Audit Committee and Compensation Committee each held 1 meeting. All members of the Board attended all of the meetings of the Board held while they were members of the Board. All members of the Audit Committee and Compensation Committee attended all meetings of the Committee held while they were members thereof. Compliance With Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and the American Stock Exchange. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) Forms they file. The rules of the SEC regarding the filing of such statement require that "late filings" of such statements be disclosed in the Company's proxy statement. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that, during the fiscal year ended February 25, 2000, its officers, directors and greater than ten percent beneficial owners complied with all applicable filing requirements except for Mr. Mitchell who had 1 late filing of Form 4 and Mr. McAdams who had 3 late filings of Form 4. 11 Item 11. Executive Compensation REMUNERATION OF DIRECTORS AND OFFICERS The following table sets forth compensation paid by the Company to the Chief Executive Officer for services rendered during fiscal years 2000,1999,1998 . There are no other executive officers whose total annual salary and bonus exceeds $100,000. The footnotes to the table provide additional information concerning the Company's compensation and benefit programs.
SUMMARY COMPENSATION TABLE Annual Compensation Other Name and Annual All Other Principal Fiscal Compen- Compen- Position Year Salary($) Bonus($) sation($)(1) sation($)(2) - --------- ------ --------- -------- ------------ ------------ William F. Mitchell, 2000 $225,000 $12,023 $ - $4,000 President and Chief 1999 207,085 126,563 - 3,876 Executive Officer 1998 178,450 - - 3,876
(1) The Company's executive officers receive certain perquisites. For fiscal years 2000, 1999 and 1998, the perquisites received by Mr. Mitchell did not exceed the lesser of $50,000 or 10% of his salary and bonus. (2) These amounts represent the Company's contribution to the Retirement Savings Plan. Directors of the Company who are not officers of the Company are paid $600 for Board of Directors meetings which they attend. Additional compensation is not paid for committee meetings. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of May 19, 2000, the number of shares and percentage of the Company's Common Stock owned beneficially by each director, each executive officer named in the Summary Compensation Table, and each person holding, to the Company's knowledge, more than 5% of the outstanding Common Stock. The table also sets forth the holdings of all directors and executive officers as a group. 12 Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner Ownership Class - ------------------------------------ --------- -------- William F. Mitchell (1) 1,777,998 25.1% c/o Environmental Tectonics Corporation County Line Industrial Park Southampton, PA 18966 Pete L. Stephens, M.D. (2) 675,300(3) 9.5% 40 Bridgetown Rd Hilton Head Island South Carolina 29928 Richard E. McAdams (2) 33,742(4) * c/o Environmental Tectonics Corporation County Line Industrial Park Southampton, PA 18966 Philip L. Wagner, Ph.D. (2) 12,000(5) * Chadds Ford Technologies, Inc. P.O. Box 377 Chadds Ford, PA 19317 Duane D. Deaner 8,750(6) * c/o Environmental Tetonics Corporation County Line Industrial Park Southampton, PA 18966 Craig Macnab(2) 0 * 428 Westview Avenue Nashville, TN 37205 FINOVA Mezzanine Capital 840,986(7) 11.3% 500 Church Street, Suite 200 Nashville, TN 37219 Emerald Advisors, Inc. 635,840(8) 9.0% 1857 William Penn Way P.O. Box 10666 Lancaster, PA 17605-0666 All directors, executive officers and 5% owners as a group (8 persons) 3,984,616(9) 53.5% * less than 1% - -------------------- 13 (1) Chairman of the Board, President and Director of the Corporation. Shares of Common Stock include 192,000 shares held by Mr. Mitchell's wife. (2) Director of the Corporation. (3) Includes 25,500 shares held by or for the benefit of Dr. Stephens' wife and two of his children. (4) Includes options to purchase 12,500 shares of Common Stock held under the Company's Incentive Stock Option Plan which are presently exercisable. (5) Includes 8,000 shares of Common Stock held by or for the benefit of Dr. Wagner's wife. (6) Includes options to purchase 8,750 shares of Common Stock held under the Company's Incentive Stock Option Plan which are currently exercisable. (7) These shares include 332,820 shares of Common Stock underlying a presently exercisable warrant to purchase shares of Common Stock. (8) As reported in a Schedule 13G, dated February 1,2000, filed by Emerald Advisors, Inc., Emerald has sole voting power with respect to 432,880 shares of Common Stock and sole dispositive power over 202,960 shares of Common Stock. (9) Includes options to purchase 12,500 and 8,750 shares of Common Stock which may be acquired by Director McAdams and Duane Deaner, Chief Financial Officer, respectively, upon the exercise of options granted under the Company's Incentive Stock Option Plan. Item 12. Certain Relationships and Related Transactions None Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: Number Item 3.1 Registrant's Articles of Incorporation, as amended, were filed as Exhibit 3.1. to Registrant's Form 10-K for the year ended February 28, 1997 and are incorporated herein by reference. 3.2 Registrant's By-Laws, as amended, were filed as Exhibit 3(ii) to Registrant's Form 10-K for the year ended February 25, 1994 and are incorporated herein by reference. 4.1 12% Subordinated Debenture due March 27, 2004 was filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended February 28, 1997 and is incorporated herein by reference. 14 10.1 Registrant's 1988 Incentive Stock Option Plan was filed as Exhibit 10(v) to Registrant's Form 10-K for the year ended February 23, 1990 and is incorporated herein by reference.* 10.2 Registrant's Employee Stock Purchase Plan was filed on July 6, 1988 as Exhibit A to the Prospectus included in Registrant's Registration Statement (File No. 33-42219) on Form S-8 and is incorporated herein by reference.* 10.3 Registrant's Stock Award Plan adopted April 7, 1993, filed as Exhibit 10(ix) to the Registrant's Form 10-K for the fiscal year ended February 25, 1994 and is incorporated herein by reference.* 10.4 Form of 1996 Warrant Agreement between the Registrant and Chase Manhattan Capital Corporation, filed as Exhibit 10(xiv) to the Registrant's Form 10-KSB for the fiscal year ended February 23, 1996 and is incorporated herein by reference. 10.5 Revolving Credit Agreement, dated as of March 27, 1997, between the Registrant and First Union National Bank was filed as Exhibit 10.6 to Registrant's Form 10-K for the year ended February 28, 1997 and is incorporated herein by reference. 10.6 Amendment to Revolving Credit Agreement dated as of November 28, 1997, as filed as Exhibit 10.6 to registrant's Form 10-KSB for the year ended February 27, 1998, and is incorporated herein by reference. 10.7 Debenture Purchase Agreement, dated March 27, 1997, between the Registrant and Sirrom Capital Corporation was filed as Exhibit 10.7 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 10.8 Preferred Stock Purchase Agreement, dated March 27, 1997, between the Registrant and Sirrom Capital Corporation was filed as Exhibit 10.8 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 10.9 Stock Purchase Warrant, dated March 27, 1997, issued by the Registrant to Sirrom Capital Corporation was filed as Exhibit 10.9 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 15 13 Portions of Registrant's 1999 Annual Report to Shareholders which are incorporated by reference into this Form 10-K. 21 List of subsidiaries. 23 Consent of Grant Thornton LLP. 27 Financial Data Schedule - --------------- * Represents a management contract or a compensatory plan or arrangement. (b) Reports on Form 8-K: None. 16 SIGNATURES In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENVIRONMENTAL TECTONICS CORPORATION By /s/ William F. Mitchell -------------------------------- William F. Mitchell, President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Position Date ---- -------- ---- /s/ William F. Mitchell - -------------------------- Chairman of the Board, May 25, 2000 William F. Mitchell Chief Executive Officer, President and Director /s/ Duane D. Deaner - -------------------------- Chief Financial May 25, 2000 Duane D. Deaner Officer (Principal Accounting Officer) /s/ Richard E. McAdams - -------------------------- Director May 25, 2000 Richard E. McAdams /s/ Craig Macnab - -------------------------- Director May 25, 2000 Craig Macnab /s/ Pete L. Stephens - -------------------------- Director May 25, 2000 Pete L. Stephens, M.D. /s/ Philip L. Wagner - -------------------------- Director May 25, 2000 Philip L. Wagner, Ph.D. 17 ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ($ in thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Charges/ Balance at (Credits) Balance At Beginning to Costs/ End of Description of Period Expenses Reductions(A) Period ----------- --------- -------- ------------- ------ Year ended February 25, 2000: Valuation and qualifying accounts related to: Accounts receivables $ 385 $ - $ 18 $ 367 Inventory $ 625 $ 95 $ - $ 720 Property, plant and equipment $7,527 $ 535 $ 58 $8,004 Software development costs $4,619 $ 596 $ - $5,215 Other assets $ 25 $ 36 $ - $ 61 Year ended February 26, 1999 Valuation and qualifying accounts related to: Accounts receivable $ 379 $ 83 $ 77 $ 385 Inventory $1,040 $(315) $100 $ 625 Property, plant and equipment $6,729 $ 798 $ - $7,527 Software development costs $3,914 $ 705 $ - $4,619 Other assets $ 0 $ 25 $ - $ 25 Year ended February 27, 1998 Valuation and qualifying accounts related to: Accounts receivables $ 237 $ 142 $ - $ 379 Inventory $ 756 $ 284 $ - $1,040 Property, plant and equipment $6,258 $ 482 $ 11 $6,729 Software development costs $3,244 $ 670 $ - $3,914 Other assets $ 0 $ - $ - $ 0
(A) Amounts written off or retired 18 EXHIBIT INDEX Exhibit No. Item - ----------- ---- 3.1 Registrant's Articles of Incorporation, as amended, were filed as Exhibit 3.1 to Registrant's Form 10-K for the year ended February 28, 1997 and are incorporated herein by reference. 3.2 Registrant's By-Laws, as amended, were filed as Exhibit 3(ii) to Registrant's Form 10-K for the year ended February 25, 1994 and are incorporated herein by reference. 4.1 12% Subordinated Debenture due March 27, 2004 was filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended February 28, 1997 and is incorporated herein by reference. 10.1 Registrant's 1988 Incentive Stock Option Plan was filed as Exhibit 10(v) to Registrant's Form 10-K for the year ended February 23, 1990 and is incorporated herein by reference.* 10.2 Registrant's Employee Stock Purchase Plan was filed on July 6, 1988 as Exhibit A to the Prospectus included in Registrant's Registration Statement (File No. 33-42219) on Form S-8 and is incorporated herein by reference.* 10.3 Registrant's Stock Award Plan adopted April 7, 1993, filed as Exhibit 10(ix) to the Registrant's Form 10-K for the fiscal year ended February 25, 1994 and is incorporated herein by reference.* 10.4 Form of 1996 Warrant Agreement between the Registrant and Chase Manhattan Capital Corporation, filed as Exhibit 10(xiv) to the Registrant's Form 10-KSB for the fiscal year ended February 23, 1996 and is incorporated herein by reference. 10.5 Revolving Credit Agreement, dated as of March 27, 1997, between the Registrant and First Union National Bank was filed as Exhibit 10.6 to Registrant's Form 10-K for the year ended February 28, 1997 and is incorporated herein by reference. 10.6 Amendment to Revolving Credit Agreement dated as of November 28, 1997, as filed as Exhibit 10.6 to registrant's Form 10-KSB for the year ended February 27, 1998, and is incorporated herein by reference. 10.7 Debenture Purchase Agreement, dated March 27, 1997, between the Registrant and Sirrom Capital Corporation was filed as Exhibit 10.7 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 10.8 Preferred Stock Purchase Agreement, dated March 27, 1997, between the Registrant and Sirrom Capital Corporation was filed as Exhibit 10.8 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 10.9 Stock Purchase Warrant, dated March 27, 1997, issued by the Registrant to Sirrom Capital Corporation was filed as Exhibit 10.9 to the Registrant's Form 10-KSB for the fiscal year ended February 28, 1997 and is incorporated herein by reference. 13 Portions of Registrant's 1999 Annual Report to Shareholders which are incorporated by reference into this Form 10-KSB. 21 List of subsidiaries. 23 Consent of Grant Thornton LLP. 27 Financial Data Schedule - --------------- * Represents a management contract or a compensatory plan or arrangement. EX-13 2 EXHIBIT 13 ENVIRONMENTAL TECTONICS CORPORATION 2000 ANNUAL SHAREHOLDERS' REPORT FINANCIAL REVIEW ($ in thousands, except share and per share data)
Fiscal Year End 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Net sales $ 34,920 $ 29,225 $ 29,284 $ 21,884 $ 15,580 Gross profit 12,798 11,672 9,298 5,742 5,206 Operating income 5,327 4,759 4,208 1,196 1,492 Net income (loss) 2,837 2,170 1,794 (20) 299 Earnings (loss) per common share: Basic .40 .32 .25 (.01) .05 Diluted .36 .29 .23 (.01) .05 Working capital 16,306 13,755 11,462 10,334 7,860 Long-term obligations 4,455 4,219 4,356 6,997 5,514 Total assets 31,897 35,448 22,955 23,095 20,926 Total stockholders' equity 16,245 11,030 8,579 6,409 6,111 Weighted average common shares: Basic 6,604,000 5,861,000 5,981,000 5,930,000 5,870,000 Diluted 7,319,000 6,312,000 6,496,000 5,930,000 5,870,000
All earnings per share and share amounts have been restated to reflect a 2 for 1 stock split effective May 28, 1999. No cash dividends have ever been paid on the Company's common stock, and the Company is currently prohibited from declaring any cash dividends on common stock under the terms of its credit facility. 1 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Fiscal 2000 Versus Fiscal 1999 Certain statements under Item 1 and Item 7 contained herein or as may otherwise be incorporated by reference herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to: statements regarding future product development, technological advances and market acceptance of products. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Environmental Tectonics Corporation (the "Company"), or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, general economic and business conditions, competition, technological advances, political unrest in customer countries, contract cancellations and other risk factors that are detailed in this document and in other periodic reports and registration statements filed by Environmental Tectonics Corporation with the Securities and Exchange Commission. All forward-looking statements included in this document are based on information available to the company on the date hereof, and the Company assumes no responsibility to update any such forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. The company had a net income of $2,837,000 or $.36 per share (diluted), versus a net income of $2,170,000 or $.29 per share (diluted) in 1999. Operating income was $5,327,000, an increase of $568,000 or 11.9% over 1999. These increases were primarily the result of a higher gross margin reflecting the increased sales level. Total sales increased $5,695,000 or 19.5% from 1999 as sales increases were evidenced in all areas, most significantly in the domestic market which was up $4,209,000 or 80.7%. Domestic sales represented 27.0% of the Company's total sales, up from 17.9% in the prior period. Increases were evidenced across all product areas except hyperbaric, with the most significant increases in entertainment products and the Company's disaster management simulator product. Sales to the U.S. Government increased $430,000, 37.1%, and represented 4.5% of total sales, up slightly from 4.0% in the prior period. The increase reflected sales to the U.S. Navy for large submarine decompression chambers. International sales, including sales of the Company's Polish subsidiary, increased $1,056,000, and represented 68.5% of the Company's total sales, down from 78.1% in the prior period. The increase reflected additional sales in the Company's Polish subsidiary which benefited from an additional 4 months activity in the current period. Customers in 2000 representing 10% or more of sales were Mends International $8,107,000, the United Kingdom Ministry of Defense $4,821,000, and the Walt Disney companies $3,681,000. Additionally, open orders for the Walt Disney companies constituted 56.7% of the Company's backlog at February 25, 2000. On a segment basis, sales of the Company's Aircrew Training Systems (ATS) products, which create and monitor the physiological effects of motion (including spatial disorientation and centrifugal forces) on humans and equipment for medical, training, research and entertainment markets, were $26,361,000 an increase of $1,896,000, or 7.7% over 1999. Sales of these products accounted for 75.5% of the Company's sales compared to 83.7% in 1999. Sales in the Company's other segment, the Industrial Group, which designs and produces chambers that create environments that are used for sterilization, research and medical applications, increased $3,799,000 or 79.8% and accounted for 24.5% of the Company's total sales compared to 16.3% in 1999. Gross profit increased $1,126,000 or 9.6%. As a percentage of sales, gross profit was 36.6%, down from 39.9% in 1999. This decrease was attributable to a product mix shift to lower margin Industrial Group products. Operating profit increased $568,000, or 11.9% compared to 1999. On a segment basis, ATS had an operating profit of $5,039,000, a decrease of $658,000 from the prior period, while the Industrial Group had an operating profit of $1,355,000 compared to an operating loss of $89,000 in 1999. These segment operating profits were offset, in part, by unallocated corporate expenses of $936,000, an increase of $87,000 over 1999. 2 Selling and administrative expenses increased $35,000, or 0.5%, due principally to higher staffing and related expenses in support of the expanded sales activity and additional selling and administrative expenses for the Company's Polish subsidiary which had an additional four months activity in the current period. As a percentage of sales, selling and administrative expenses were 18.8% compared to 22.3% in 1999. Research and development expenses increased $523,000, or 131.7% from 1999, primarily for ATS and entertainment product applications. Most of the Company's research efforts, which were and continue to be a significant cost of its business, are included in cost of sales for applied research for specific contracts, as well as research for feasibility and technology updates. Capitalized software development costs for 2000 were $555,000 compared to $581,000 in 1999. Amortization of software costs, which was charged to cost of sales, was $596,000 and $651,000 for 2000 and 1999, respectively. Interest expense was down $386,000, 34.3% from 1999 reflecting lower borrowings. Letter of credit and other expenses decreased $79,000 principally due to decreased bank charges. The Company's provision for taxes, rate-wise, remained unchanged from the prior year and approximated the statutory rate. Fiscal 1999 Versus Fiscal 1998 The Company had a net income of $2,170,000 or $.29 per share (diluted), versus a net income of $1,794,000, or $.23 per share (diluted) in 1998. Operating income was $4,759,000, an increase of $551,000, or 13.1% over 1998. These increases were primarily the result of higher gross margins reflecting increased sales of ATS products. Total sales decreased slightly $59,000, .2% from 1998 as decreases domestically and to the U.S. Government were only partially offset by an increase internationally and the addition of sales from the Company's Polish subsidiary purchased in April, 1998. Domestic sales decreased $3,640,000, 41.1%, and represented 17.9% of the Company's total sales, down from 30.2% in the prior year. The decrease domestically primarily reflected reduced industrial sterilizer sales coupled with decreased sales of the Company's entertainment products. Sales to the U.S. Government decreased $1,779,000, 60.6% and represented 4.0% of the Company's total sales, down from 10.0% for the prior year. The decrease in U.S. Government sales primarily reflected the completion in the prior year of a large chamber project. International sales, including sales of the Company's Polish subsidiary, increased $5,360,000, 30.6% and represented 78.1% of the Company's total sales. The increase internationally primarily resulted from additional progress on two large centrifuge projects including a Centrifuge project for the United Kingdom Ministry of Defense (UK MOD). Sales in 1999 to the UK MOD were approximately $7.0 million or 24.0% of the Company's total sales. Open orders for the UK MOD constituted $11.1 million of the Company's sales backlog at February 26, 1999. On a segment basis, sales of the Company's Aircrew Training Systems (ATS) products, which create and monitor the physiological effects of motion (including spatial disorientation and centrifugal forces) on humans and equipment for medical, training, research and entertainment markets were $24,465,000 an increase of $2,410,000, or 10.9% over 1998. Sales of these products accounted for 83.7% of the Company's sales compared to 75% in 1998. Sales in the Company's other segment, the Industrial Group, which designs and produces chambers that create environments that are used for sterilization, research and medical applications, decreased $2,469,000 or 34.2%, and accounted for 16.3% of the Company's total sales compared to 25% in 1998. Although the primary reduction was in sterilizer sales, decreases were evidenced across all product lines for this Group. Gross profit increased $2,374,000 or 25.5%. As a percentage of sales, gross profit was 39.9% up from 31.8% in 1998. These increases were attributable to a product mix shift to higher margin ATS products. Operating profit increased $551,000, or 13.1% compared to 1998. On a segment basis, ATS has an operating profit of $5,697,000, an increase of $1,466,000 while the Industrial Group had an operating loss of $89,000 compared to an operating profit of $691,000 in 1998. These segment operating profits were offset, in part, by unallocated corporate expenses of $849,000, an increase of $135,000 over 1998. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Selling and administrative expenses increased $1,574,000, or 31.8%, due principally to higher commissions expense on higher commissionable sales, increased government claim expenses, and the addition of selling and administrative expenses for the Company's Polish subsidiary. As a percentage of sales, selling and administrative expenses were 22.3% compared to 16.9% in 1998. Research and development expenses increased $249,000, or 168.2% from 1998. Most of the Company's research efforts, which were and continue to be a significant cost of its business, are included in cost of sales for applied research for specific contracts, as well as research for feasibility and technology updates. Capitalized software development costs for 1999 were $581,000 compared to $395,000 in 1998. Amortization of software costs, which was charged to cost of sales, was $651,000 and $670,000 for 1999 and 1998, respectively. Interest expense was down $120,000, 9.6% from 1998 reflecting a lower average interest rate. Letter of credit and other expenses decreased $16,000 principally due to decreased bank charges. The Company's provision for taxes, rate-wise, remained unchanged from the prior year and approximated the statutory rate. Fiscal 1998 Versus Fiscal 1997 The Company had net income of $1,794,000 or $.23 per share (diluted) compared to a net loss of $20,000 or $.01 per share in 1997. Operating income was $4,208,000, an increase of $3,012,000 or 252% over 1997. These increases were primarily the result of increased sales which were $29,284,000, up $7.4 million or 34% over 1997. Domestic sales increased $4,477,000 or 102% over 1997, and accounted for 30% of the Company's total sales, up from 20% in 1997. This increase was due to the introduction of the Company's proprietary motion-based technology into the entertainment marketplace, as well as a $1,308,000 increase in sales of industrial sterilizers. Sales to the U.S. Government, principally for work on two large altitude chambers and a continuation of our contracted operator maintenance contracts on selected aircrew training devices, increased $854,000, or 41%, and accounted for 10% of the Company's total sales, the same percentage as 1997. Sales to international customers, principally government agencies, increased $2,068,000, or 13% over 1997, and accounted for 60% of the Company's total sales, down from 70% in 1997. The increase in international sales was due principally to continued work on a centrifuge for Japan and a multipurpose aircraft trainer for the United Kingdom Ministry of Defense (UKMOD). Sales in 1998 to the UKMOD were approximately $9,226,000, or 32% of the Company's total sales. Open orders for the UKMOD accounted for 59% of the Company's sales backlog at February 27, 1998. On a segment basis, sales of the Company's Aircrew Training Systems (ATS) products, which create and monitor the physiological effects of motion (including spatial disorientation and centrifugal forces) on humans and equipment for medical, training, research and entertainment markets were $22,055,000, an increase of $8,808,000, or 66% over 1997. Sales of these products accounted for 75% of the Company's sales compared to 61% in 1997. Sales in the Company's other segment, the Industrial Group, which designs and produces chambers that create environments that are used for sterilization, research and medical applications, decreased $1,408,000, or 16%, and accounted for 25% of ETC's total sales compared to 39% in 1997. This reduction was due principally to international sales of the Company's sterilizers and environmental chambers, which were $2,533,000 lower in 1998 compared to 1997. Gross profit increased $3,556,000 or 62%. As a percentage of sales, gross profit was 32%, up from 26% in 1997. These increases were attributable, in part, to the higher sales volume which improved plant capacity utilization, as well as an increase in sales of higher-margined ATS products. Operating profit increased $3,012,000, or 252% compared to 1997. On a segment basis, ATS had an operating profit of $4,321,000, an increase of 97%, while the Industrial Group had an operating profit of $691,000 compared to an operating loss of $304,000 in 1997. These segment operating profits were offset, in part, by unallocated corporate expenses of $714,000, an increase of $61,000, or 9% over 1997. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Selling and administrative expenses increased $563,000, or 13%, due principally to higher variable costs related to the higher sales volume, such as commissions and travel expenses. As a percentage of sales, selling and administrative expenses were 17% compared to 20% in 1997. This improvement was due, in part, to the fixed administrative costs being spread over the higher sales total, as well as a reduction in accounting and legal fees. Research and development expenses decreased $19,000, or 11% from 1997. The Company's research efforts, which were and continue to be a significant cost of its business, are included in cost of sales for applied research for specific contracts, as well as research and development for basic research for feasibility and technology updates. Capitalized software development costs for 1998, were $395,000 compared to $494,000 in 1997. Amortization of software costs, which were charged to cost of sales, were $670,000 and $681,000 for 1998 and 1997, respectively. Interest expense was virtually unchanged from 1998. Other expense increased during 1998, principally due to foreign exchange charges. The Company's provision for taxes, rate-wise, remained unchanged from the prior year and approximated the statutory rate. Liquidity and Capital Resources At February 25, 2000, the Company had a Credit Agreement with a bank which provided a credit facility of $15 million. This agreement expires on August 31, 2001. Substantially all of the company's short-term financing is provided by this bank. At February 25, 2000, the Company had $ 9.3 million available under the credit agreement. During fiscal 2000, the company used $2,383,000 of cash for operating activities. This was primarily the result of an increase in accounts receivable and inventories, and a reduction in billings in excess of costs and estimated earnings on uncompleted long-term contracts and customer deposits. Partial offsets were net income, non- cash charges, and a decrease in costs and estimated earnings in excess of billings on uncompleted long-term contracts. In general, the net use of cash for operations reflected the use of cash , received in advance in February, 1999, to build purchased contract equipment. Investing activities used $1,569,000 and consisted of purchases for capital equipment and capitalized software. Financing activities generated $416,000 of cash. This included the net effect of borrowing under the Company's credit facility to pay off $4.0 million of the Company's subordinated debt, payment of dividends on preferred stock and additional paid-in-capital from the issuance of common stock. The company believes that cash generated from operating activities as well as available borrowing under the Credit Agreement will be sufficient to meet its future obligations. In reference to the Company's outstanding claims with both the U.S. government and an international customer, to the extent the Company is unsuccessful in further recovery of 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). 5 Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Year 2000 Disclosure As of January 1, 2000, the Company experienced no major issues during the transition from 1999 to 2000. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's Common Stock (the Common Stock) is traded on the American Stock Exchange under the symbol ETC. As of May 8, 2000, the Company had 308 shareholders of record. The following table sets forth the quarterly ranges of high and low sale prices, and the closing sale price, for shares of the Common Stock for the periods indicated, as adjusted for a 2 for 1 stock split effective May 28, 1999. Such prices represent quotations between dealers and do not include mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. Sale Prices -------------------------- Closing High Low Sale Price ---- --- ---------- 2000 First Quarter $14-1/2 $7-15/16 $11-7/8 Second Quart 12-1/8 9 10-11/16 Third Quarter 10-5/8 8-5/8 9-5/8 Fourth Quarter 21 9-3/8 12-7/8 1999 First Quarter $11-1/4 $8-1/4 $10-1/2 Second Quarter 12-7/8 9-1/8 9-3/4 Third Quarter 11-3/4 6-5/8 11 Fourth Quarter 17 9-1/16 16-1/8 The Company has never paid any cash dividends on the Common Stock in the past and does not anticipate that any cash dividends will be declared or paid in the foreseeable future. The Company's current line of credit facility prohibits the payment of any dividends by the Company without the lender's prior written consent. Backlog The Company's sales backlog at February 25, 2000 and February 26, 1999, for work to be performed and revenue to be recognized under written agreements after such dates, was approximately $44,146,000 and $32,141,000, respectively. In addition, the Company's training and maintenance contracts backlog at February 25, 2000 and February 26, 1999, for work to be performed and revenue to be recognized after that date under written agreements, was approximately $1,288,000 and $1,311,000, respectively. Of the February 25, 2000 backlog, approximately $38,725,000 was under contracts for ATS and maintenance support including $25,755,000 for the Walt Disney companies. Approximately 64% of the February 25, 2000 backlog is expected to be completed prior to February 23, 2001. 6 Report of Independent Certified Public Accountants Board of Directors Environmental Tectonics Corporation We have audited the accompanying consolidated balance sheets of Environmental Tectonics Corporation and Subsidiary as of February 25, 2000 and February 26, 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three fiscal years in the period ended February 25, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Environmental Tectonics Corporation and Subsidiary as of February 25, 2000 and February 26, 1999, and the consolidated results of their operations and cash flows for each of the three fiscal years in the period ended February 25, 2000, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has recorded receivables in the amount of $5.85 million related to claims made to or against the United States government and an international customer for contract costs incurred through February 25, 2000. The total net claims amount made is approximately $12 million based on costs incurred through February 25,2000, and is subject to negotiation, arbitration and audit by the U.S. government and the international customer. /s/ Grant Thornton LLP - ---------------------- Grant Thornton LLP Philadelphia, Pennsylvania April 30, 2000 7 Consolidated Balance Sheets ($ in thousands, except share data)
February 25, February 26, 2000 1999 ------------ ------------ ASSETS Cash and cash equivalents $ 1,725 $ 5,344 Cash equivalents restricted for letters of credit 32 47 Accounts receivable, net 10,771 9,656 Costs and estimated earnings in excess of billings on uncompleted long-term contracts 8,878 10,416 Inventories 3,904 3,118 Deferred tax asset 689 1,136 Prepaid expenses and other current assets 482 787 ------- ------- Total current assets 26,481 30,504 Property, plant and equipment, net 3,300 2,842 Software development costs, net of accumulated amortization of $ 5,215 and $ 4,619 in 2000 and 1999, respectively 1,096 1,137 Other assets 1,020 965 ------- ------- Total assets $31,897 $35,448 ======= ======= LIABILITIES Current portion of long-term obligations $ 78 $ 121 Accounts payable - trade 1,830 1,554 Billings in excess of costs and estimated earnings on uncompleted long-term contracts 3,282 6,775 Customer deposits 2,935 5,696 Accrued income taxes 455 920 Other accrued liabilities 1,595 1,683 ------- ------- Total current liabilities 10,175 16,749 ------- ------- Long-term obligations, less current portion: Credit facility payable to banks 4,093 - Subordinated debt 350 4,124 Other 12 95 ------- ------- 4,455 4,219 ------- ------- Deferred tax liability 652 702 ------- ------- Total liabilities 15,282 21,670 ------- ------- Redeemable cumulative convertible preferred stock, $100 par and redemption value: 25,000 shares authorized; 25,000 shares issued and outstanding at February 26, 1999 0 2,372 ------- ------- Minority Interest 370 376 STOCKHOLDERS' EQUITY Common stock - authorized 20,000,000 shares, $.05 par value; 6,864,280 and 6,166,412 shares issued and outstanding in 2000 and 1999, respectively 343 308 Capital contributed in excess of par value of common stock 5,832 3,240 Accumulated other comprehensive income (loss) (62) 21 Retained earnings 10,132 7,461 ------- ------- Total stockholders' equity 16,245 11,030 ------- ------- Total liabilities and stockholders' equity $31,897 $35,448 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 8 Consolidated Statements of Operations ($ in thousands, except share and per share data)
Year Ended Year Ended Year Ended February 25 February 26, February 27, 2000 1999 1998 ----------- ------------ ----------- Net sales $ 34,920 $ 29,225 $ 29,284 Cost of goods sold 22,122 17,553 19,986 --------- --------- --------- Gross profit 12,798 11,672 9,298 --------- --------- --------- Operating expenses: Selling and administrative 6,551 6,516 4,942 Research and development 920 397 148 --------- --------- --------- 7,471 6,913 5,090 --------- --------- --------- Operating income 5,327 4,759 4,208 --------- --------- --------- Other expenses: Interest expense 738 1,124 1,244 Letter of credit fees 53 26 58 Other, net 56 162 146 --------- --------- --------- 847 1,312 1,448 --------- --------- --------- Income before provision for income taxes 4,480 3,447 2,760 and minority interest Provision for income taxes 1,573 1,201 966 --------- --------- --------- Income before minority interest $ 2,907 $ 2,246 $ 1,794 ========= ========= ========= Income attributable to minority interest 70 76 - Net income $ 2,837 $ 2,170 $ 1,794 Per share information Earnings per common share: Basic $ .40 $ .32 $ .25 Diluted $ .36 $ .29 $ .23 Income available to common stockholders $ 2,671 $ 1,853 $ 1,502 Weighted average common shares: Basic 6,604,000 5,861,000 5,981,000 Diluted 7,319,000 6,312,000 6,496,000
The accompanying notes are an integral part of the consolidated financial statements. 9 Consolidated Statements of Changes in Stockholders' Equity ($ in thousands, except share data) For the years ended February 25, 2000, February 26, 1999, and February 27, 1998
Capital contributed in excess of Accumulated Common stock par value of other Total ----------------------- common comprehensive Retained stockholders' Shares Amount stock income earnings equity -------- -------- ------------ ------------- --------- ------------- Balance, February 28, 1997 2,963,083 $ 296 $ 2,007 $ - $ 4,106 $ 6,409 Net income for the year - - - - 1,794 1,794 Value of warrants issued in connection with issuance of subordinated debt - - 499 - - 499 Accretion of preferred stock - - - - (38) (38) Dividends on preferred stock - - - - (254) (254) Shares issued in connection with employee stock purchase and stock option plans 41, 550 3 146 - - 149 Shares issued in connection with employee stock award 1,963 1 19 - - 20 ---------- ----- ------- ----- -------- -------- Balance, February 27, 1998 3,006,596 $ 300 $ 2,671 $ - $ 5,608 $ 8,579 Net income for the year - - - - 2,170 2,170 Other comprehensive income - - - 21 - 21 ---------- ----- ------- ----- -------- -------- Total comprehensive income - - - 21 2,170 2,191 Stock issued in connection with with acquisition 55,000 6 489 - - 495 Accretion of preferred stock - - - - (42) (42) Dividends on preferred stock - - - - (275) (275) Shares issued in connection with employee stock purchase and stock option plans 21,610 2 80 - - 82 ---------- ----- ------- ----- -------- -------- Balance, February 26, 1999 3,083,206 $ 308 $ 3,240 $ 21 $ 7,461 $ 11,030 Net income for the year - - - - 2,837 2,837 Other comprehensive loss - - - (83) - (83) ---------- ----- ------- ----- -------- -------- Total comprehensive income - - - (83) 2,837 2,754 Stock split effective May 28, 1999 3,083,206 - - - - - Dividend on preferred stock - - - - (38) (38) Accretion of preferred stock - - - - (128) (128) Shares issued in connection with conversion of preferred stock 666,666 33 2,467 - - 2,500 Shares issued in connection with employee stock purchase and stock option plans 31,202 2 125 - - 127 ---------- ----- ------- ----- -------- -------- Balance, February 25, 2000 6,864,280 $ 343 $ 5,832 $ (62) $ 10,132 $ 16,245 ========== ===== ======= ===== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 10 Consolidated Statements of Cash Flows ($ in thousands)
Year Ended Year Ended Year Ended February 25 February 26, February 27, 2000 1999 1998 ----------- ------------ ----------- Cash flows from operating activities: Net income $ 2,837 $ 2,170 $ 1,794 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation and amortization 1,395 1,642 1,463 Increase (decrease)in allowance for accounts receivable and inventory 77 (409) 527 Minority interest (6) 76 - Changes in operating assets and liabilities: (Increase) decrease in assets Accounts receivable (1,097) (1,202) 2,762 Costs and estimated earnings in excess of billings on uncompleted long-term contracts 1,538 (4,765) (2,306) Inventories (888) 623 (882) Prepaid expenses and other current assets 145 (530) (44) Other assets (125) 12 (35) Increase (decrease) in liabilities: Accounts payable 276 112 (375) Billings in excess of costs and estimated earnings on uncompleted long-term contracts (3,493) 5,630 (1,543) Customer deposits (2,761) 4,323 264 Accrued income taxes (465) (64) 713 Other accrued liabilities (93) 616 (414) Payments under settlement agreements (120) (120) (120) Decrease (increase) in deferred income taxes, net 397 (366) (157) ------- ------- ------- Net cash (used in) provided by operating activities (2,383) 7,748 1,647 ------- ------- ------- Cash flows from investing activities: Acquisition of equipment (1,014) (567) (670) Software development costs capitalized (555) (581) (395) Purchase of subsidiary, net of cash acquired - 60 - ------- ------- ------- Net cash used in investing activities (1,569) (1,088) (1,065) ------- ------- ------- Cash flows from financing activities: Net (payments) borrowings under credit facility 4,093 (467) (6,247) Net proceeds from (payments on) subordinated debt (3,774) - 3,730 Net proceeds from preferred stock - - 2,292 Payment of dividends on preferred stock (38) (275) (254) Deferred financing costs - - (876) Decrease (increase) in cash equivalents restricted for letters of credit 15 (32) 650 Decrease in notes payable - related party - (800) (500) Net decrease in other long-term obligations (40) (70) (9) Proceeds from issuance of common stock/warrants 160 82 668 ------- ------- ------- Net cash provided by (used in) financing activities 416 (1,562) (546) ------- ------- ------- Effect of exchange rates on cash (83) 21 - Net (decrease) increase in cash and cash equivalents (3,619) 5,119 36 Cash and cash equivalents at beginning of year 5,344 225 189 ------- ------- ------- Cash and cash equivalents at end of year $ 1,725 $ 5,344 $ 225 ======= ======= ======= Supplemental schedule of cash flow information: Interest paid $ 421 $ 925 $ 1,123 Income taxes paid $ 1,533 $ 1,357 $ 434 Supplemental information on non-cash operating and investing activities: During the year ended February 25, 2000, the Company reclassed $216 from inventory to property, plant and equipment. The Company reclassed $ 0 and $158 of inventory to property, plant and equipment during the years ended February 26, 1999 and February 27, 1998, respectively.
The accompanying notes are an integral part of the consolidated financial statements. 11 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies: Nature of Business Environmental Tectonics Corporation ("ETC" or the "Company") is primarily engaged in the development, marketing and manufacturing of Aircrew Training Systems (ATS) and industrial simulation equipment. The Company utilizes its internally developed software systems in virtually all of its products. ETC focuses on software enhancements, product extensions, new product development and new marketplace applications. Sales of ATS products are made principally to U.S. and foreign government agencies and to the entertainment market. Sales of industrial simulation equipment, which includes sterilizers, environmental systems, and hypo/hyperbaric equipment, are made to both commercial customers and governmental agencies worldwide. Stock Split: On February 25, 1999, the Company's Board of Directors declared a 2-for-1 stock split for stockholders of record on May 17, 1999. All earnings per share and share amounts in the financial statements for all years presented have been restated to reflect the 2-for-1 split. Principles of Consolidation: The consolidated financial statements include the accounts of Environmental Tectonics Corporation, its wholly owned subsidiary, ETC International Corporation and its 65% owned subsidiary, ETC-PZL Aerospace Industries SP. Z O.O. All material inter-company accounts and transactions have been eliminated. The Company's fiscal year is the 52- or 53-week annual accounting period ending the last Friday in February. Use of Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made for revenue recognition under the percentage of completion method (see Note 1, Revenue Recognition), claims receivable, inventory, and computer software costs. The Company has recorded receivables in the amount of $5.85 million for claims made or to be made against the United States government and an international customer for contract costs incurred through February 25, 2000. The total net claims amount filed with the U.S. government is approximately $12.0 million based on costs incurred through February 25, 2000, and additional claims are in preparation for filing in fiscal 2001 against an international customer. These claims are subject to negotiation, arbitration and audit by the United States government and the international customer. Revenue Recognition: Revenue is recognized on long-term contracts utilizing the percentage of completion method based on costs incurred as a percentage of estimated total costs. Revenue recognized on uncompleted long-term contracts in excess of amounts billed to customers is reflected as an asset. Amounts billed to customers in excess of revenue recognized on uncompleted long-term contracts are reflected as a liability. When it is estimated that a contract will result in a loss, the entire amount of the loss is accrued. The effect of revisions in cost and profit estimates for long-term contracts is reflected in the accounting period in which the facts requiring the revisions become known. Contract progress billings are based upon contract provisions for customer advance payments, contract costs incurred, and completion of specified contract milestones. Contracts may provide for customer retainage of a portion of amounts billed until contract completion. Retainage is generally due within one year of completion of the contract. Revenue for contracts under $100 or to be completed in less than one year, and revenue on parts and services, is recognized as shipped. Revenue for service contracts is recognized ratably over the life of the contract, with related material costs expensed as incurred. 12 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies (Continued): Cash and Cash Equivalents: Cash and cash equivalents include short-term deposits at market interest rates with original maturities of three months or less. The Company maintains cash balances at several financial institutions located in the Northeast United States and at some locations internationally. Accounts in each domestic institution are insured by the Federal Deposit Insurance Corporation up to $100. During the year the Company had cash and cash equivalents in excess of insured amounts. However, most of the Company's funds are with one financial institution which has never experienced any customer losses. Inventories: Inventories are valued at the lower of cost or market. Cost is determined principally by the first-in, first-out method. The costs of finished goods and work-in-process inventories include material, direct engineering, manufacturing labor, and overhead components. The Company periodically reviews the net realizable value of the inventory and, if necessary, writes down the recorded costs. Depreciation of Property, Plant and Equipment: Property, plant and equipment are depreciated over their estimated useful lives by the straight-line method for financial reporting purposes. Accelerated depreciation methods are used for tax purposes. Upon sale or retirement of property, plant and equipment, the costs and related accumulated depreciation are eliminated from the accounts. Any resulting gains or losses are included in the determination of net income. Amortization of Goodwill: The Company amortizes costs in excess of fair values of net assets of the businesses acquired using the straight - line method over a period not to exceed 20 years. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. Goodwill of $662 was recorded in fiscal 1999 for the Company's purchase of ETC-PZL Aerospace Industries, SP. Z O.O. Amortization expense was $36 in fiscal 2000 and accumulated amortization as of February 25, 2000 was $61. Amortization of Capitalized Software Development Costs: The Company capitalizes the qualifying costs of developing software contained in certain products. Capitalization of costs requires that technological feasibility has been established. When the software is fully documented and tested, capitalization of development costs cease and amortization commences over a period ranging from 36 to 60 months (dependent upon the life of the product) on a straight-line basis which, at a minimum, approximates estimated sales. Realization of capitalized software costs is subject to the Company's ability to market the related product in the future and generate cash flows to support future operations. Capitalized software costs and related amortization totaled $555 and $596, respectively, for the year ended February 25, 2000. Capitalized software costs and related amortization totaled $581 and $651, respectively, for the year ended February 26, 1999. Amortization of Deferred Financing Costs: Capitalized costs relating to the March, 1997 financing of the Company are being amortized over the respective terms of each agreement. Amortization expense relating to deferred financing costs was $331, $181 and $241 in 2000, 1999, and 1998, respectively (see note 7). 13 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies (Continued): Income Taxes: The Company accounts for income taxes using the liability method, which reflects the impact of temporary differences between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws. Long-Lived Assets: The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles, and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no material effect on the Company's consolidated financial position or results of operations. Stock Options: The Company accounts for stock options in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied (see note 12). The Company's Incentive Stock Option Plan is accounted for under APB Opinion No. 25. Advertising Costs: The Company expenses advertising costs as incurred. Advertising expense was $270, $294 and $210 in 2000, 1999, and 1998, respectively. Earnings Per Common Share: The Company has adopted SFAS No. 128, "Earnings Per Share," which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. 14 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies (Continued): The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. All earnings per share and share amounts have been restated to reflect a 2 for 1 stock split effective May 28, 1999.
Year ended February 25, 2000 ---------------------------------------------------- Weighted average Per share Income shares amount ----------- ------------- --------- (numerator) (denominator) Net income $2,837 Less preferred stock dividends (38) Less accretion of preferred stock (128) ------ Basic earnings per share Income available to common stockholders $2,671 6,604,184 $ .40 ====== ===== Effective of dilutive securities Stock options 224,151 Stock warrant 490,358 --------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $2,671 7,318,693 $ .36 ====== ========= ===== Year ended February 26, 1999 ---------------------------------------------------- Weighted average Per share Income shares amount ----------- ------------- --------- (numerator) (denominator) Net income $2,170 Less preferred stock dividends (275) Less accretion of preferred stock (42) ------ Basic earnings per share Income available to common stockholders $1,853 5,861,377 $ .32 ====== ===== Effective of dilutive securities Stock options 38,641 Stock warrants 412,007 ---------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $1,853 6,312,025 $ .29 ====== ========= =====
There were conversion provisions of preferred stock totaling 666,666 shares of common stock which were not included in the computation of diluted earnings per share because the effect of assumed conversions was anti-dilutive. These conversion provisions were not outstanding at February 25, 2000 (see also note 7). 15 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies (Continued):
Year ended February 27, 1998 ---------------------------------------------------- Weighted average Per share Income shares amount ----------- ------------- --------- (numerator) (denominator) Net income $1,794 Less preferred stock dividends (254) Less accretion of preferred stock (38) ------ Basic earnings per share Income available to common stockholders $1,502 5,980,688 $ .25 ------ ----- Effective of dilutive securities Stock options 70,634 Stock warrants 444,289 --------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $1,502 6,495,611 $ .23 ====== ========= =====
There were conversion provisions of convertible notes payable and preferred stock totaling 800,000 shares of common stock which were not included in the computation of diluted earnings per share because the effect of assumed conversions was anti-dilutive. These conversion provisions were not outstanding at February 25, 2000. 16 Notes to Consolidated Financial Statements ($ in thousands, except share data) 1. Summary of Significant Accounting Policies (Continued): Reporting Comprehensive Income: In June 1997, the Financial Accounting Standards Board (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. Other comprehensive income consists of foreign currency translation adjustments. The adoption of SFAS No. 130 did not have a material impact on the Company's consolidated financial position or results of operations. Business Segment Presentation: 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 had no impact on the Company's consolidated financial position or results of operations. Reclassifications: Certain reclassifications have been made to the 1999 and 1998 financial statements to conform with the 2000 presentation. 2. Acquisition of ETC-PZL Aerospace Industries SP. Z O.O. On April 21, 1998, the Company acquired a 65% ownership in MP-PZL Aerospace Industries, Ltd. ("MP-PZL"), a simulation and advanced training device manufacturing company located in Warsaw, Poland, for $375 in cash, an 8% interest-only three-year note payable for $350 and 55,000 shares of the Company's common stock amounting to $495. MP-PZL was subsequently renamed ETC-PZL Aerospace Industries SP. Z O.O. ("ETC-PZL"). The Company's cost for this acquisition was $1,220 and has been recorded in the accompanying balance sheet under the purchase method of accounting for business combinations. In connection with the acquisition, the Company recorded goodwill of $662 and a minority interest of $300. 17 Notes to Consolidated Financial Statements ($ in thousands, except share data) 2. Acquisition of ETC-PZL Aerospace Industries SP. Z O.O. (Continued): ETC-PZL's fiscal period ends December 31. The results of ETC-PZL for the period May 1, 1998 through December 31, 1998 have been included in the Company's results of operations for the twelve months ended February 26, 1999. On a pro forma basis, had the Company consolidated the results of ETC-PZL in 1998 or for a full 12 months in 1999, the following comparisons would result:
Twelve months ended: February 25, February 26, February 26, 2000 1999 1999 ------------ ------------- ------------ (as reported) (pro forma) Net sales $ 34,920 $ 29,225 $ 29,841 Gross profit 12,798 11,672 11,906 Operating income 5,327 4,759 4,723 Net income 2,837 2,170 2,155 Per share information Income available to common shareholders 2,671 1,853 1,838 Income per share: basic 0.40 0.32 0.31 Income per share: diluted 0.36 0.29 0.29 Number of shares: basic 6,604,000 5,861,000 5,861,000 Number of shares: diluted 7,319,000 6,312,000 6,312,000 Twelve months ended: February 26, February 27, February 27, 1999 1998 1998 ------------ ------------- ------------ (as reported) (pro forma) Net sales $ 29,225 $ 29,284 $ 31,391 Gross profit 11,672 9,298 9,944 Operating income 4,759 4,208 4,521 Net income 2,170 1,794 1,922 Per share information Income available to common shareholders 1,853 1,502 1,603 Income per share: basic 0.32 0.25 0.27 Income per share: diluted 0.29 0.23 0.26 Number of shares: basic 5,861,000 5,981,000 5,981,000 Number of shares: diluted 6,312,000 6,496,000 6,496,000
Subsequent to fiscal year end, on March 6, 2000, the Company signed an agreement to purchase for approximately $300 an additional 30% ownership in ETZ-PZL. The sale is contingent upon approval by the Polish Ministry of Treasury. 18 Notes to Consolidated Financial Statements ($ in thousands, except share data) 3. Accounts Receivable: The components of accounts receivable at February 25, 2000 and February 26, 1999, are as follows: 2000 1999 ---- ---- U.S. government receivables billed and unbilled contract costs subject to negotiation $ 5,145 $ 4,529 U.S. commercial receivables billed 1,395 598 International receivables billed and unbilled contract costs subject to negotiation 4,598 4,914 ------- -------- 11,138 10,041 Less allowance for doubtful accounts (367) (385) ------- -------- $10,771 $ 9,656 ======= ======== 19 Notes to Consolidated Financial Statements ($ in thousands, except share data) 3. Accounts Receivable (Continued): 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 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 2001. 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 $12.0 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. The U.S. government has made offers for settlement which the Company deems inadequate. 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 February 25, 2000, approximately $1.6 million was included in U.S. government receivables. Collectibility of these amounts may be dependent upon the resolution of the above claims. International receivables billed: International receivables billed included $ 0.9 million at February 25, 2000 and February 26, 1999 related to a certain contract with the Royal Thai Air Force. 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 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. Except as noted in the award, the rights and obligations of the parties remain as per the original contract including the potential invoking of penalties or termination of the contract for delay. On December 22, 1997, the Company successfully performed acceptance testing and the unit passed with no discrepancy reports. Although the contract was not completed in the time allotted, the Company has requested an extension on the completion time due to various extenuating circumstances, including allowable "force majeure" events. The balance due on the contract is still under review. However, the Company is not able to determine what, if any, impact the extended completion period will have upon the receipt of final payment. Unbilled contract costs subject to negotiation represent claims made or to be made against an international customer for three contracts covering 1994 to the present. Claims aggregating $1.5 million were recorded in fiscal 2000. Claim costs have been incurred in connection with customer caused delays, errors in specifications and designs, and other out-of-scope items and may not be received in full during fiscal 2001. 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 is currently updating and finalizing these claims and has begun legal proceedings against the customer. As a related item, during fiscal 2000 the aforementioned international customer, citing failure to deliver product within contract terms, assessed liquidated damages totaling approximately $1.6 million on two contracts currently in progress. The Company disputes the basis for these liquidated damages and plans to contest them vigorously. However, following generally accepted accounting principles, the Company reduced contract values and corresponding revenues by approximately $1.3 million, of which $1.0 million was recorded in fiscal 2000. 20 Notes to Consolidated Financial Statements ($ in thousands, except share data) 4. Costs and Estimated Earnings on Uncompleted Contracts: The following is a summary of long-term contracts in progress at February 25, 2000 and February 26, 1999:
2000 1999 ---- ---- Costs incurred on uncompleted long-term contracts $ 23,468 $ 24,926 Estimated earnings 14,937 18,529 -------- -------- 38,405 43,455 Less billings to date (32,809) (39,814) -------- -------- $ 5,596 $ 3,641 ======== ========
21 Notes to Consolidated Financial Statements ($ in thousands, except share data) 4. Costs and Estimated Earnings on Uncompleted Contracts (Continued):
2000 1999 ---- ---- Included in accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted long-term contracts $ 8,878 $ 10,416 Billings in excess of costs and estimated earnings on uncompleted long-term contracts (3,282) (6,775) --------- ---------- $ 5,596 $ 3,641 ======= ==========
Included in billings in excess of costs and estimated earnings on uncompleted long-term contracts is a provision for anticipated losses on contracts of $306 and $206 in 2000 and 1999, respectively. 5. Inventories: Inventories consist of the following: Raw Work in material process Total -------- -------- ------- February 25, 2000 $ 343 $ 3,561 $ 3,904 February 26, 1999 388 2,730 3,118 Inventory is presented net of an allowance for obsolescence of $ 720 and $ 625 in 2000 and 1999, respectively. 6. Property, Plant and Equipment: The following is a summary of property, plant and equipment, at cost, and estimated useful lives at February 25, 2000 and February 26, 1999:
Estimated useful 2000 1999 lives ---- ---- ----- Land $ 100 $ 100 Building and building additions 1,908 1,811 40 years Machinery and equipment 6,865 6,652 3-5 years Office furniture and equipment 1,039 956 10 years Building improvements 1,392 850 5-10 years --------- --------- 11,304 10,369 Less accumulated depreciation (8,004) (7,527) --------- --------- Property, plant and equipment, net $ 3,300 $ 2,842 ========= =========
Depreciation expense for the years ended February 25, 2000, February 26, 1999, and February 27, 1998, was $ 535, $ 707, and $ 482, respectively. 22 Notes to Consolidated Financial Statements ($ in thousands, except share data) 7. Long-Term Obligation and Credit Arrangements: Long-term obligations at February 25, 2000 and February 26, 1999, consist of the following:
2000 1999 ---- ---- Credit facility payable to banks (subsequently refinanced) $ 4,093 $ - Subordinated debt, net 350 4,124 Products liability settlement (net of unamortized discount of $ 37 and $71 in 2000 and 1999, respectively, based on imputed rate of 11%) 48 134 Term loans payable accruing interest at between 9% and 9.9% collateralized by priority liens on certain equipment 42 82 -------- ------ 4,533 4,340 Less current portion (78) (121) --------- ------ $ 4,455 $4,219 ======== ======
The amounts of future long-term obligations maturing in each of the next five fiscal years are as follows:
2001 $ 115 2002 4,455 2003 - 2004 - 2005 and thereafter - -------- Total future obligations 4,570 Unamortized discounts or financing cost associated with obligations (37) -------- $ 4,533 ========
The approximate average loan balance, maximum aggregate borrowings outstanding at any month-end payable under the credit facility and subordinated debt during the fiscal years, and weighted average interest rate computed by the days outstanding method as of February 25, 2000 and February 26, 1999, are as follows: 2000 1999 ----- ---- Approximate average loan balance $ 575 $ 4,578 Maximum aggregate $ 5,393 $ 7,000 Weighted average interest rate 8.16% 7.87% Interest is charged on direct borrowings at the bank's prime rate less a factor ranging from 0% to 0.5% based on the Company's Leverage Ratio, as defined, or adjusted LIBOR in 2000 and 1999. The interest rates were 8.1% and 7.5% at February 25, 2000 and February 26, 1999, respectively. The Company's letter of credit limit is $5.0 million, provided that the cumulative of all outstanding trade letters of credit does not exceed $2.5 million. The balances outstanding under these provisions at February 25, 2000, were $1.5 million. Fees on letters of credit outstanding were 0.75% at February 25, 2000 and 1.5% at February 26, 1999, respectively. 23 Notes to Consolidated Financial Statements ($ in thousands, except share data) 7. Long-Term Obligation and Credit Arrangements (Continued): On February 25, 2000, the Company signed an amendment to its revolving Credit Agreement originally entered into on March 27, 1997, which increased its credit facility to $15 million and extended its expiration date to August 31, 2001. These funds are available to support working capital needs and letter of credit. Terms and conditions of the amendment remained essentially the same as the original agreement. The Credit Agreement is collateralized by substantially all of the Company's assets. The Company is prohibited from declaring any cash dividends under the terms of the Credit Agreement. This facility bears interest at the bank's prime lending rate less a factor ranging from 0% to 0.5% based on the Company's Leverage Ratio, as defined, or adjusted LIBOR. A commitment fee of 0.2% is charged for unused available funds. The credit facility includes certain covenants related to, among other things, prohibitions on incurring additional debt, change in ownership of certain officers, payment of dividends and maintenance, on a quarterly basis, of certain financial ratios. Substantially all of the Company's short-term financing is provided by this bank. The Company had $9.3 million available under the Credit Agreement at February 25, 2000. On March 27, 1997, 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. On January 11, 2000, the Company utilized $4.1 million of its revolving credit facility to repay these subordinated debentures. See also commentary concerning long term bonds. In connection with the subordinated debentures, warrants were issued to acquire 332,820 shares of the Company's common stock at an exercise price of $.50 per share; $499 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 is being amortized to interest expense over the term of the warrants, which is seven years. On March 27, 1997, the Company also issued 25,000 shares of 11% redeemable convertible preferred stock for $2.5 million. Each share of convertible stock was convertible, at the option of the shareholder, into 26.66 shares of the Company's common stock at a price of $3.75 per share. On February 26, 1999, the Company issued a redemption notice to redeem the outstanding 25,000 shares of Series A Preferred Stock in their entirely. On March 25, 1999, the Company received notice that Sirrom Capital Corporation had exercised its conversion privilege under the terms of the agreement to convert its 25,000 shares of Series A Preferred Stock into the Company's common shares. Consequently, on April 19, 1999, the Series A Preferred was retired and 666,666 shares of common stock were issued to Sirrom Capital Corporation. Concurrent with this transaction the Company charged retained earnings for $128 representing the difference between book and face value of the Preferred Stock and then reclassed $2,500 of Preferred Stock value to common stock at par and additional paid in capital. Total financing fees associated with the March 27, 1997 financing were approximately $876, all of which had been charged to interest expense or accreted to retained earnings by February 25, 2000. The proceeds from these transactions were used to repay, in full, amounts outstanding with a prior lender. Subordinated debt at February 25, 2000, consisted of debt issued for the acquisition of ETC-PZL (see note 2). 24 Notes to Consolidated Financial Statements ($ in thousands, except share data) 7. Long-Term Obligation and Credit Arrangements (Continued): As a condition to the extension of the prior credit facility through March 31, 1997, warrants were issued to an affiliate of a Bank to purchase 200,000 shares of the Company's common stock at a price equal to $2.59. On March 6, 2000, these warrants were exercised and the Company received $518 representing the full purchase price. Subsequently, on March 20, 2000, the Company issued 212,866 shares (representing the original warrant value as adjusted) of its common shares. On March 15, 2000, the Company issued approximately $5.5 million of unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds (Series of 2000). Net proceeds from these bonds were used to repay a $4.1 million advance taken on the Company's revolving credit facility and to finance construction of an addition to the Company's main plant in Southampton, Pa. The bonds are secured by a $5.6 million irrevocable direct pay Letter of Credit issued by the Company's main lender which expires on March 15, 2005 and which is secured by all assets of the Company. The Bonds carry a maturity date of April 1, 2020, bear a variable interest rate which adjusts each week to a rate required to remarket the bonds at full principal value (currently at 6.59% on May 19, 2000 ) with a cap of 17%, and are subject to mandatory redemption of $275 per year for 19 years and $245 for the 20th year. Product Liability Settlement: During June 1995, the Company entered into a settlement with the employee of a customer who brought a products liability claim against the Company. The settlement of $1,195 will be satisfied with (i) funds of $547 (including accrued interest) previously deposited by the Company's products liability insurance carrier with the U.S. District Court, and (ii) a settlement payable to the plaintiff for the remaining amount of $648. The Company paid $53 by July 20, 1995 and $100 on April 20, 1996. In September 1996, the Company renegotiated the payment schedule. For the period beginning October 1996, the company will pay $10 per month. The claimant did reserve the right to pursue additional payment amounts as per the original settlement agreement of July 29, 1995. The Company has recorded a discount of $37 on this settlement based on an imputed interest rate of 11%, which is amortized over the term of the settlement. The carrying value of the aforementioned financial instruments approximates their fair values at February 25, 2000. 8. Related Parties: ETC Europe: The Company transacts its business in Europe through ETC Europe, an affiliated entity which was 99% owned by the President of the Company. Sales through ETC Europe were $6,025 and $1,957 in 2000 and 1999, respectively. Amounts due from ETC Europe as of February 25, 2000 and February 26, 1999, were $56. Effective March 7, 2000, the Company completed the purchase for $100 of the 99% ownership held by the President of the Company. Subordinated Debt and Preferred Stock: During 2000 a director of ETC was also a director of one of its creditors (see note 7). 9. Leases: Operating Leases: The Company leases certain premises and office equipment under operating leases which expire over the next five years. Future minimum rental payments required under noncancellable operating leases having a remaining term expiring after one fiscal year as of February 25, 2000, are $125 in 2001; $63 in 2002; $62 in 2003; $63 in 2004; and $122 in 2005 and thereafter. Total rental expense for all operating leases for the years ended February 25, 2000, February 26, 1999, and February 27, 1998, was $39, $69, and $106 respectively. 25 Notes to Consolidated Financial Statements ($ in thousands, except share data) 10. Income Taxes: The components of the provision (benefit) for income taxes are as follows:
Year Ended Year Ended Year Ended February 25, February 26, February 27, 2000 1999 1998 ------------ ------------ ------------ Currently payable: Federal $ 889 $ 1,272 $ 1,099 State 179 184 24 Foreign taxes 108 111 - ------- ------- -------- 1,176 1,567 1,123 ------- ------- -------- Deferred: Federal 360 (333) (142) State 37 (33) (15) ------- ------- -------- 397 (366) (157) ------- ------- -------- $ 1,573 $ 1,201 $ 966 ======= ======= ========
A reconciliation of the statutory federal income tax (benefit) to the effective tax is as follows:
Year Ended Year Ended Year Ended February 25, February 26, February 27, 2000 1999 1998 ------------ ----------- ------------ Statutory income tax 34.0% 34.0% 34.0% State income tax, net of federal tax benefit and state net operating loss carryforwards in 1999 2.9 3.9 (0.6) Foreign sales corporation (5.2) (4.4) (4.9) Other 3.4 1.5 6.5 ----- ----- ----- 35.1% 35.0% 35.0% ===== ===== =====
The tax effects of the primary temporary differences are as follows:
2000 1999 1998 ------------ ----------- ------------ Deferred tax assets: Net arbitration award against Company $ 0 $ 446 $ - Net products liability settlement 115 161 70 Vacation reserve 59 45 43 Inventory reserve 270 236 389 Receivable reserve 138 145 142 Warranty reserve 46 44 44 Other, net 61 59 82 ----- ------- ------ Total current deferred tax asset $ 689 $ 1,136 $ 770 Deferred tax liabilities: Amortization of capitalized software $ 395 $ 407 $ 432 Depreciation 257 295 270 ------ ------- ------ Total noncurrent deferred tax liability $ 652 $ 702 $ 702 ====== ======= ======
27 Notes to Consolidated Financial Statements ($ in thousands, except share data) 11. Business Segment Information: The Company primarily manufactures, under contract, various types of high-technology equipment which it has designed and developed. The Company considers its business activities to be divided into two segments: Aircrew Training Systems (ATS) and Industrial simulation. The ATS business produces devices which create and monitor the physiological effects of motion, including spatial disorientation and centrifugal forces for medical, training, research and entertainment markets. The Industrial Group business produce chambers that create environments that are used for sterilization, research and medical applications. The following segment information reflects the accrual basis of accounting:
Industrial ATS Group Total ---------- ---------- -------- 2000 ---- Net sales $ 26,361 $ 8,559 $ 34,920 Interest expense 465 125 590 Depreciation and amortization 1,024 371 1,395 Operating income 5,039 1,355 6,394 Income tax provision 1,601 431 2,032 Identifiable assets 20,344 5,538 25,882 Expenditures for segment assets 650 167 817 1999 ---- Net sales $ 24,465 $ 4,760 $ 29,225 Interest expense 711 84 795 Depreciation and amortization 1,289 353 1,642 Operating income (loss) 5,697 (89) 5,608 Income tax provision (benefit) 1,745 (61) 1,684 Identifiable assets 22,470 2,644 25,114 Expenditures for segment assets 438 26 464 1998 ---- Net sales $ 22,055 $ 7,229 $ 29,284 Interest expense 808 158 966 Depreciation and amortization 1,048 415 1,463 Operating income 4,231 691 4,922 Income tax provision 1,198 187 1,385 Identifiable assets 14,902 2,917 17,819 Expenditures for segment assets 435 85 520 2000 1999 1998 ---------- ---------- -------- Reconciliation to consolidated amounts: Segment operating income $ 6,394 $ 5,608 $ 4,922 Less interest expense (590) (795) (966) Less income taxes (2,032) (1,684) (1,385) ---------- ---------- -------- Total profit for segments 3,772 3,129 2,571 Corporate home office expense (936) (849) (714) Interest and other expenses (388) (517) (482) Income tax benefit 459 483 419 Minority interest (70) (76) - ---------- ---------- -------- Net income $ 2,837 $ 2,170 $ 1,794 ======== ========== ========
Segment operating income (loss) consists of net sales less applicable costs and expenses relating to these revenues. Unallocated general corporate expenses, letter of credit fees, interest expense, and income taxes have been excluded from the determination of the total profit for segments. General corporate expenses are primarily central administrative office expenses. Property, plant, and equipment are not identified with specific business segments because most of these assets are used in each of the segments. 28 Notes to Consolidated Financial Statements ($ in thousands, except share data) 11. Business Segment Information (Continued): Approximately 63% of sales totaling $16,609 in 2000 were made to two international and one domestic customer in the ATS segment. Approximately 24% of sales totaling $7,005 in 1999 were made to one international customer in the ATS segment. Approximately 19%, 11% and 10% of sales in 1998 were made to two international customers and one domestic commercial account, totaling sales of $5,492, $3,266 and $3,013, respectively, in the ATS segment. Included in the segment information for the year ended February 25, 2000, are export sales of $23,907. Of this amount, there are sales to or relating to governments or commercial accounts in Great Britain ($4,821), Poland ($4,201), and Nigeria ($8,107). Sales to the U.S. government and its agencies aggregate $1,587 for the year ended February 25, 2000. Included in the segment information for the year ended February 26, 1999 are export sales of $22,876. Of these amounts, there are sales to or relating to governments or commercial accounts in Great Britain ($7,005), Poland ($2,530), Japan ($2,130), Nigeria ($1,990), Bangladesh ($1,548), Turkey ($1,057), the UAE ($1,040), and Egypt ($949) for ATS sales. Sales to the U.S. government and its agencies aggregate $1,158 for the year ended February 26, 1999. Included in the segment information for the year ended February 27, 1998 are export sales of $17,490. Of these amounts, there are sales to or relating to governments or commercial accounts in Great Britain ($5,721), Japan ($3,382), Turkey ($1,734), Egypt ($1,288), Oman ($710), Norway ($558), and the UAE ($524) for ATS sales. Sales to the U.S. government and its agencies aggregated $2,936 for the year ended February 27, 1998. 12. Stock Options: In August, 1999 the Company adopted an Incentive Stock Option Plan to replace the 1988 Incentive Stock Option Plan which expired in August, 1999. The plan authorizes a committee of the Board of Directors to grant options for the purchase of up to 500,000 shares of common stock to qualifying officers and other key employees. The Plan provides that option price shall not be less than 100% (or in the case of a ten percent owner, 110%) of the current market price of the stock on the date of the grant. Options may be exercised on a cumulative basis at the rate of 25% per year commencing one year after the date of grant. The Plan will terminate on August 1, 2008. At February 25, 2000, there were 321,500 shares available to be granted under the Plan. Since the exercise price of each option is not less than 100% of the current market price of the Company's stock on the date of grant, no compensation cost has been recognized for the Plan. Had compensation cost for the Plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. Reported amounts reflect the 2 for 1 stock split declared by the Company on February 25, 2000 (see note 1). 2000 1999 1998 ---- ---- ---- Net income: As reported $ 2,837 $ 2,170 $ 1,794 Pro forma $ 2,350 $ 2,073 $ 1,765 Basic earnings per share: As reported $ .40 $ .32 $ .25 Pro forma $ .33 $ .30 $ .24 Diluted earnings per share: As reported $ .36 $ .29 $ .23 Pro forma $ .30 $ .28 $ .22 29 Notes to Consolidated Financial Statements ($ in thousands, except share data) 12. Stock Options (Continued): The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1999 and 1998: dividend yield of 0% and 0%; expected volatility of 54% and 60%; risk-free interest rate of 5.47% and 6.2%; and expected life of five and four years. A summary of the status of the Plan as of February 25, 2000, February 26, 1999, and February 27, 1999, and changes during the years ending on those dates is presented below.
2000 1999 ------------------------ ------------------------- Weighted Weighted average average exercise exercise Shares price Shares price ------ ----- ------ ----- Outstanding at beginning of year 543,700 $ 6.57 92,350 $ 1.99 Granted 0 0 490,000 7.05 Exercised (28,950) 3.59 (38,650) 1.78 Forfeited (17,000) 4.86 - - ------- ------- Outstanding at end of year 497,750 543,700 6.57 ------- ------- Options exercisable at year end 52,563 26,850 Weighted average fair value of options granted during the year $ - $ 3.7 1998 -------------------------- Weighted average exercise Shares price ------ ----- Outstanding at beginning of year 197,620 $ 1.88 Granted - - Exercised (79,670) 1.58 Forfeited (25,600) 2.25 --------- -------- Outstanding at end of year 92,350 1.99 Options exercisable at year end 22,288 Weighted average fair value of options granted during the year $ -
30 Notes to Consolidated Financial Statements ($ in thousands, except share data) 12. Stock Options (Continued): The following information applies to options outstanding at February 25, 2000:
Options outstanding Options exercisable ---------------------------- --------------------------------------- Weighted Number average Weighted Number Weighted Outstanding at remaining average exercisable at average February 25, contractual exercise February 25, exercise Range of exercise prices 2000 life (years) price 2000 price ------------------------ -------------- ------------ -------- -------------- --------- $1.75 to $2.25 31,250 6.5 years $ 2.21 23,438 $ 2.21 $5.00 to $7.81 466,500 8.8 years $ 7.11 29,125 $ 5
13. Claims and Litigation: Certain other 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. 14. Employee Benefit Plan The Company maintains a retirement savings 401(k) plan for eligible employees. The Company's contributions to the plan are based on a percentage of the employees' qualifying contributions. The Company's contributions totaled $121, $103, and $91 in 2000, 1999, and 1998 respectively. 31 Notes to Consolidated Financial Statements ($ in thousands, except share data) 15. Quarterly Consolidated Financial Information (Unaudited): Financial data for the interim periods of 2000, 1999 and 1998 were as follows:
Quarter Ended ----------------------------------------------------------- Fiscal Year 2000 May August November February 28 27 26 25 --------- --------- --------- --------- Net sales $ 8,295 $ 8,279 $ 9,107 $ 9,239 Gross profit 3,418 2,679 3,381 3,320 Operating income 1,426 716 1,401 1,784 Income before income taxes 1,231 522 1,187 1,540 Minority interest (35) (32) 8 129 Net income 835 372 763 867 Earnings per common share: Basic .11 .05 .11 .13 Diluted .10 .05 .10 .11 Quarter Ended ----------------------------------------------------------- Fiscal Year 1999 May August November February 29 28 27 26 --------- --------- --------- --------- Net sales $ 7,460 $ 5,996 $ 7,475 $ 8,294 Gross profit 2,749 2,283 2,648 3,992 Operating income 999 829 1,003 1,928 Income before income taxes 712 441 597 1,697 Minority interest - 61 (10) 25 Net income 464 234 399 1,073 Earnings per common share: Basic .07 .03 .05 .17 Diluted .07 .02 .05 .15 Quarter Ended ----------------------------------------------------------- Fiscal Year 1998 May August November February 30 29 28 27 --------- --------- --------- --------- Net sales $ 6,644 $ 7,181 $ 7,639 $ 7,820 Gross profit 1,960 2,358 2,467 2,513 Operating income 790 1,095 1,143 1,180 Income before income taxes 546 631 755 828 Net income 360 406 491 537 Earnings per common share: Basic .05 .05 .07 .08 Diluted .05 .05 .06 .07
Note: All earnings per share amounts have been restated to reflect a 2 for 1 stock split effective May 28, 1999. 32 EX-21 3 EXHIBIT 21 ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES SCHEDULE 21 LIST OF SUBSIDIARIES % Name Jurisdiction Ownership - ---- ------------ --------- Entertainment Technology Corporation PA 100% ETC International Corporation Barbados 100% ETC-PZL Aerospace Industries Poland 65% EX-23 4 EXHIBIT 23 Consent of Independent Certified Public Accountants --------------------------------------------------- We have issued our report dated April 20, 2000, accompanying the consolidated financial statements incorporated by reference in the Annual Report of Environmental Tectonics Corporation and Subsidiary on Form 10-K for the year ended February 25, 2000 and Part II of this form. We have also audited Schedule II for each of the three years in the period ended February 25, 2000. In our opinion, this schedule represents fairly, in all material respects, the information required to be set forth therein. We hereby consent to the incorporation by reference in the Registration Statement of Environmental Tectonics Corporation and Subsidiary of Form S-8 (File No. 333-65469, effective October 8, 1998), Form S-8 (File No 2-92407, effective August 14, 1984) and on Form S-3 (File No. 33-42219, effective September 4, 1991). Philadelphia, Pennsylvania May 25, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 0000033113 ENVIRONMENTAL TECTONICS CORPORATION 1,000 US$ YEAR FEB-25-2000 FEB-27-1999 FEB-25-2000 1 1,757 0 11,138 367 3,904 26,481 11,304 8,004 31,897 10,175 0 0 0 343 15,902 31,897 34,920 34,920 22,122 7,471 109 0 738 4,480 1,573 2,837 0 0 0 2,837 0.40 0.36
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