<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
------------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ -----------------------
Commission file number 1-8988
----------------------------------------------------------
ECC INTERNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1714658
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
175 Strafford Avenue, Suite 116, Wayne, Pennsylvania 19087-3377
- --------------------------------------------------------------------------------
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code (610) 687-2600
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------- ---------------------------------------------
None None
- ----------------------- ---------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.10 Per Share
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant 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. [X]
As of August 20, 1996, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $41,309,019. (This figure was
computed on the basis of the closing price for the Registrant's Common Stock on
August 20, 1996 using the number of shares held on August 20, 1996 by
stockholders who are not officers, directors or record holders of 10% or more of
the Registrant's outstanding Common Stock. The characterization of such
officers, directors and 10% stockholders as affiliates is for purposes of the
computation only and should not be construed as an admission for any purpose
whatsoever that any of such persons are, in fact, affiliates of the Registrant.)
As of August 20, 1996 there were 7,833,143 shares of the Registrant's Common
Stock, $0.10 par value per share, issued and outstanding.
Information with respect to directors in Item 10 and the information required by
Items 11-13 is incorporated by reference to the definitive proxy statement of
the Registrant filed with the Commission in connection with its Annual Meeting
of Shareholders scheduled for the week of December 2, 1996.
The Exhibit Index is located on pages 44 through 47.
<PAGE> 2
PART I
Item 1. Business.
- ------- --------
(a) General Development of Business.
-------------------------------
(1) ECC International Corp., a Delaware corporation organized in 1969 (the
"Company"), designs, manufactures, and markets computer-controlled simulators
used primarily for training personnel to perform maintenance and operator
procedures on military weapons systems. The Company's simulators measure
performance as a trainee operates the equipment, conducts equipment tests,
diagnoses programmed malfunctions, and takes corrective actions. The Company's
equipment is used by all four branches of the U.S. Armed Services as well as
numerous foreign governments for familiarization, operator training and
maintenance training for aircraft, missiles, submarines, surface ships, tanks,
combat vehicles, and radar systems.
The Company's systems also have application in industrial and
vocational training programs, such as control room simulators for power plants.
The Company also offers training and educational products to
purchasers of its simulators and to others. These products consist of the
development of training programs and curricula, development of multi media
programs and computer-based training, preparation of training handbooks, and
instruction on the use of the Company's simulators.
The Company designs and manufactures substantially all of the
components of its simulator systems, with the exception of certain equipment
such as commercially available computers, CRTs, disk drives and printers, which
it purchases. The Company is not dependent on any one supplier for raw materials
or computer related equipment used in or sold as part of its systems.
The Company's systems are marketed through a direct sales force
located in Wayne, Pennsylvania, and East Sussex, England and by independent
international sales representatives located in 17 foreign countries.
In fiscal year 1992, the Company began to manufacture, under license
from Deutsche Wurlitzer GmbH, a glass front frozen food product vending machine,
during which time orders for a limited number of units were received. First
deliveries of these units were made in December 1992 and a total of
approximately 500 machines were manufactured and sold during fiscal years 1993
through 1995. In the fiscal year ended June 30, 1995, the Company began the
design, manufacture and sale of its own frozen food/refrigerated vending
machine.
The Company developed a glass front 54 selection bottle vending
machine and entered into a contract for 5,000 machines with Snapple Beverage
Corporation ("Snapple") in November 1993. The contract included an option to
purchase 5,000 additional machines which Snapple exercised in March 1994, and
provided for an exclusivity period through March 31, 1995. Since April 1, 1995,
the Company has been marketing this machine to other beverage companies and
vending operators through its vending distributor network. The Snapple contract
was completed during fiscal year 1996. On July 1, 1996, the Company's vending
operations were placed into ECC Vending Corp., a wholly owned subsidiary.
(2) Not applicable.
<PAGE> 3
(b) Financial Information about Industry Segments.
---------------------------------------------
The Company designs and manufactures training simulators and develops
training programs and curricula. In addition, the Company manufactures frozen
food and bottle vending machines. See Note 10 to the Consolidated Financial
Statements for information concerning operations by business segment and sales
by geographic area and major customers.
(c) Narrative Description of Business.
---------------------------------
(1) (i) Principal Products, Services and Revenue Sources.
------------------------------------------------
See the information set forth above in Item 1(a) and (b) and
following in Item (c)(1)(iv).
(ii) New Products.
------------
Vending Machines - See the information set forth above in
Item 1(a) and (b) and following in Item (c)(1)(iv).
(iii) Raw Materials.
-------------
The components used in the assembly of vending machines and
training systems, as well as the parts used to manufacture the computers and
devices used in the Company's systems, are purchased from original equipment
manufacturers, electronics supply firms and others. The Company has no reason to
believe that it cannot continue to obtain such components, or suitable
substitutes, as it may require.
(iv) Patents, Trademarks, Licenses, Franchises and Concessions.
---------------------------------------------------------
On September 18, 1979, the Company received a patent on the
EC 3 system, a computer-controlled general purpose simulator developed by the
Company. This patent expired on September 18, 1996. The Company does not
consider the patent to be critical for the protection of the Company's
proprietary technology and systems. Competitors are using general purpose
computers in their simulation systems, although the Company does not believe
such computers are as efficient as the EC 3 in this specific application.
The Company received a Design Patent and two Utility Patents
covering key elements of its bottle vending unit. These patents expire at
varying dates through fiscal year 2005.
(v) Seasonality of Business.
-----------------------
The Company's business is not seasonal.
(vi) Working Capital Practices.
-------------------------
The Company's working capital practices are similar to other
government contractors.
<PAGE> 4
(vii) Dependence on Customer.
----------------------
A substantial portion of the Company's training business is
government-related and channeled to the Company through the Department of
Defense. For the fiscal year ended June 30, 1996, 21.2% of sales were made
directly to the Department of Defense, while an additional 52.7% of sales were
made to various other contractors for ultimate use by the Department of Defense.
Within the Department of Defense, there are various agencies which are
"customers" of the Company, with the largest being the U.S. Air Force. For the
fiscal year ended June 30, 1996, several contracts with this "customer"
accounted for 16.0% of the Company's sales. Revenue contributed by the Vending
Division for the fiscal year ended June 30, 1996 accounted for 13.2% of the
Company sales and was substantially all relating to the Snapple contract. (Also
see Note 10 to the Consolidated Financial Statements.)
(viii)Backlog.
-------
At June 30, 1996, the Company's backlog (which represents
that portion of outstanding contracts not yet included in revenue) was
approximately $170,800,000, of which $76,500,000 represented contract options,
as compared to approximately $232,607,000, of which $109,845,000 represented
contract options at June 30, 1995. Vending Operation backlog was negligible at
June 30, 1996, compared to $6,021,000 at June 30, 1995. It is anticipated that
over 60% of the backlog, exclusive of contract options at June 30, 1996, will be
delivered during the fiscal year ending June 30, 1997.
(ix) Renegotiation or Termination of Contracts or Subcontracts
---------------------------------------------------------
at Government's Election.
------------------------
The Company's government contracts contain standard terms
permitting termination without cause at the option 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).
(x) Competitive Conditions.
----------------------
The Company is in competition with a large number of firms.
Many of the Company's competitors are substantially larger and have greater
financial resources. Competition is based upon both price and performance
considerations. Positive factors pertaining to the Company's competitive
position are that the Company has a large base of installed systems and
substantially more experience than its competitors in the computer-controlled
maintenance simulation field. The Company expects to see new competitors in its
market, which the Company believes is one of the defense segments which
continues to have growth potential.
In recent years, the Company entered the vending machine
manufacturing business in two distinct areas. The first is the frozen food
vending area, where the company introduced its frozen food machine, built under
license from Deutsche Wurlitzer, approximately four years ago and last year ECC
introduced its own design frozen vending machine. The second is the beverage
vending area where the company introduced its large glass front vending machine
which displays and vends up to fifty-four (54) different selections of glass
bottles. Although there are a number of major manufacturers in the vending
business, the Company does not currently have any major competition for its
machines. However, the Company believes that one or more of the major
manufacturers will introduce new products to compete with the Company's vending
machines in the near future.
<PAGE> 5
(xi) Systems Development.
During the fiscal years ended June 30, 1996, 1995, and 1994,
approximately $407,000, $1,239,000 and $557,000, respectively, were spent on
Company-sponsored research activities, including manufacturing, engineering and
software development relating to the development of new products and product
enhancements. There have been no customer-sponsored research activities within
the last three years. During the fiscal year ended June 30, 1996, the Company
employed the equivalent of 20 full-time professional employees whose prime
responsibility is in research and development activities. In addition to this
full-time research and development staff, from time to time the Company utilizes
the specialized skills of many of its other employees and contract personnel on
a limited engagement basis.
(xii) Environment.
The Company has nothing to report under this caption.
(xiii)Number of Persons Employed.
As of June 30, 1996, the Company employed approximately 983
persons.
(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales.
-----
Export sales were immaterial to the Company's gross sales.
Management does not believe there are substantial risks involved in the
Company's foreign operations at this time, nor does management believe that any
material part of the business is dependent on any one foreign contract, the loss
of which would have a material adverse effect on the business.
Item 2. Properties.
- ------ ----------
The Company owns its simulation development and manufacturing facilities
which are situated on 27 acres in Orlando, Florida. The main plant facility
totals 398,086 square feet. Ancillary buildings on the property total 85,460
square feet. In March 1995, the entire vending operation was moved to a 72,500
square foot leased facility approximately five miles from the main plant.
In addition, the Company leases approximately 10,000 square feet of office
space in Wayne, Pennsylvania under a lease that expired on March 31, 1996 with
three one-year options the first of which has been exercised. The Corporate
Headquarters, the Company's Marketing Staff and the Instructional Systems Design
Group are resident at this location.
The Company's wholly owned subsidiary, ECC Simulation Limited has three
separate leased facilities. The first lease, expiring in 2015, is for a 25,000
square foot facility in Shoreham-by-Sea, West Sussex, England. The second lease,
expiring in July 2003, with a lease break option in 1998, is for 9,000 square
feet of space in a facility near the Shoreham location. Management intends to
exercise the lease break option for the 9,000 square foot facility in 1998. (See
Note 11 to the Consolidated Financial Statements.) Due to the continued growth
of the U.K. operation, the Company signed a new lease in December 1995 expiring
in June 2016, with a lease break option in 2002. This leased property is for
50,000 square feet in Brighton, East Sussex, England.
<PAGE> 6
Item 3. Legal Proceedings.
- ------ -----------------
During fiscal year 1996, the Company submitted a claim for contract
adjustment under the Economic Price Adjustment (EPA) provisions of a major
contract seeking approximately $950,000. The value of the claim is included as a
component of contract value for purposes of revenue recognition. (See Note 11
Summary of Quarterly Results.)
The Company also submitted a claim for the effects of a Stop Work Order
issued on one of its contracts in the amount of $191,000, of which $150,000 was
deferred in inventory as of June 30, 1996. The claim represents the cost of idle
time resulting from the Stop Work Order as well as the effect of the release of
the Stop Work Order.
In 1992, the Company began to manufacture and sell outside of Europe, under
license from Deutsche Wurlitzer GmbH ("Wurlitzer"), a glass front frozen food
product vending machine. In 1995, the Company began the design, manufacture and
sale of its own frozen food product vending machine. Wurlitzer has indicated to
the Company that it believes the Company is prohibited, based on the terms of
the license agreement, from selling the Company-designed frozen food product
vending machine in Europe and that such machine is subject to the royalty
provisions of such license agreement. On February 21, 1996, the Company
commenced an action in the United States District Court for the Middle District
of Florida seeking declaratory judgement that its frozen food product vending
machine design, currently utilized by ECC Vending Corp., does not infringe
certain rights held by Wurlitzer and is not covered by any license or
non-disclosure agreements between the Company and Wurlitzer. The case has
recently been transferred to the United States District Court for the Southern
District of New York. Wurlitzer has indicated to the Company that it intends to
file a counterclaim seeking unspecified damages and enforcement of its rights.
The Company believes that it has valid defenses to any claims that Wurlitzer may
have and that its design does not infringe on any patents or rights of Wurlitzer
and is not covered by any agreements with Wurlitzer. In the event that Wurlitzer
is successful in its counterclaim, the Company does not believe it would have a
material adverse effect on the financial condition or results of the Company.
Item 4. Submissions of Matters to a Vote of Security Holders.
- ------ ----------------------------------------------------
There was no vote of security holders during the fourth quarter of the last
fiscal year.
<PAGE> 7
<TABLE>
Executive Officers and Key Management Employees of the Registrant
-----------------------------------------------------------------
Each of the following executive officers and key management employees of
the Company has been elected by the Board of Directors and serves at the
discretion of the Board.
<CAPTION>
Name Age Position with the Registrant Officer Since
---- --- ---------------------------- -------------
<S> <C> <C> <C>
George W. Murphy 60 President, Chief Executive 1970
Officer and Director
James B. Conyers, Jr.* 53 Vice President, Staff Operations 1987
Patrick M. Donohue 60 Vice President, Marketing 1986
James M. Ferguson 60 Vice President, New Business Development, 1980
ECC Vending Corp.
Ajit W. Hirani 49 Vice President, General Manager Orlando 1986
Training Simulation Division and Director
Ali Kalwar* 46 Vice President, Program Management 1996
Jerome Pogorzelski* 55 Vice President, Manufacturing, 1991
Training Systems Division
Jerry Robbins 46 Vice President, Manufacturing, 1987
ECC Vending Corp.
Nicholas A. Siecko 58 Vice President, Instructional 1969
Systems Development
Relland Winand 41 Vice President, Finance and 1996
Chief Financial Officer
and Secretary/Treasurer
Robert Wollam* 46 Vice President, Engineering 1996
<FN>
- ----
* Key management employees who are not "officers" for purposes of Section 16 of
the Securities Exchange Act of 1934 and the rules and regulations thereunder.
</TABLE>
Messrs. Kalwar, Winand and Wollam assumed their current positions in fiscal
year 1996. Mr. Hirani assumed his current position in January 1995 and was
elected a Director in March 1995. Messrs. Conyers, Ferguson, Pogorzelski and
Robbins assumed their current positions during 1994 and the remaining officers
have been in their positions for at least five years.
<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- ------ ----------------------------------------------------------------
Matters.
--------
(a) Market Information.
------------------
<TABLE>
The price range of the Company's Common Stock during the last two
fiscal years was as follows:
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
June 30, 1996 $ 9.25 $ 9.13
March 31, 1996 10.63 10.38
December 31, 1995 11.00 10.00
September 30, 1995 12.38 12.00
June 30, 1995 13.25 10.25
March 31, 1995 12.25 10.00
December 31, 1994 12.75 8.75
September 30, 1994 16.00 10.50
</TABLE>
Common Stock prices shown above are the last sales prices on the New York
Stock Exchange.
(b) Holders.
-------
As of August 20, 1996 the Company had approximately 1,061 shareholders of
record of its Common Stock based on the transfer agent's listings. The Company
believes its shares are beneficially held by several thousand additional
shareholders based on broker dealer demand for proxy materials in 1995.
(c) Dividends.
---------
Under the Company's current credit agreement (described in Note 6 to
the Consolidated Financial Statements) the Company is permitted to pay cash
dividends subject to certain financial covenants of the agreement. There were no
dividends declared or paid in fiscal year 1996.
<PAGE> 9
<TABLE>
Item 6. Selected Financial Data.
- ------ -----------------------
(In Thousands, Except Per Share Data)
<CAPTION>
Fiscal Years Ended June 30
--------------------------
Operating Data 1996 1995 1994 1993 1992
- -------------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales............................... $117,156 $107,607 $63,301 $54,435 $58,777
Operating Income/(Loss)................. $ 6,007 $ 11,734 $ 7,758 $ 1,298 $(2,608)
Net Income/(Loss)....................... $ 2,878 $ 7,318 $ 3,929 $(1,043) $(2,979)
Per Share Data
- --------------
Weighted Average Number
of Common and Common Share
Equivalents Outstanding ............... 7,889 7,894 6,891 6,136 5,985
Weighted Average Number
of Common and Common Share
Equivalents Outstanding, assuming
full dilution*.........................
Earnings Per Common Share and
Common Share Equivalents:
Earnings/(Loss) Per Common Share
and Common Share Equivalents........... $ 0.36 $ 0.93 $ 0.57 $ (0.17) $ (0.50)
======== ======== ======= ======= =======
Earnings Per Common Share and
Common Share Equivalents,
assuming full dilution*................
Cash Dividends Declared Per
Common Share .......................... $ -- $ -- $ -- $ -- $ 0.20
<FN>
* Earnings per common share and common share equivalents assuming full dilution was either
anti-dilutive or not materially different from earnings per common share in all fiscal
years presented.
</TABLE>
<TABLE>
<CAPTION>
As At June 30
-------------
Balance Sheet Data 1996 1995 1994 1993 1992
- ------------------ -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Total Assets............................ $95,397 $89,739 $65,180 $58,433 $68,442
Working Capital......................... $44,236 $40,983 $28,154 $13,871 $ 1,021
Long-Term Debt.......................... $18,706 $16,250 $16,818 $13,068 $ --
Stockholders' Equity.................... $52,875 $49,039 $34,603 $26,225 $27,248
</TABLE>
<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations.
-------------
(a) (1) and (2) Liquidity and Capital Resources.
-------------------------------
During fiscal year 1996, the Company's principal sources of cash were
receipts on accounts receivable, borrowings under the revolving credit facility
and proceeds from the issuance of common stock or exercise of stock options. The
principal uses of these funds were to make payments on the term loan and to
finance the increase in inventory, as well as acquisitions of property, plant
and equipment.
In fiscal year 1995, the Company's principal sources of cash were proceeds
from the new loan facility and temporary credit facility, exercise of stock
options, and the remaining proceeds from the private equity placement on June
30, 1994. The primary uses of these funds were to repay the Company's previous
bank debt and to finance the increases in accounts receivable, costs and
estimated earnings in excess of billings on uncompleted contracts (costs and
estimated earnings), as well as additions to property, plant and equipment. In
fiscal year 1994, the Company's principal sources of cash were a reduction in
accounts receivable and proceeds from the private equity placement. The
principal uses of these funds was to reduce Company debt, finance increases in
inventory and costs and estimated earnings, as well as acquisitions of property,
plant and equipment.
The increase in accounts receivable of approximately $2.4 million at June
30, 1996 was primarily due to billings on the Company's large cost plus contract
for which payment was received in July 1996. The increase in accounts receivable
in fiscal year 1995 was primarily due to domestic operation progress payment and
delivery billings as well as vending operation billings in June 1995. The
decrease in accounts receivable in fiscal year 1994 was a result of a large
number of deliveries and milestone payments billed in June 1993 for which
payments were received in early fiscal year 1994.
Costs and estimated earnings decreased during fiscal year 1996 due to
significant billings on several of the Company's contracts which were completed
or substantially completed in fiscal year 1996. Costs and estimated earnings
increased during fiscal year 1995 and 1994 as a result of continued progress on
major contracts and due to new contracts for which work began in either late
fiscal year 1993 or early 1994.
Raw material inventory increased during fiscal years 1996 due to the
continued production of vending machines for stock in anticipation of future
sales orders. Raw material inventory increased during fiscal year 1995 and 1994
in order to support production capacity and delivery requirements under a large
bottle vending contract, as well as, other bottle and frozen vending orders.
Work in process inventory increased during fiscal year 1996, primarily due
to the production of common parts which are used for various contracts. Common
parts are allocated based on contract requirements. Work in process inventory
decreased during fiscal year 1995 primarily as a result of the write-off of the
Company's Pop-Up Target claim. (See Note 3 to the Consolidated Financial
Statements for further detail.) In addition, frozen vending units in process as
of June 30, 1994 were completed and sold during early fiscal year 1995.
Prepaid expenses and other increased in fiscal years 1996, 1995 and 1994
primarily due to the recognition of additional deferred tax assets. (See the
components of the deferred tax asset in Note 7 to the Consolidated Financial
Statements.)
<PAGE> 11
The increase in accounts payable at June 30, 1996 and 1995 was primarily
the result of material purchases in the vending operation as well as raw
material purchase requirements under one of the Company's major contracts.
The Company executed two amendments to its loan facility during fiscal year
1996 increasing the maximum allowable borrowings to $25.0 million. (See Note 6
to the Consolidated Financial Statements.) The Company's term loan requires
quarterly principal payments of $750,000 during fiscal year 1997.
The increase in capital in excess of par at June 30, 1996 and 1995 was
primarily the result of the purchase of stock under employee stock purchase
plans, the exercise of stock options, as well as the tax benefit received from
the exercise of employee stock options under one of the Company's stock option
plans. In fiscal year 1995, the increase was offset by the retirement of 50,000
shares of treasury stock.
On June 30, 1994, the Company placed privately approximately $8.0 million
of its $0.10 par value common stock through the sale of 687,000 shares at $12.00
per share. The placement included an option for each purchaser to acquire an
equivalent number of shares within the subsequent twelve months at $16.00 per
share. No such options were exercised. Net proceeds from the offering were
approximately $7.9 million, of which $2.9 million was received in June of fiscal
year 1994. The remaining proceeds were received during fiscal year 1995.
The Company anticipates spending approximately $4.2 million for new
machinery and equipment, computers and to continue to refurbish the Orlando
facility during fiscal year 1997.
Due to the continued growth of the U.K. operation, the Company signed a new
lease during fiscal year 1996 for approximately 50,000 square feet near the
existing UK leased facility. The lease expires in June 2016 with a lease break
option in 2002.
Other than as stated above, the Company has no other material commitments
for capital expenditures. Management believes that with the funds available
under its loan facility and its projected cash flow the Company will have
sufficient resources to meet current and future operating commitments.
<PAGE> 12
(3) Results of Operations.
---------------------
1996 Compared with 1995.
-----------------------
The Company had a net profit of $2.9 million in fiscal year 1996, a
decrease of 60.7% versus fiscal year 1995 net profit of $7.3 million. The
decrease in profitability is primarily the result of low sales volume in the
vending division as well as changes in contract mix and adjustments to certain
domestic and UK contracts. Sales volume in the vending division was low as the
large vending order from a major customer was completed during the second/third
quarter of fiscal year 1996 and not replaced with another large order. The
decrease in sales volume in the vending division was more than offset by
increases in volume in both the domestic and U.K. training divisions.
Gross margin decreased as a percentage of sales in fiscal year 1996 as
compared to fiscal year 1995. This decrease was due to gross margin adjustments
on certain contracts of the domestic and U.K. training operations, lack of
volume in the vending division, as well as other factors. The decrease in the
domestic training operation is largely the result of the Company's continued
change in contract mix. While the Company has experienced an increase in volume
on its large domestic cost plus type contracts, these contracts generally yield
lower gross margins than the fixed price type. A downward adjustment was taken
in gross margin on the Company's large domestic cost plus type contract during
the second half of fiscal year 1996. This adjustment was due to revised
manufacturing costs to complete based upon the initial unit production under the
contract. Also, adjustments were taken to the gross margin of two fixed price
domestic contracts primarily due to protracted acceptance schedules which
resulted in higher than previously anticipated costs. These adjustments were
partially offset by the recognition of revenue associated with an Economic Price
Adjustment Claim filed during the fourth quarter of fiscal year 1996. (See Note
3 and 11 to the Consolidated Financial Statements).
Gross margin of the U.K. operation decreased due to adjustments on two
major contracts. The first contract adjustment resulted from customer
requirements for extended testing on trainers. The second contract adjustment
was the result of completion of the design phase on the contract which led to a
clarification of the complexity of detailed specifications. The extended testing
on one contract and recognition of the increased complexity of the trainer on
another contract resulted in higher estimated costs than previously anticipated.
In addition, the gross margin in the vending division decreased
substantially in fiscal year 1996 as compared to fiscal year 1995. The vending
division completed its large vending order to a major customer during the
second/third quarter of fiscal year 1996 and did not replace it with another
large order. As a result, efficiencies were not achieved due to low production
volumes and fixed costs were marginally covered. The vending division's
financial performance improved during the fourth quarter of fiscal year 1996 due
to increased volume and management expects to see continued improvement in
fiscal year 1997.
Selling, general and administrative costs of the Company increased 19.5% or
$2.5 million in fiscal year 1996 as compared to fiscal year 1995. The increase
was primarily the result of higher salaries and advertising costs in the vending
division as marketing efforts are expanded, as well as higher bid and proposal
costs of the domestic and UK training divisions in order to meet increased
business opportunities.
<PAGE> 13
Systems development expense decreased in fiscal year 1996 as a result of
the reduction of development costs associated with the new model
frozen/refrigerated vending machine which is now in production.
Interest income decreased in fiscal year 1996 as interest due the Company
based on the IRS look-back method of accounting for completed contracts was
substantially lower than the amount received in the previous fiscal year.
Interest expense increased marginally in fiscal year 1996 due to higher
borrowings under the Company's revolving credit agreement.
<PAGE> 14
1995 Compared with 1994.
-----------------------
ECC had a net profit of $7.3 million in fiscal year 1995, an increase of
86.3% versus fiscal year 1994 net profit of $3.9 million. This increase in
profitability reflects a 70% increase in sales over the prior year. The increase
in sales is primarily the result of increased volume Company wide. Sales
increased in fiscal year 1995 by $17.0 million, $21.8 million and $5.5 million
in the domestic training, vending and U.K. training operations, respectively.
The sales increase of $21.8 million in the vending operation was primarily the
result of continued production of bottle vending machines under a contract
procured during late fiscal year 1994. The increase in U.K. operation sales is
the result of continued progress under an existing contract as well as progress
on a $19.5 million contract received in early fiscal year 1995.
Gross margin decreased as a percent of sales in fiscal year 1995 as
compared to fiscal year 1994. This decrease was due to gross margin adjustments
on certain contracts of the domestic training and U.K. training operations as
well as other factors. An adjustment was taken to a cost plus incentive fee
contract of the domestic training operation in fiscal year 1995 due to higher
than originally anticipated costs. In addition, during fiscal year 1995 there
was an increase in volume on certain cost-type contracts which typically yield
lower gross margins than the Company's typical fixed price contracts. The
write-off of costs associated with the Company's Pop-Up-Target claim as
disclosed in Note 3 to the Consolidated Financial Statements further reduced
gross margin in the domestic training operation during fiscal year 1995.
Gross margin as a percent of sales of the U.K. training operation decreased
substantially in fiscal year 1995 versus fiscal year 1994. This decrease was the
result of additional training requirements being identified on an existing
contract, resulting in a reduction of contract gross margin. Also, a contract
received in fiscal year 1995 contains a substantial amount of subcontract effort
which results in a lower than normal gross margin.
These decreases in gross margin were partially offset by the gross margin
of the vending operation which improved from a loss in fiscal year 1994 to a
gross margin contribution in fiscal year 1995. The Company recorded a charge to
Vending Cost of Sales of $891,000 during the fourth quarter of fiscal year 1995,
primarily the result of a standard cost revision and an inventory book to
physical adjustment. Vending operation margins are expected to continue to
improve as efficiencies are being gained and production costs come further in
line with management projections. With the expiration of the exclusivity period
in the Snapple contract on March 31, 1995, the Company has been marketing its
bottle vending machine to several beverage companies and vending operators
through its vending distributor network.
Selling, general and administrative costs of the Company increased 11.5% or
$1.3 million in fiscal year 1995 as compared to fiscal year 1994. The increase
was primarily the result of higher salaries, technical support costs, marketing
rep commissions, consulting fees and outbound freight costs related to the
vending operation as well as an increase in selling, general and administrative
costs in the U.K. operation. These increases were partially offset by a
reduction in bid and proposal costs and legal expenses in the domestic
operation.
Systems development expense increased in fiscal year 1995 as a result of
development costs primarily associated with the frozen vending machine which
began production in late fiscal year 1995.
<PAGE> 15
Interest income increased in fiscal year 1995 as a result of interest due
the Company based on the IRS look-back method of accounting for completed
contracts which was greater than the amount received in the previous year.
Interest expense decreased in fiscal year 1995 as a result of the Company's
new loan facility which was negotiated under more favorable terms.
Other, net changed from an expense in fiscal year 1994 to income in fiscal
year 1995 primarily due to the absence, in fiscal year 1995, of IRS late payment
penalties relative to tax deposits as well as reduced bank fees.
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112 "Employers' Accounting for Post Employment
Benefits." SFAS No. 112 requires recognition of the cost of certain benefits
paid to former or inactive employees on an accrual basis and principally affects
the Company's accounting for disability benefits. The impact of adopting SFAS
No. 112 was immaterial.
1994 Compared with 1993.
-----------------------
ECC had a net profit of $3.9 million in fiscal year 1994 versus a net loss
of $1.0 million in fiscal year 1993. This return to profitability was due to the
increase in gross margin of the domestic operation partially offset by the
reduction of gross margin of the U.K. operation.
The 11.6% increase in gross margin as a percent of sales of the domestic
operation in fiscal year 1994 was due to the substantial completion in fiscal
year 1993 of the C-17A development contract which due to higher than projected
costs in fiscal year 1993 had substantially reduced fiscal year 1993 gross
margin. However, fiscal year 1994 gross margin as a percent of sales was not
affected by the remaining effort required on the C-17A development contract as
the higher costs to complete this contract had been recognized in prior fiscal
years. In addition, the Company received several new contracts during fiscal
year 1994 for copies of trainers and training systems previously built by ECC
and these contracts are yielding slightly higher gross margins than originally
projected. Partially offsetting the increases in domestic gross margins referred
to above were higher completion costs and unanticipated late charges on certain
contracts which were substantially completed or completed in fiscal year 1993.
In addition, the Company suffered a loss of gross margin on the new bottle
vending operation. This loss was the result of higher start-up costs than had
originally been projected.
The gross margin as a percent of sales of the U.K. operation decreased 8.8%
in fiscal year 1994 versus fiscal year 1993. This decrease was the result of the
completion of a certain contract in fiscal year 1993 with an unusually high
gross margin. The fiscal year 1994 gross margin returned to more normal Company
levels.
ECC filed claims for additional costs the Company incurred for work
performed on three "build-to-print" Pop-Up Target contracts for the U.S. Army.
ECC's claims sought over $3.0 million, based on deficient technical packages
provided to ECC as conceded by the Army. (See Results of Operations 1995
compared with 1994.)
<PAGE> 16
The U.S. Army, under the auspices of the Department of Defense Inspector
General (DoD IG), investigated the Company's claims relative to the Pop-Up Tank
Targets. The Company was subsequently informed by the Assistant United States
Attorney, with responsibility for the investigation, that the investigation was
concluded and that no legal action would be taken against the Company, having
concluded that the claim submissions merited no further investigatory attention.
Selling, general and administrative costs of the Company in fiscal year
1994 increased by $1.5 million or 15% as compared to fiscal year 1993. This
increase was primarily the result of higher salaries, management incentive,
profit sharing and marketing rep fees. The increase in management incentive and
profit sharing are due to the fact that these expenses were not incurred in
fiscal year 1993 due to the loss the Company sustained. The Company continued to
expand its foreign marketing efforts which, therefore, increased marketing rep
fees. These increases were partially offset by reductions in bid and proposal
costs and the selling, general and administrative costs of the U.K. operation.
Systems development expense decreased by $0.5 million or 48% from fiscal
year 1993. This substantial decrease was the result of systems development
personnel being assigned to production and engineering requirements in other
areas.
Interest payable to the Company in fiscal year 1994 on the IRS look-back
method of accounting for completed contracts was greater than the amount payable
in fiscal year 1993. As a result, interest income in fiscal year 1994 increased
versus interest income in fiscal year 1993.
Interest expense decreased by $0.7 million in fiscal year 1994 due
primarily to the reduction of the Company's overall debt, however, interest
rates did increase slightly offsetting a portion of the overall decrease in
interest expense.
Other net, expense in fiscal year 1994 decreased $0.3 million versus fiscal
year 1993. This reduction was due to fewer intercompany transactions between the
U.K. operation and the domestic operation and a more stable U.S. dollar to pound
sterling exchange rate during fiscal year 1994. In addition, in fiscal year 1993
the bank agreement required the elimination of the U.K. pound denominated line
of credit which subjected certain borrowings to the exchange fluctuation which
were very dramatic and costly during fiscal year 1993. This reduction in cost
was partially offset by IRS late payment penalties relative to tax deposits.
Certain Factors That May Affect Future Operating Results
--------------------------------------------------------
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
changes in government spending, cancellation of weapons programs, delays in
contract awards, delays in the acceptance process of contract deliverables, the
Company's continued ability to develop and introduce products in both its
training division and newly formed vending subsidiary, the introduction of new
products by competitors, pricing practices of competitors, the cost and
availability of parts and the Company's ability to control costs.
<PAGE> 17
To date, a substantial portion of the Company's revenues have been
attributable to long-term contracts with various government agencies. As a
result, any factor adversely affecting procurement of long-term government
contracts could have a material adverse affect on the Company's financial
condition and results of operations.
The Company's vending subsidiary completed a large vending order to a major
customer during fiscal year 1996 and, to date, has not replaced it with another
large order. The vending subsidiary is presently in negotiations with several
potential customers and any factor adversely affecting the Company's ability to
obtain sales orders for its vending products may have a material adverse affect
on the Company's financial condition and results of operations.
Because of these and other factors, past financial performance should not
be considered an indication of future performance. The Company's future
quarterly operating results may vary significantly, depending on factors such as
the timing of contract awards or potentially lengthly sales cycles for the
vending products. Investors should not use historical trends to anticipate
future results and should be aware that the trading price of the Company's
Common Stock may be subject to wide fluctuations in response to quarterly
variations in operating results and other factors, including those discussed
above.
<PAGE> 18
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
Index to Consolidated Financial Statements Page(s)
- ------------------------------------------ -------
Report of Independent Accountants 19
Consolidated Statements of Operations for the Fiscal Years
Ended June 30, 1996, 1995 and 1994 20
Consolidated Balance Sheets, June 30, 1996 and 1995 21
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended June 30, 1996, 1995 and 1994 22-23
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 1996, 1995 and 1994 24-25
Notes to Consolidated Financial Statements 26-43
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
the Board of Directors of
ECC International Corp.
We have audited the consolidated financial statements of ECC International Corp.
and Subsidiaries listed in the index on Page 18 of this Form 10-K. These
consolidated 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ECC International
Corp. and Subsidiaries as of June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
August 20, 1996
<PAGE> 20
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net Sales......................................................... $117,156 $107,607 $63,301
Cost of Sales ..................................................... 95,712 82,060 43,711
-------- -------- -------
Gross Profit ...................................................... 21,444 25,547 19,590
-------- -------- -------
Expenses:
Selling, General & Administrative ............................ 15,030 12,574 11,275
Systems Development .......................................... 407 1,239 557
-------- -------- -------
Total Expenses ........................................... 15,437 13,813 11,832
-------- -------- -------
Operating Income .................................................. 6,007 11,734 7,758
-------- -------- -------
Other Income (Expense):
Interest Income .............................................. 244 877 346
Interest Expense ............................................. (1,570) (1,487) (1,720)
Other - Net .................................................. (158) 47 (534)
-------- -------- -------
Total Other (Expense) .................................... (1,484) (563) (1,908)
-------- -------- -------
Income Before Income Taxes ........................................ 4,523 11,171 5,850
Provision for Income Taxes ........................................ 1,645 3,853 1,921
-------- -------- -------
Net Income ........................................................ $ 2,878 $ 7,318 $ 3,929
======== ======== =======
Earnings Per Common Share and
Common Share Equivalents......................................... $ 0.36 $ 0.93 $ 0.57
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED BALANCE SHEETS as of June 30, 1996 and 1995
- ---------------------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current:
Cash ................................................ $ 5,057 $ 3,535
Accounts Receivable, Net ............................ 11,136 8,778
Costs and Estimated Earnings in Excess of Billings
on Uncompleted Contracts ........................... 35,251 39,752
Inventories ......................................... 12,984 10,035
Prepaid Expenses and Other .......................... 2,190 1,764
------- -------
Total Current Assets ........................... 66,618 63,864
Property, Plant and Equipment, Net ...................... 26,686 24,007
Other Assets ............................................ 2,093 1,868
------- -------
Total Assets ................................... $95,397 $89,739
======= =======
LIABILITIES
Current:
Temporary Credit Facility ........................... $ -- $ 2,534
Current Portion of Long-Term Debt ................... 4,272 3,600
Accounts Payable .................................... 10,967 7,197
Advances on Long-Term Contracts ..................... 856 1,395
Accrued Expenses .................................... 6,287 8,155
------- -------
Total Current Liabilities ...................... 22,382 22,881
------- -------
Deferred Income Taxes ................................... 1,434 1,569
------- -------
Long-Term Debt .......................................... 18,706 16,250
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.10 par; authorized, 20,000,000 shares;
issued and outstanding, 1996 and 1995,
7,833,143 and 7,657,846 shares, respectively .......... 782 766
Preferred Stock, $0.10 par; authorized, 1,000,000
shares; none issued and outstanding in 1996 and 1995 .. -- --
Capital in Excess of Par ................................ 22,831 21,822
Retained Earnings ....................................... 29,284 26,406
Cumulative Translation Adjustment ....................... (22) 45
------- -------
Total Stockholders' Equity ..................... 52,875 49,039
------- -------
Total Liabilities and Stockholders' Equity ..... $95,397 $89,739
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 22
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Fiscal Years Ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
<CAPTION>
Capital Stock Cumulative Total
Common In Excess Retained Subscription Translation Treasury Stockholders'
Stock of Par Earnings Receivable Adjustment Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 623 10,935 15,159 -- (89) (403) 26,225
Net Income -- -- 3,929 -- -- -- 3,929
Stock Issued:
Employee Stock Purchase
Plan - 107,587 Shares 11 316 -- -- -- -- 327
Exercise of Options -
514,206 Shares 51 1,085 -- -- -- -- 1,136
Private Placement
687,000 shares 69 7,867 -- (5,012) -- -- 2,924
Translation Adjustment -- -- -- -- 62 -- 62
---- ------- ------- ------- ---- ----- -------
Balance, June 30, 1994 754 20,203 19,088 (5,012) (27) (403) 34,603
---- ------- ------- ------- ---- ----- -------
Net Income -- -- 7,318 -- -- -- 7,318
Stock Issued:
Employee Stock Purchase
Plan - 53,713 Shares 6 505 -- -- -- -- 511
Exercise of Options -
116,748 Shares 11 256 -- -- -- -- 267
Private Placement
687,000 shares -- -- -- 5,012 -- -- 5,012
Stock Retired:
Treasury Stock
50,000 Shares (5) (398) -- -- -- 403 --
Income Tax Reduction
Relating to Stock Options -- 1,256 -- -- -- -- 1,256
Translation Adjustment -- -- -- -- 72 -- 72
---- ------- ------- ------- ---- ----- -------
Balance, June 30, 1995 $766 $21,822 $26,406 $ -- $ 45 $ -- $49,039
---- ------- ------- ------- ---- ----- -------
</TABLE>
<PAGE> 23
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
For the Fiscal Years Ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
<CAPTION>
Capital Stock Cumulative Total
Common In Excess Retained Subscription Translation Treasury Stockholders'
Stock of Par Earnings Receivable Adjustment Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income -- -- 2,878 -- -- -- 2,878
Stock Issued:
Employee Stock Purchase
Plan - 63,285 Shares 6 517 -- -- -- -- 523
Exercise of Options -
102,012 Shares 10 272 -- -- -- -- 282
Income Tax Reduction
Relating to Stock Options -- 220 -- -- -- -- 220
Translation Adjustment -- -- -- -- (67) -- (67)
---- ------- ------- ---- ---- ---- -------
Balance, June 30, 1996 $782 $22,831 $29,284 $ -- $(22) $ -- $52,875
==== ======= ======= ==== ==== ==== =======
</TABLE>
Common shares issued and outstanding at June 30, 1993 and 1994 were 6,228,592
and 7,657,846 shares, respectively.
See accompanying notes to the consolidated financial statements.
<PAGE> 24
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In Thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Income ........................................................................... $ 2,878 $ 7,318 $ 3,929
Items Not Requiring Cash:
Depreciation ................................................................ 3,825 3,420 3,350
Provision for Doubtful Accounts ............................................. 84 51 --
Deferred Income Taxes ....................................................... (675) (79) (110)
Changes in Certain Assets and Liabilities:
Accounts Receivable ..................................................... (2,442) (5,644) 3,477
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts .................................................. 4,501 (16,831) (7,222)
Inventories ............................................................. (2,949) (164) (1,877)
Prepaid Expenses and Other .............................................. 114 (50) 214
Accounts Payable ........................................................ 3,770 3,326 750
Advances on Long-Term Contracts ......................................... (539) 1,310 (1,781)
Accrued Expenses ........................................................ (1,868) 737 3,514
------- -------- -------
Net Cash (Used In)/Provided By Operating Activities ........................... 6,699 (6,606) 4,244
------- -------- -------
Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment .................................... (6,504) (4,310) (2,109)
Other ......................................................................... (292) (11) 90
------- -------- -------
Net Cash Used In Investing Activities ......................................... (6,796) (4,321) (2,019)
------- -------- -------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock, Options
Exercised and Warrants, Including Related Tax Benefit ....................... 1,025 7,046 4,387
New Borrowings Under Term Loan ................................................ -- 9,000 --
Repayments Under Term Loan .................................................... (3,000) (750) --
New Borrowings Under Revolving Credit Facilities, Net ......................... 3,594 14,134 --
Repayments Under Revolving Credit Agreement
and Notes Payable ........................................................... -- (17,568) (5,000)
------- -------- -------
Net Cash Provided By/(Used In) Financing Activities ........................... 1,619 11,862 (613)
------- -------- -------
Net Increase in Cash ............................................................. 1,522 935 1,612
------- -------- -------
Cash at Beginning of the Period .................................................. 3,535 2,600 988
------- -------- -------
Cash at End of the Period......................................................... $ 5,057 $ 3,535 $ 2,600
======= ======== =======
</TABLE>
<PAGE> 25
ECC International Corp. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended June 30, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------------------
<CAPTION>
(In Thousands)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest .......................................................... $1,665 $1,189 $1,701
Income Taxes ...................................................... $2,766 $2,839 $1,223
Supplemental Schedule of Noncash Investing and Financing Activities:
Retirement of Treasury Stock ...................................... -- 403 --
Common Stock issued in exchange for Stock
Subscription Receivable .......................................... -- -- 5,012
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ECC International Corp. and Subsidiaries
- ----------------------------------------
1. Significant Accounting Policies.
-------------------------------
Consolidation.
-------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany transactions have been
eliminated in consolidation.
Revenue and Cost Recognition.
----------------------------
Defense.
-------
Contract sales and costs are recognized using the percentage of
completion method, measured by the ratio of costs incurred to date to
estimated total costs. The Company does not anticipate that its
financial condition will be materially affected by contract costs in
excess of amounts accrued.
Contract costs include all direct labor and material costs and those
indirect costs related to contract performance, such as indirect
labor, supplies and depreciation.
Costs incurred for specific anticipated contracts are deferred and
included in contract sales and costs when the contract award is
assured. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Claims are
considered in the estimated contract performance at such time as the
amount to be recognized is reasonably determinable and probable.
The asset, costs and estimated earnings in excess of billings on
uncompleted contracts, consists principally of contract revenue for
which billings have not been presented, as such amounts were not
billable at the balance sheet date. Substantially all of these amounts
will be billed in the following fiscal year.
Vending.
-------
Sales and average cost of units produced under a contract are
recognized as deliveries are made.
Use of Estimates.
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> 27
Advertising.
-----------
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. Advertising expense was $354,000, $51,000
and $67,000 for fiscal years 1996, 1995 and 1994, respectively.
Inventories.
-----------
Work in process and finished goods inventory are valued using the specific
identification cost method, but not in excess of net realizable value. Raw
materials and vending division inventories are valued at lower of average
cost or market.
Property and Depreciation.
-------------------------
Property, plant and equipment is stated at cost. Depreciation is provided
on the straight- line method over the estimated useful lives of the
respective assets as follows: buildings 15 to 30 years; machinery and
equipment 3 to 10 years; and demonstration and test equipment 5 years.
Applicable asset and accumulated depreciation accounts are reduced for the
sale or other disposition of property and the resulting gain or loss is
included in income.
Impairment of Long Lived Assets.
-------------------------------
In the event that facts and circumstances indicate that the cost of
property, plant and equipment may be impaired an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required.
Income Taxes.
------------
The Company recognizes deferred income taxes by applying enacted statutory
tax rates, applicable to future years, to temporary differences between the
tax bases and financial statement carrying values of the Company's assets
and liabilities.
Earnings Per Share.
------------------
Earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year.
<PAGE> 28
Earnings per common share assuming full dilution is determined by dividing
net income by the weighted average number of common shares outstanding
during the year after giving effect to the exercise of outstanding stock
options assumed converted to common stock. The calculation of earnings per
common share and common share equivalents assuming full dilution was either
anti-dilutive or not materially different from earnings per common share in
1996, 1995 and 1994. The weighted average number of common and common stock
equivalents outstanding during 1996, 1995 and 1994 were 7,889,345,
7,894,181 and 6,891,033, respectively.
Employee Benefit Plans.
----------------------
The Company has a profit sharing plan which covers all employees who work
in excess of 1,000 hours per year. Minimum contributions are based on
income before income taxes, subject to limitations based on employee
compensation and certain other restrictions defined in the plan document.
Contributions of $2,698,533, $3,124, 112 and $1,929,004 were accrued in the
years ended June 30, 1996, 1995 and 1994, respectively of which $2,698,533,
$2,451,940 and $649,047 were paid during the respective fiscal year.
The Company also has a savings and investment plan which covers all
employees. Employer contributions are based on a percentage of employee
contributions and certain other restrictions defined in the plan document.
Employer contributions of $640,354, $552,394 and $514,101 were accrued and
paid in the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
The Company's policy is to fund amounts accrued.
Statement of Financial Accounting Standards Not Yet Adopted.
-----------------------------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock
Based Compensation." The Company is required to adopt this standard no
later than fiscal year 1997. The provisions of SFAS No. 123 established
accounting standards, requiring recognition of expense for stock options
based on an option pricing model, as well as certain financial statement
disclosure requirements for all employee stock compensation plans. If the
accounting standards defined in the statement are not adopted, additional
pro-forma disclosures must be made as though the standards had been
applied. The Company is evaluating the provisions of SFAS No. 123, but has
not yet made a decision on whether to follow the provisions of SFAS No. 123
or APB No. 25 when accounting for employee stock options.
<TABLE>
2. Accounts Receivable.
-------------------
<CAPTION>
(In Thousands)
1996 1995
------- ------
<S> <C> <C>
Contract Receivables, Billed Amounts .. $ 7,748 $5,876
Commercial Vending Receivables ........ 3,224 2,211
Other ................................. 299 742
Allowance for Doubtful Accounts ....... (135) (51)
------- ------
Total ............................. $11,136 $8,778
======= ======
</TABLE>
<PAGE> 29
Contract receivables include amounts under long-term contracts and
subcontracts principally with the U.S. Government, or its contractors, and
the United Kingdom Ministry of Defense or its contractors. Commercial
vending receivables consist of amounts due from a variety of geographically
disbursed vending customers at June 30, 1996.
The provision for doubtful accounts, related to the vending operation,
included in Selling, General and Administrative expense was $84,000 and
$50,800 in fiscal year 1996 and 1995, respectively.
<TABLE>
3. Inventories.
-----------
<CAPTION>
(In Thousands)
1996 1995
------- -------
<S> <C> <C>
Finished Goods ................. $ 1,888 $ 1,140
Work in Process ................ 3,069 1,998
Raw Materials .................. 8,027 6,897
------- -------
Total ...................... $12,984 $10,035
======= =======
</TABLE>
During fiscal year 1996, the Company submitted a claim for contract
adjustment under the Economic Price Adjustment (EPA) provisions of a major
contract seeking approximately $950,000. The value of the claim is included
in costs and estimated earnings in excess of billings on uncompleted
contracts. (See Note 11 Summary of Quarterly Results.)
The Company also submitted a claim for the effects of a Stop Work Order
issued on one of its contracts in the amount of $191,000, of which $150,000
was deferred in inventory as of June 30, 1996. The claim represents the
cost of idle time resulting from the Stop Work Order as well as the effect
of the release of the Stop Work Order.
In prior years, the Company filed claims against the U.S. Government for
additional costs incurred on three "build-to-print" Pop-Up Target contracts
seeking over $3.0 million. After several years of litigation, the Armed
Services Board of Contract Appeals issued a decision awarding the Company
minimal damages on its claim. The Company appealed the Board's decision to
the United States Court of Appeals for the Federal Circuit which denied the
Company's appeal during fiscal year 1995. Accordingly, the Company recorded
a one time write-off of costs included in inventory amounting to $994,000
in the second quarter of fiscal year 1995.
During fiscal year 1994, due to various facts and circumstances the Company
elected not to pursue certain equitable adjustments previously submitted
and accordingly wrote off $700,000 deferred in inventory relative to the
equitable adjustments.
<PAGE> 30
<TABLE>
4. Property, Plant and Equipment.
-----------------------------
<CAPTION>
(In Thousands)
1996 1995
------- -------
<S> <C> <C>
Land .................................. $ 2,411 $ 2,411
Buildings ............................. 21,548 19,940
Machinery and Equipment ............... 24,484 20,350
Demonstration and Test Equipment ...... 9,528 8,765
------- -------
Total ............................. 57,971 51,466
Less Accumulated Depreciation ......... 31,285 27,459
------- -------
Total ............................. $26,686 $24,007
======= =======
</TABLE>
Repairs and maintenance expense for the fiscal years ended June 30, 1996,
1995 and 1994 were $985,000, $760,000 and $569,000, respectively.
<TABLE>
5. Accrued Expenses.
----------------
(In Thousands)
1996 1995
------ ------
<S> <C> <C>
Compensation ........................... $2,298 $2,669
Accrued Vacation ....................... 1,580 1,424
Profit Sharing Contribution ............ -- 672
Federal/State Income Tax Payable ....... 238 930
Other .................................. 2,171 2,460
------ ------
Total .............................. $6,287 $8,155
====== ======
</TABLE>
<TABLE>
6. Temporary Credit Facility and Long-Term Debt.
--------------------------------------------
<CAPTION>
(In Thousands)
1996 1995
------- -------
<S> <C> <C>
Revolving Credit Facility and Term Loan (Bank) ..... $22,978 $19,850
Less Current Portion ............................... 4,272 3,600
------- -------
Total .......................................... $18,706 $16,250
======= =======
</TABLE>
On September 20, 1994, the Company entered into a loan facility ("Loan
Facility") with a bank totaling $20.0 million. The loan facility originally
consisted of a $9.0 million term loan, and an $11.0 million revolving
credit facility which included $2.0 million of revolving credit available
in the British Sterling equivalent for the Company's wholly owned
subsidiary, ECC Simulation Limited. Proceeds from the loan facility were
used to pay the outstanding balance under the Company's revolving credit
facility with its primary lender at June 30, 1994.
<PAGE> 31
On April 6, 1995, the Company executed the First Amendment to its loan
facility providing for a temporary increase in its line of credit. The
Amendment allowed the Company to borrow up to $13 million under the
revolving credit portion of the loan facility. The terms of the amendment
required that borrowings under the increased line ($2.0 million) be repaid
on, the earlier of, the date of the Company's receipt of a certain contract
delivery payment or September 30, 1995. Thereafter, the original terms of
the loan facility were re-instated. Borrowings under the amended portion of
the loan facility were $600,000 at June 30, 1995 and were repaid during the
first quarter of fiscal year 1996.
Concurrent with the First Amendment to the loan facility, the Company's
wholly owned subsidiary, ECC Simulation Limited executed a separate
Temporary Credit Facility ("Temporary Facility") totalling $4.0 million
available in the British Sterling equivalent and expiring on September 30,
1995. Outstanding amounts under the Temporary Facility were due on demand.
Total borrowings under the Temporary Facility were $2.5 million at June 30,
1995 and were repaid during the first quarter of fiscal year 1996.
On June 19, 1996, the Company executed the Second Amendment to its Loan
Facility providing for an increase in its line of credit and extending the
expiration date of the revolving credit portion of the Loan Facility to
September 30, 1998. The expiration date of the Term Loan remains September
1997. The Second Amendment allows the Company to borrow up to an aggregate
of $25.0 million under its Loan Facility. The Second Amendment also
increased the portion of credit available in the British Pound Sterling
equivalent for the Company's wholly owned subsidiary, ECC Simulation
Limited, to $7.5 million through but not including October 30, 1996 and
$5.0 million thereafter. The Company's total borrowings including face
amount of letters of credit outstanding may not exceed $25.0 million. All
other terms of the Loan Facility were unchanged.
Interest is payable quarterly in arrears at a rate defined in the
agreement. The Company is required to pay certain fees on an annual basis
as calculated by the bank. The revolving credit commitment fee is equal to
.25% per annum on the total outstanding balance. A Standby Letter of Credit
fee is equal to 1% per annum plus issuance costs.
The loan facility includes certain covenants related to, among other
things, maintaining a minimum fixed charge coverage ratio, debt to equity
ratio and current ratio. In addition, substantially all of the assets of
the Company are pledged as collateral for the loan facility.
The Company did not comply with the minimum fixed charge coverage ratio or
the maximum allowable expenditures for fixed assets covenants at June 30,
1996 and accordingly has received irrevocable waivers with respect to such
covenants from its bank lenders.
<TABLE>
Aggregate maturities under the Revolving Credit Facility and Term Loan are
as follows:
<CAPTION>
(In Thousands)
<S> <C>
1997 4,272
1998 18,706
-------
Total $22,978
=======
</TABLE>
<PAGE> 32
7. Income Taxes.
------------
<TABLE>
The domestic and foreign components of income before income taxes are
presented below:
<CAPTION>
(In Thousands)
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Domestic ..................... $4,985 $10,761 $5,217
Foreign ...................... (462) 410 633
------ ------- ------
Total ................... $4,523 $11,171 $5,850
====== ======= ======
</TABLE>
<TABLE>
The components of the provision for income taxes are as follows:
<CAPTION>
(In Thousands)
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Current:
Federal ................. $2,207 $3,641 $1,969
State ................... 140 261 62
Foreign ................. (27) 30 --
------ ------ ------
Subtotal ............ 2,320 3,932 2,031
------ ------ ------
Deferred:
Federal ................. $ (663) $ (45) $ (144)
State ................... (12) (34) 34
------ ------ ------
Subtotal ............ (675) (79) (110)
------ ------ ------
Provision for Income Taxes ... $1,645 $3,853 $1,921
====== ====== ======
</TABLE>
The Company utilized $951,000 and $1.9 million of Florida net operating
loss carryforwards to reduce fiscal year 1995 and fiscal year 1994 Florida
income taxes payable, respectively.
The Company also utilized $244,998 of Pennsylvania net operating loss
carryforwards to reduce fiscal year 1996 Pennsylvania income taxes payable.
<PAGE> 33
<TABLE>
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities are as follows for the years
ended June 30:
<CAPTION>
(In Thousands)
1996 1995
---- ----
Asset Liability Asset Liability
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Revenue Recognized on Completed
Contract for Tax Return and on
Percentage of Completion for
Financial Reporting ................. $ 132 $ -- $ 436 $ --
Foreign Net Operating Loss ............ 275 -- 116 --
Difference between Book and
Tax Depreciation .................... -- 1,375 -- 1,469
Capitalized Bid and Proposal Expense .. 671 -- 134 --
Accruals Not Currently Deductible ..... 747 59 440 100
------ ------ ------ ------
Subtotal .......................... 1,825 1,434 1,126 1,569
Valuation Allowance ................... (275) -- (116) --
------ ------ ------ ------
Total ............................. $1,550 $1,434 $1,010 $1,569
====== ====== ====== ======
</TABLE>
<TABLE>
These deferred tax assets and liabilities are included in/or classified as
follows on the balance sheet at June 30:
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Prepaid Expenses and Other ..................... $1,550 $1,010
Non-current deferred income tax liabilities .... 1,434 1,569
</TABLE>
<TABLE>
Differences between the statutory U.S. Federal Income Tax rate and the
effective income tax rate reported in the financial statements are as follows
at June 30:
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal Statutory Rates .......................... 34.0% 34.0% 34.0%
Increase in Taxes Resulting From:
State Income Taxes (after deducting
federal income tax benefit) .................. 0.6% 1.5% 0.7%
Foreign Net Operating Loss Carryforward ...... (2.5%) (2.2%) (3.7%)
Other ........................................ 4.3% 1.2% 1.8%
---- ---- ----
Total Provision for Income Taxes ................. 36.4% 34.5% 32.8%
==== ==== ====
</TABLE>
<PAGE> 34
The Company realized an income tax benefit of $220,000 and $1,256,000
during fiscal year 1996 and 1995, respectively, related to the exercise of
certain employee stock options which are recognized as employee
compensation for tax purposes, however, not for financial reporting
purposes. This tax benefit was credited to Capital in Excess of Par.
8. Financial Instruments.
---------------------
Off Balance Sheet Risk.
-----------------------
As collateral for performance and advances on certain long-term contracts,
the Company is contingently liable under standby letters of credit in the
amount of $267,763 at June 30, 1996. The standby letters of credit are in
force through August 6, 1997 subject to extension and the Company pays a
fee to its primary lender of 1% per annum of their face value. If the
Company were required to obtain replacement standby letters of credit as of
June 30, 1996 for those currently outstanding, it is the Company's opinion
that the replacement cost for such standby letters of credit would not
significantly vary from the present fee structure.
Concentrations of Credit Risk.
------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Except for U.S. and foreign government agencies, concentration of credit
risk with respect to accounts receivable are limited, due to the large
number of customers comprising the Company's customer base and their
dispersion among many different geographies. The Company generally does not
require collateral or other security to support customer receivables.
Fair Value of Financial Instruments.
------------------------------------
<TABLE>
At June 30, 1996, the carrying amounts and fair values of the Company's
financial instruments are listed below.
<CAPTION>
(In Thousands) Carrying Fair
-------------- -------- ----
Value Value
----- -----
<S> <C> <C>
Term Loan $ 5,250 $ 4,900
Revolving Credit Facility 17,728 17,728
Standby Letters of Credit -- 268
</TABLE>
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues of debt with similar terms and
remaining maturities.
The fair value of Standby Letters of Credit are based on fees currently
charged for similar agreements.
<PAGE> 35
9. Stockholders' Equity.
--------------------
Under the Company's Qualified Stock Option Plans, directors, officers and
certain key employees may purchase the Company's Common Stock at 100% of
the fair market value of the shares on the date of grant. Options are
exercisable up to 10 years from the date granted.
<TABLE>
A summary of transactions for the fiscal years ended June 30, 1996, 1995
and 1994 are as follows:
<CAPTION>
Shares Shares Average
Available Under Option Price
For Option Option Per Share
---------- ------ ---------
<S> <C> <C> <C>
Balance at June 30, 1993............................... 18,125 284,250 $ 6.91
Terminated............................................. 6,250 (6,250) $ 7.24
Exchange Program
Terminated......................................... 278,024 (278,024) $ 6.91
Reissued........................................... (139,012) 139,012 $ 2.375
Exercised.............................................. -- (110,178) $ 2.375
-------- -------- -------
Balance at June 30, 1994............................... 163,387 28,810 $ 2.375
Granted................................................ (10,000) 10,000 $ 11.50
Exercised.............................................. -- (28,810) $ 2.375
Expired................................................ (105,572) -- $ --
-------- -------- -------
Balance at June 30, 1995............................... 47,815 10,000 $ 11.50
Granted................................................ (47,800) 47,800 $ 10.00
Terminated............................................. 1,000 (1,000) $ 11.50
-------- -------- -------
Balance at June 30, 1996............................... 1,015 56,800 $10.238
======== ======== =======
</TABLE>
Under the Company's Non-Qualified Stock Option Plan, directors, officers,
and key employees may purchase the Company's Common Stock at 100% of fair
market value of the shares on the date of grant. Except as otherwise
determined by the Board of Directors, no options granted under the Plan
will be immediately exercisable, but, rather, will be exercisable as to
twenty percent of the shares covered thereby after one year from the date
the option is granted and will be exercisable as to an additional twenty
percent each year thereafter. All options will expire upon the earlier of
10 years and 30 days from date of grant or, with respect to shares covered
by such options, five years from the date the option first became
exercisable with respect to such shares.
<PAGE> 36
<TABLE>
A summary of transactions for the fiscal years ended June 30, 1996, 1995
and 1994 are as follows:
<CAPTION>
Shares Shares Average
Available Under Option Price
For Option Option Per Share
---------- ------ ---------
<S> <C> <C> <C>
Balance at June 30, 1993 ............. 157,042 963,008 $ 5.03
(Option Shares Exercisable 774,208)
Terminated ........................... 20,500 (20,500) $ 5.12
Exchange Program
Terminated ....................... 942,508 (942,508) $ 5.03
Reissued ......................... (471,250) 471,250 $ 2.125
Exercised ............................ -- (248,938) $ 2.125
Granted .............................. (32,000) 32,000 $ 2.625
Terminated ........................... 3,000 (3,000) $ 2.125
Expired .............................. 58,579 (58,579) $ 2.125
-------- -------- -------
Balance at June 30, 1994 ............. 678,379 192,733 $ 2.21
(Option Shares Exercisable 115,933)
Terminated ........................... 600 (600) $ 2.125
Exercised ............................ -- (70,313) $ 2.156
Granted .............................. (672,000) 672,000 $11.46
-------- -------- -------
Balance at June 30, 1995 ............. 6,979 793,820 $10.014
(Option Shares Exercisable 87,220)
Terminated ........................... 11,750 (11,750) $11.101
Exercised ............................ -- (49,101) $ 2.174
Granted .............................. (2,000) 2,000 $10.00
-------- -------- -------
Balance at June 30, 1996 ............. 16,729 734,969 $10.520
======== ======== =======
(Option Shares Exercisable 176,169)
</TABLE>
On September 24, 1990, the Board of Directors authorized new stock options
with an exercise price of $5.00 per share in substitution and replacement
of unexercised portions of the Non-Statutory Stock Options granted on or
before September 24, 1990.
During fiscal year 1991, the Board of Directors adopted the 1991 Stock
Option Plan. Under the 1991 Stock Option Plan, directors other than
committee members, officers and certain key employees are eligible to
receive options to purchase the Company's Common Stock at 100% of fair
market value of the shares on the date of grant. Options expire up to 10
years from date of grant and are all presently exercisable. The shares
reserved for issuance and covered by options granted under the 1991 Stock
Option Plan are set forth in the following table.
<PAGE> 37
<TABLE>
Shares Shares Average
Available Under Option Price
For Option Option Per Share
---------- ------ -----------
<S> <C> <C> <C>
Balance June 30, 1993 ................... 7,895 302,875 $ 4.30
Additional Authorized ................... 62,286 -- --
Terminated .............................. 35,000 (35,000) $ 5.39
Exchange Program
Terminated .......................... 122,000 (122,000) $ 5.50
Reissue ............................. (61,000) 61,000 $ 2.125
Granted ................................. (93,954) 93,954 $ 2.625
Exercised ............................... -- (155,090) $ 2.34
-------- -------- -------
Balance June 30, 1994 ................... 72,227 145,739 $ 3.26
Additional Authorized ................... 75,373 -- --
Granted ................................. (112,000) 112,000 $11.50
Exercised ............................... -- (17,625) $ 2.533
-------- -------- -------
Balance June 30, 1995 ................... 35,600 240,114 $ 7.155
Additional Authorized ................... 96,161 -- --
Granted ................................. (85,200) 85,200 $10.088
Exercised ............................... -- (22,911) $ 2.448
Terminated .............................. 10,000 (10,000) $11.50
Not Used Within Year of Authorization ... (55,895) -- --
-------- -------- -------
Balance June 30, 1996 ................... 666 292,403 $ 8.230
======== ======== =======
</TABLE>
On February 11, 1988, the Company granted each of its then four outside
directors an option to purchase 12,500 shares of the Company's Common Stock
at a price of $7.20 per share (the market value on that day) later reduced
to 6,250 at $2.375 for two directors. The Company reserved 50,000 shares of
its Treasury Stock to cover the exercise of these options. The Treasury
Stock referred to above were retired in fiscal year 1995 at their aggregate
cost and a like number of authorized but unissued shares were reserved to
cover these options. As of June 30, 1996, 5,000 shares of these options
were exercised.
During fiscal year 1993, the Board of Directors approved a Stock Option
Exchange Program. This program permits all employees to cancel all (but
only all) of their existing options which have an exercise price higher
than $2.125 per share in return for a new option (for a number of shares
equal to one-half of the number of shares as their existing options) which
will have an exercise price equal to $2.125 per share (in the case of
non-statutory options) and an exercise price equal to $2.375 per share (in
the case of incentive stock options). The Stock Option Exchange Program
also covered the Director's options previously granted to Messrs. Jesse
Krasnow and Herbert Krasnow. Messrs. Martin Kaplan and Thomas McGrath, who
comprise the Stock Option Committee, were not eligible to participate in
the Stock Option Exchange Program.
<PAGE> 38
During fiscal year 1990, the shareholders approved the 1990 Employee Stock
Purchase Plan. The Plan was intended to provide eligible employees with an
opportunity to purchase the Company's common stock through payroll
deductions at eighty-five percent of the market price on specified dates.
Common stock reserved for issuance under the Plan was 360,000 shares. All
shares were issued under the Plan as of June 30, 1993.
During fiscal year 1994, the Shareholders approved the 1993 Employee Stock
Purchase Plan. The Plan is the same in all aspects as the 1990 Plan
including the number of shares reserved, 360,000 shares. There were 63,285
and 53,713 shares issued under this Plan during the years ended June 30,
1996 and 1995, respectively. At June 30, 1996, 135,415 shares were unused
and accordingly will no longer be reserved.
During fiscal year 1996, the Shareholders approved the 1996 Employee Stock
Purchase Plan. The Plan is the same in all aspects as the 1990 and 1993
Stock Purchase Plans including the number of shares reserved, 360,000
shares. No shares have been issued under this Plan as of June 30, 1996.
The Company's Stock Option Plan Committee, which is comprised of Messrs.
Kaplan and McGrath, administer all the stock option plans of the Company.
The Company has available 1,000,000 authorized and unissued shares of $0.10
par value Preferred Stock. Shares may be issued from time to time in one or
more series, each series having such special rights, privileges and
preferences as may be determined by the Board of Directors at time of
issuance.
On June 30, 1994 the Company issued 687,000 shares of its $0.10 par value
common stock in a private offering at a price of $12 per share. The
offering included an option for each purchaser to acquire an equivalent
number of shares within the next 12 months at $16 per share. No such
options were exercised at June 30, 1995.
Net proceeds from the private offering were $7,936,400 of which $5,011,400
were not received as of June 30, 1994. This amount was included as a
separate component of Stockholders Equity in the Consolidated Balance Sheet
under the caption "Stock Subscription Receivable" at June 30, 1994. The
$5,011,400 remaining proceeds were received during fiscal year 1995.
On August 27, 1996, the Board of Directors declared a dividend distribution
of one Right for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on September 17, 1996. Each
Right entitles the registered holder to purchase from the Company a unit
consisting of one one-thousandth of a share (a "Unit") of Series B Junior
Participating Preferred Stock, $0.10 par value per share at a purchase
price of $40.00 per unit, subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement between the Company and
Mellon Bank, N.A. as Rights Agent.
<PAGE> 39
10. Business Segment Information.
----------------------------
The Company designs and manufactures training simulators as well as frozen
food and bottle vending machines.
<TABLE>
The Company's operations by business segment, were as follows:
<CAPTION>
(In Thousands)
Training Vending
Operation Operation Corporate Consolidated
<S> <C> <C> <C> <C>
Revenues
1996 $101,713 $15,443 -- $117,156
1995 83,534 24,073 -- 107,607
1994 61,069 2,232 -- 63,301
Operating Income
1996 8,514 (2,507) -- 6,007
1995 11,741 (7) -- 11,734
1994 9,671 (1,913) -- 7,758
Identifiable Assets
1996 80,085 10,359 4,953 95,397
1995 77,798 8,585 3,356 89,739
1994 56,622 6,290 2,268 65,180
Depreciation
1996 3,445 380 -- 3,825
1995 3,098 322 -- 3,420
1994 3,230 120 -- 3,350
Capital Expenditures
1996 5,525 979 -- 6,504
1995 2,080 2,230 -- 4,310
1994 1,275 834 -- 2,109
</TABLE>
Intersegment sales are not material. Identifiable assets are those assets
employed in each segment's operation. Corporate assets consist primarily of
cash.
<PAGE> 40
<TABLE>
Sales by Class of Customer.
---------------------------
<CAPTION>
(In Thousands)
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
U.S. Government
Direct ............................ $ 24,835 $ 36,476 $ 40,125
Subcontract ....................... 61,742 35,309 14,715
-------- -------- --------
Total U.S. Government .... 86,577 71,785 54,840
-------- -------- --------
Foreign Governments ................... 14,392 11,697 5,203
Foreign Commercial .................... 305 21 1,021
Other ................................. 439 31 5
-------- -------- --------
Total Training ........... 101,713 83,534 61,069
-------- -------- --------
Vending (substantially one customer
in 1995 and 1994) ................. 15,443 24,073 2,232
-------- -------- --------
Total Sales .............. $117,156 $107,607 $ 63,301
======== ======== ========
</TABLE>
Export Sales from the U.S. were not material for the fiscal years ended
June 30, 1996, 1995 and 1994. Export sales do not include Foreign Military
Sales through U.S. Government agencies and prime contractors of
$14,445,000, $27,582,000 and $27,797,000 in the fiscal years ended June 30,
1996, 1995, and 1994, respectively.
<TABLE>
Sales by Geographic Area.
-------------------------
<CAPTION>
(In Thousands)
United Europe and
States Middle East Consolidated
<S> <C> <C> <C>
Revenues
1996 $102,222 $14,934 $117,156
1995 95,883 11,724 107,607
1994 57,077 6,224 63,301
Operating Income
1996 6,059 (52) 6,007
1995 11,161 573 11,734
1994 7,095 663 7,758
Identifiable Assets
1996 83,365 12,032 95,397
1995 79,483 10,256 89,739
1994 61,579 3,601 65,180
</TABLE>
<PAGE> 41
<TABLE>
11. Summary of Quarterly Results (Unaudited).
----------------------------------------
<CAPTION>
(In Thousands, Except Per Share Data)
September December March June
1996 30 31 31 30
--------- -------- ------- ----
<S> <C> <C> <C> <C>
Net Sales..................................... $26,980 $31,691 $27,305 $31,180
Gross Profit.................................. $ 6,350 $ 6,413 $ 3,488 $ 5,193
Operating Income/(Loss)....................... $ 3,033 $ 2,783 $ (404) $ 595
Income/(Loss) Before Income Taxes............. $ 2,573 $ 2,376 $ (608) $ 182
Net Income/(Loss)............................. $ 1,687 $ 1,559 $ (398) $ 30
Earnings/(Loss) Per Common Share
and Common Share Equivalents................. $ 0.21 $ 0.20 $ (0.05) $ 0.00
</TABLE>
As the result of the periodic review of estimated costs at completion and
consideration of changes in facts and circumstances, revisions were made in
the estimated costs to complete in the third and fourth quarter of fiscal
year 1996 on certain contracts. During the third and fourth quarter,
adjustments were taken to the gross margin of two fixed price contracts
primarily due to protracted acceptance schedules which resulted in higher
than previously anticipated costs. Also, a downward adjustment in gross
margin on the Company's large cost plus type contract was recorded in the
third quarter. In addition, gross margin in the Vending Division decreased
in the third and fourth quarter due to a decrease in sales volume as the
Company's largest vending machine order was completed in the second
quarter.
During the fourth quarter of fiscal year 1996, the UK operation was
required to adjust margins and recognize additional contingent costs on two
major contracts. The effect of these adjustments was to reduce net income
by $1.1 million for the fourth quarter and year ended June 30, 1996. In
addition, the significant level of effort on the Company's large domestic
cost-plus contract which earns a low margin has the effect of reducing the
Company's overall margin.
The reductions in gross margin were partially offset by a reduction in
manufacturing overhead related primarily to the Company's profit sharing
expense and other payroll related costs which during the first three
quarters were accrued for in anticipation of a 100% contribution. However,
due to the Company's profitability for the year, the actual profit sharing
contribution was reduced to 75%.
Also, during the fourth quarter of fiscal year 1996, the U.K. Division
determined that it would no longer have use for its 9,000 square foot
leased facility. Accordingly, the Company recorded a $75,000 (after-tax)
write-off associated with the lease commitment.
The lower than anticipated sales volume in the Vending Division, the
adjustments to gross margin in the UK Division and the lower than normal
gross margin recognized on the large domestic cost plus type contract,
contributed to the reduction of the profit sharing from the anticipated
100% contribution.
<PAGE> 42
As disclosed in Note 3, during the fourth quarter of fiscal year 1996, the
Company submitted a claim for contract adjustment under the Economic Price
Adjustment (EPA) provisions of a major contract seeking approximately
$950,000. The value of the claim is included in costs and estimated
earnings in excess of billings on uncompleted contracts. The effect of
recording the EPA was to increase net income by approximately $574,000 for
the fourth quarter and fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
September December March June
1995 30 31 31 30
--------- -------- ------- ----
<S> <C> <C> <C> <C>
Net Sales............................... $20,656 $22,676 $28,832 $35,443
Gross Profit............................ $ 5,733 $ 5,412 $ 6,024 $ 8,378
Operating Income........................ $ 2,341 $ 1,935 $ 2,819 $ 4,639
Income Before Income Taxes.............. $ 1,996 $ 1,651 $ 3,131 $ 4,393
Net Income.............................. $ 1,336 $ 1,189 $ 1,871 $ 2,922
Earnings Per Common Share
and Common Share Equivalents........... $ 0.17 $ 0.15 $ 0.24 $ 0.37
</TABLE>
As disclosed in Note 3, the Company recorded a one time write-off, during
the second quarter of fiscal year 1995, of $994,000 (pre-tax) relating to
the Pop-Up Target claim previously included in inventory.
The Company recorded a charge to Vending Cost of Sales of $891,000 during
the fourth quarter of fiscal year 1995, primarily the result of a standard
cost revision and an inventory book to physical adjustment.
For interim reporting purposes, the Company had previously allocated S,G&A
costs to contracts utilizing an annualized estimated rate to absorb such
costs. Effective July 1, 1994, the Company conformed its method of
accounting for S,G&A costs on an interim basis to the method used for
annual reporting purposes, that is, charged to operations as incurred.
12. Commitments and Contingencies.
- ----------------------------------
<TABLE>
The Company and its subsidiaries lease certain office facilities and
equipment under operating leases. Future minimum lease payments under all
noncancellable operating leases as of June 30, 1996 are as follows:
<CAPTION>
(In Thousands)
<S> <C>
1997 ...................................... $1,253
1998 ...................................... 941
1999 ...................................... 827
2000 ...................................... 765
Remaining Years ........................... 1,756
------
Total Minimum Lease Payments............... $5,542
======
</TABLE>
<PAGE> 43
Rent expense under all operating leases was approximately $1,632,683,
$1,024,540 and $826,011 for the fiscal years ended June 30, 1996, 1995 and
1994, respectively.
Item 9. Disagreements on Accounting and Financial Disclosures
- ------ -----------------------------------------------------
The Company has nothing to report under this item.
<PAGE> 44
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10 - 13 (except for the information set forth at the end of Part I with
respect to Executive Officers of the Company) is incorporated by reference from
the Company's definitive proxy statement which is expected to be filed pursuant
to Regulation 14A on or before October 27, 1996.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) (1) and (2) Financial Statements
--------------------
The financial statements filed as part of this Annual Report
are listed in the Index to Consolidated Financial Statements on page 18.
Schedules other than those so listed are omitted for the reason that they are
either not applicable or not required or because the information required is
contained in the consolidated financial statements or notes thereto.
(3) Exhibits
--------
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2 Assignment and Assumption Agreement, dated as of June 30, 1996, between
ECC International Corp. and ECC Vending Corp.
3.1 Certificate of Incorporation (5)
3.2 By-Laws (2)
4.1 Form of Common Stock Certificate (5)
10.1 Educational Computer Corporation
1981 Incentive Stock Option Plan (5)
10.2 Educational Computer Corporation
1986 Incentive Stock Option Plan (5)
10.3 Educational Computer Corporation
1986 Non-Qualified Stock Option Plan (5)
10.4 ECC International Corp. 1991 Option Plan (4)
<PAGE> 45
10.5 Form of Stock Option Agreement for outside directors (7)
10.6 Rights Agreement dated as of July 28, 1986 between Educational
Computer Corporation and Mellon Bank (East), N.A. (1)
10.7 Amendment to Rights Agreement dated as of February 21, 1989
between ECC International Corp. and Mellon Bank
(East), N.A. (7)
10.8 Form of Subscription Agreement dated June 30, 1994 related
to Private Placement. (7)
10.9 Form of Option Agreement dated June 30, 1994 related
to Private Placement. (7)
10.10 Term Loan and Revolving Credit Agreement dated as of
September 20, 1994 by and among First Fidelity Bank,
National Association and ECC International Corp. (7)
10.11 Guaranty and Surety Agreement dated as of
September 20, 1994 to induce First Fidelity Bank,
N.A. to make loans or other financial accommodations
to ECC Simulation Limited. (7)
10.12 Form of Director's and Officer's Agreement to Defend
and Indemnify. (3)
10.13 First Amendment dated as of April 6, 1995 to the
Term and Revolving Credit Agreement dated
as of September 20, 1994 by and among
First Fidelity Bank, National Association and
ECC International Corp. (11)
10.14 Overdraft Facility dated as of April 3, 1995 by and
among ECC Simulation Limited and First Fidelity Bank,
N.A. London Branch. (11)
10.15 Second Amendment dated as of October 13, 1995 to the
Term and Revolving Credit Agreement dated as of
September 20, 1994 by and among First Fidelity Bank,
National Association and ECC International Corp. (6)
10.16 Lease between ECC International Corp. and State of
Wisconsin Investment Board for the premises 2900 Titan
Row, Orlando, Florida. (6)
<PAGE> 46
10.17 Lease between ECC Simulation Limited, ECC International
Corp. and G.J. King & Son Limited for the premises Unit 1
Home Farm Business Centre, Brighton, England. (6)
10.18 Lease between ECC Simulation Limited, ECC International
Corp. and G.J. King & Son Limited for the premises Unit 3A
Home Farm Business Centre, Brighton, England. (6)
10.19 Lease between ECC Simulation Limited, ECC International
Corp. and G.J. King & Son Limited for the premises Unit 2
Home Farm Business Centre, Brighton, England. (6)
10.20 ECC International Corp. Executive Savings Plan. (6)
10.21 Third Amendment dated as of June 19, 1996 to the Term
and Revolving Credit Agreement dated as of September
20, 1994 between ECC International Corp; ECC
Simulation Limited and First Union National Bank
(Successor by merger to First Fidelity Bank, National
Association).
10.22 Second Amendment to Rights Agreement dated August 7, 1996
between ECC International Corp. and Mellon Bank, N.A. (8)
10.23 Third Amendment to Rights Agreement dated August 27, 1996
between ECC International Corp. and Mellon Bank, N.A. (9)
10.24 Rights Agreement dated August 27, 1996 between ECC
International Corp. and Mellon Bank, N.A. (10)
11 Schedules of Computation of Earnings Per Share
21 Subsidiaries of the Registrant
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
- --------------------------------------------------------------------------------
1 Incorporated by reference to the Registrant's Registration Statement on
Form 8-A dated July 28, 1986. (Commission File No. 1-8988)
<PAGE> 47
2 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1989. (Commission File No. 1-8988)
3 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996. (Commission File No. 1-8988)
4 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1991. (Commission File No. 1-8988)
5 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1993. (Commission File No. 1-8988)
6 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995. (Commission File No. 1-8988)
7 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1994. (Commission File No. 1-8988)
8 Incorporated by reference to the Registrant's Current Report on Form 8-K
dated August 13, 1996. (Commission File No. 1-8988)
9 Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 4, 1996 (Commission File No. 1-8988)
10 Incorporated by reference to the Registrant's Registration Statement on
Form 8-A dated September 4, 1996. (Commission File No. 1-8988)
11 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1995. (Commission File No. 1-8988)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
<PAGE> 48
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECC INTERNATIONAL CORP.
By: /s/ Relland Winand
--------------------------
Relland Winand
Vice President, Finance
Date: September 27, 1996
----------------------------
Pursuant to the requirements of 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, by a majority of the Board of
Directors.
/s/ George W.Murphy )
- -------------------------------------------- )
George W. Murphy, President, Chief Executive )
Officer and Principal Executive Officer )
)
/s/ Relland Winand )
- -------------------------------------------- )
Relland Winand, Vice President, Finance )
and Principal Financial and Accounting Officer )
)
/s/ Ajit W. Hirani )
- -------------------------------------------- )
Ajit W. Hirani, Director )
)
/s/ Julian Demora ) September 27, 1996
- -------------------------------------------- )
Julian Demora, Director )
)
/s/ Martin S. Kaplan )
- -------------------------------------------- )
Martin S. Kaplan, Director )
)
/s/ Herbert S. Krasnow )
- -------------------------------------------- )
Herbert S. Krasnow, Director )
)
/s/ Jesse Krasnow )
- -------------------------------------------- )
Jesse Krasnow, Director )
)
/s/ Thomas E. McGrath )
- -------------------------------------------- )
Thomas E. McGrath, Director )
)
/s/ Merrill A. McPeak )
- -------------------------------------------- )
Merrill A. McPeak, Director )
<PAGE> 1
Exhibit 2
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
This Assignment and Assumption Agreement is made as of June 30, 1996, by
and between ECC International Corp., a Delaware corporation (the "Transferor"),
and ECC Vending Corp., a Delaware corporation (the "Transferee").
WITNESSETH:
-----------
WHEREAS, Transferor is the sole stockholder of Transferee;
WHEREAS, Transferor is transferring to Transferee the assets of Transferor
described on SCHEDULE A attached hereto for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged;
WHEREAS, Transferee has agreed to assume the liabilities of Transferor
described on SCHEDULE B attached hereto;
NOW, THEREFORE, the parties agree as follows:
1. Transfer of Assets.
------------------
1.1 On the Closing Date (as hereinafter defined), Transferor shall
transfer, convey and assign unto Transferee, its successors and assigns, to have
and to hold forever, the assets described on SCHEDULE A attached hereto.
<PAGE> 2
1.2 Transferor represents and warrants to Transferee that
Transferor is the lawful owner of all of the assets to be transferred, conveyed
and assigned to Transferee hereby; that such assets are free from all
encumbrances; and that Transferor has the full legal right, power and authority
to transfer the same as aforesaid.
1.3 Transferor hereby covenants and agrees that on and after the
Closing Date it will, at the request of Transferee, execute and deliver such
other instruments of transfer, conveyance and assignment, and take such other
action, as Transferee reasonably may require more effectively to transfer and
convey to, and vest in, Transferee, its successors and assigns, or for the
better transferring, conveying, assigning, assuring and confirming to
Transferee, its successors and assigns, or to put Transferee, its successors and
assigns in possession of, any or all of the assets hereby transferred, conveyed
and assigned, or intended so to be.
2. ASSUMPTION OF LIABILITIES. On the Closing Date, Transferee shall
assume the liabilities of Transferor the liabilities described on SCHEDULE B
attached hereto.
3. Power of Attorney.
-----------------
3.1 Transferor does hereby irrevocably constitute and appoint
Transferee, its successors and assigns, as its true and
-2-
<PAGE> 3
lawful attorney, with full power of substitution, in its name, or otherwise, and
on behalf of Transferor, or for its own use, on and after the Closing Date, to
claim, demand, collect and receive at any time and from time to time any and all
assets, properties, claims, accounts and other rights, tangible or intangible,
hereby transferred, conveyed and assigned, or intended so to be, and to
prosecute the same at law or in equity, to settle or compromise the same, and,
upon discharge thereof, to complete, execute and deliver any and all necessary
instruments of satisfaction and release.
3.2 Transferee hereby covenants and agrees with Transferor that
on and after the Closing Date it will defend the Transferor against the lawful
claims and demands of all persons arising any time and from time to time with
respect to any and all assets, properties, claims, accounts and other rights,
tangible or intangible, hereby transferred, conveyed and assigned, or intended
so to be. Transferor does hereby irrevocably constitute and appoint Transferee,
its successors and assigns, as its true and lawful attorney, with full power of
substitution, in its name, or otherwise, and on behalf of Transferor, on and
after the Closing Date, to defend against such claims and demands, including,
without limitation, to settle or compromise such claims and demands on such
terms as Transferee may consider appropriate.
-3-
<PAGE> 4
4. Closing
-------
4.1 The closing of the transactions contemplated hereby (the
"Closing") shall take place on June 30, 1996 or on such other date as the
parties may agree (the "Closing Date").
4.2 The Closing shall be held at the offices of Hale and Dorr, 60
State Street, Boston, Massachusetts or at such other location as the parties may
agree.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed by their duly authorized representatives as an instrument under seal as
of the day and year first above written.
ECC INTERNATIONAL CORP.
-------------------------------
George W. Murphy
President
ECC VENDING CORP.
-------------------------------
George W. Murphy
President
-4-
<PAGE> 5
SCHEDULE A
Assets
Cash of the Vending Division, June 30, 1996
Trade Accounts Receivable Net of Allowance of the Vending Division, June 30,
1996
Intercompany Billed Training Accounts Receivable of the Vending Division,
June 30, 1996
Intercompany Unbilled Training Accounts Receivable of the Vending Division,
June 30, 1996
Other Accounts Receivable of the Vending Division, June 30, 1996
Inventories of the Vending Division, June 30, 1996
Deferred Taxes of the Vending Division, June 30, 1996
Prepaid Expenses and Other Assets of the Vending Division, June 30, 1996
Net - Fixed Assets of the Vending Division, June 30, 1996
Deferred Charges and Other of the Vending Division, June 30, 1996
Cash Value of Life Insurance of the Vending Division, June 30, 1996
Deposits & Other of the Vending Division, June 30, 1996
-5-
<PAGE> 6
SCHEDULE B
Liabilities
Trade Accounts Payable of the Vending Division, June 30, 1996
Intercompany Training Accounts Payable of the Vending Division, June 30, 1996
Intercompany Unbilled Training Accounts Payable of the Vending Division,
June 30, 1996
Accrued Expenses Salaries & Wages of the Vending Division, June 30, 1996
Accrued Expenses Payroll Taxes of the Vending Division, June 30, 1996
Accrued Expenses Profit Sharing/Retirement of the Vending Division, June 30,
1996
Employee Stock Purchase Plan Withholding of the Vending Division, June 30, 1996
Accrued Expenses Other of the Vending Division, June 30, 1996
Deferred Taxes of the Vending Division, June 30, 1996
-6-
<PAGE> 1
Exhibit 10.21
AMENDMENT TO CREDIT AGREEMENTS
------------------------------
THIS AMENDMENT ("Amendment") made as of June 19, 1996, between ECC
INTERNATIONAL CORP. ("ECC"), ECC SIMULATION LIMITED ("Simulation") and FIRST
UNION NATIONAL BANK (successor by merger to First Fidelity Bank, National
Association) ("Bank").
BACKGROUND
----------
Bank and ECC entered into a certain Term Loan and Revolving Credit
Agreement dated as of September 20, 1994 (as amended to date, the "ECC Credit
Agreement") relative to, inter alia, a Revolver (the "ECC Revolver"), as more
fully set forth therein, the terms of which are incorporated herein by
reference. Bank and Simulation entered into a certain Revolving Credit Agreement
dated as of September 20, 1994 (as amended to date, the "Simulation Credit
Agreement") relative to a Revolver (the "Simulation Revolver"), as more fully
set forth therein, the terms of which are incorporated herein by reference. The
parties desire to amend the ECC Credit Agreement and the Simulation Credit
Agreement in the manner hereinafter provided. All capitalized terms used herein
which are not defined hereby shall have the meaning ascribed thereto in the ECC
Credit Agreement.
NOW, THEREFORE, the parties, INTENDING TO BE LEGALLY BOUND, agree as
follows:
1. Maximum Principal Amount of ECC Revolver; LC Sublimit; Expiration
-----------------------------------------------------------------
Date
----
(a) Effective as of the date hereof, and notwithstanding
Section A.2.b. of the ECC Credit Agreement to the contrary, the maximum
aggregate principal amount of advances, including the face amount of Letters of
Credit (as defined in the ECC Credit Agreement), to be outstanding at any time
under the ECC Revolver (the "Maximum Principal Amount") shall be an amount
which, when taken together with the principal amount of cash advances and the
face amount of letters of credit outstanding under the Simulation Revolver, is
not greater than $25,000,000.
(b) Effective as of the date hereof, and notwithstanding
Section B.1.a. of the ECC Credit Agreement to the contrary, the "LC Sublimit" is
hereby decreased from $7,000,000 to $1,000,000.
(c) The Expiration Date for the ECC Revolver is hereby extended
to September 30, 1998. The Expiration Date for the Term Loan will remain
September 19, 1997.
2. MAXIMUM PRINCIPAL AMOUNT OF SIMULATION REVOLVER; EXPIRATION DATE.
(a) Effective as of the date hereof, and notwithstanding
Section A.1.b. of the
<PAGE> 2
Simulation Credit Agreement to the contrary, the Maximum Principal Amount (as
defined in the Simulation Credit Agreement) of advances, including the face
amount of letters of credit, to be outstanding at any time under the Simulation
Revolver shall be an amount which is equal to the lesser of (i) $7,500,000 for
the period through but not including October 30, 1996 and $5,500,000 thereafter
or (ii) an amount which, when taken together with the principal amount of cash
advances and the face amount of letters of credit outstanding under the ECC
Revolver, is not greater than $25,000,000. Notwithstanding Section A.1.i. of the
Simulation Credit Agreement, as amended hereby, to the contrary, if due solely
to fluctuations in the exchange rate for Dollars and Pounds Sterling, the
Equivalent Dollar Amount (as defined in the Simulation Credit Agreement) of
outstanding cash advances and the face amount of outstanding letters of credit
made in Pounds Sterling, when taken together with outstanding cash advances and
the face amount of outstanding letters of credit made in Dollars under the
Simulation Credit Agreement, exceeds the applicable sublimit set forth in
subpart (i) above by 10% or less, Simulation need not repay such excess until
the Expiration Date, PROVIDED, that if the same exceeds the said applicable
sublimit by more than 10% or if the Equivalent Dollar Amount of outstanding cash
advances and the face amount of outstanding letters of credit made in Pounds
Sterling, when taken together with the sum of outstanding cash advances and the
face amount of outstanding letters of credit made in Dollars and the principal
amount of cash advances and the face amount of letters of credit outstanding
under the ECC Revolver, exceeds $25,000,000, Simulation will repay the principal
of the Simulation Revolver in the amount of such excess within one (1) Business
Day after notice thereof from Bank.
(b) The Expiration Date for the Simulation Revolver is hereby
extended to September 30, 1998.
3. AMENDMENT FEE. ECC shall, concurrently herewith, pay to Bank a
non-refundable amendment fee of $25,000.
4. CONDITIONS. The obligation of Bank to increase the Maximum
Principal Amount of the Revolvers as set forth in Sections 1 and 2 hereof is
subject to the following conditions precedent:
a. ECC shall, concurrently herewith, execute and deliver to Bank
an amended and restated Revolving Credit Note in the face amount of $25,000,000,
which amended and restated Revolving Credit Note, together with any attachments
thereto and amendments, modifications or restatements thereof or thereto, shall
constitute the "Revolving Credit Note" for all purposes of the ECC Credit
Agreement and other Loan Documents referred to therein;
b. Simulation shall, concurrently herewith, execute and deliver
to Bank an amended and restated Revolving Credit Note in the face amount of
2
<PAGE> 3
$7,500,000, which amended and restated Revolving Credit Note, together with any
attachments thereto and amendments, modifications or restatements thereof or
thereto, shall constitute the "Revolving Credit Note" for all purposes of the
Simulation Credit Agreement and other Loan Documents referred to therein;
c. Each of ECC and Simulation shall, concurrently herewith,
deliver to Bank certified resolutions of its Board of Directors authorizing it
to execute, deliver and perform, as applicable, this Amendment and any documents
required to be executed by it in connection herewith.
5. REAFFIRMATION. Except as specifically modified by this Amendment,
the ECC Credit Agreement and the Simulation Credit Agreement and all other Loan
Documents referred to in either thereof shall remain unchanged and in full force
and effect, and this Amendment shall be construed as supplemental thereto, and
each of ECC and Simulation hereby reaffirms all of its Liabilities thereunder
and agrees that the same are owing to Bank in accordance with the terms thereof
without off-set, counterclaim or defense of any nature. Each of ECC and
Simulation further reaffirms all guaranties, liens and security interests
heretofore granted by it to Bank pursuant to the Loan Documents, including
without limitation the liens, security interests and guaranties granted pursuant
to the Security Agreement dated September 20, 1994 among Bank, ECC, ECC
International, Inc. and Educational Computer Corporation International
("Security Agreement"), that certain Guarantee and Debenture dated September 20,
1994 executed and delivered by Simulation to Bank ("Guaranty and Debenture") and
that certain Guaranty and Surety Agreement dated September 20, 1994 from ECC,
ECC International, Inc. and Educational Computer Corporation to Bank
("Guaranty"); and agrees that the ECC Revolver and the Simulation Revolver, as
the Maximum Principal Amount of each thereof as amended pursuant to Sections 1
and 2 hereof, constitute a "Liability" for all purposes of said Security
Agreement, a "Secured Liability" for all purposes of said Guaranty and Debenture
and a "Liability" for all purposes of said Guaranty.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
ECC INTERNATIONAL CORP.
By:
--------------------------------
Name: George W. Murphy
Title: President
Attest:
----------------------------
Name: Relland Winand
Title: V.P. - Finance
ECC SIMULATION LIMITED
By:
--------------------------------
Name: George W. Murphy
Title: President
Attest:
----------------------------
Name: Relland Winand
Title: V.P. - Finance
FIRST UNION NATIONAL BANK
By:
--------------------------------
Name: Jack P. Albaugh
Title: Vice President
4
<PAGE> 5
JOINDER
-------
Each of the undersigned consents to the foregoing Amendment, the terms
of which are incorporated herein by reference, and agrees with Bank that the
Revolver for ECC International Corp. and the Revolver for ECC Simulation
Limited, as the Maximum Principal Amount of each thereof is amended pursuant to
Sections 1 and 2 of the within Amendment, constitute a "Liability" for all
purposes of (A) that certain Guaranty and Surety Agreement dated September 20,
1994 executed and delivered by Educational Computer Corporation International
and ECC International, Inc. to Bank, (B) that certain Guaranty and Surety
Agreement dated September 20, 1994 executed and delivered by Educational
Computer Corporation International, ECC International, Inc. and ECC
International Corp. to Bank, and (C) that certain General Security Agreement
dated September 20, 1994 among Bank, ECC International Corp., Educational
Computer Corporation International and ECC International, Inc.
IN WITNESS WHEREOF, the undersigned have executed this Joinder this
19th day of June, 1996.
ECC INTERNATIONAL, INC.
By:
--------------------------------
Name: George W. Murphy
Title: President
EDUCATIONAL COMPUTER
CORPORATION INTERNATIONAL
By:
--------------------------------
Name: George W. Murphy
Title: President
5
<PAGE> 6
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
Obligation #________________
________ __, 1996
Philadelphia, Pennsylvania
$25,000,000
FOR VALUE RECEIVED, and intending to be legally bound hereby, the undersigned
Borrower, ECC International Corp., unconditionally promises to pay to the order
of FIRST UNION NATIONAL BANK (the "Bank"), the principal amount of all advances
that are now or may hereafter be made hereunder and that are then outstanding,
together with accrued, unpaid interest thereon and any unpaid costs and expenses
payable hereunder, on September 30, 1998.
A. Terms of Note.
--------------
1. Interest Payments. Interest on the principal balance hereof
shall, except as provided in subpart A.B. below, accrue at such
rates and be payable in accordance with Section A.2. of that
certain Term Loan and Revolving Credit Agreement dated September
20, 1994, between the Bank and the Borrower, as amended to date
(together with any exhibits thereto and amendments and
modifications thereto in effect from time to time, the "Loan
Agreement").
2. Computation of Interest. Interest hereunder shall be computed
daily on the basis of a year of 360 days for the actual number of
days elapsed. All payments hereunder shall be made in lawful
currency of the United States of America and in immediately
available funds at the Bank's address set forth in the Loan
Agreement or at such other address as the Bank shall notify the
Borrower of in writing.
3. Incorporation by Reference. This Note is the Revolving Credit
Note referred to in the Loan Agreement and is subject to the
terms and conditions thereof, which terms and conditions are
incorporated herein, including, without limitation, terms
pertaining to definitions, representations, warranties,
covenants, events of default and remedies. Any capitalized term
used herein without definition shall have the definition
contained in the Loan Agreement. This Note amends and restates
all prior Notes and is being executed in connection with an
increase in the Maximum Principal Amount.
<PAGE> 7
4. Borrowing Requests; Crediting of Account. Any request for
borrowing pursuant to this Note shall be made by the Borrower in
writing in the form of a "Notice of Borrowing Under Revolving
Credit" attached hereto as Exhibit A and in accordance with the
terms of the Loan Agreement. Unless otherwise requested by the
Borrower in writing at least five (5) Business Days prior to the
date of a requested advance, each advance hereunder shall be made
by crediting the Account as defined in the Loan Agreement with
the amount of the advance. All advances made by crediting the
Account or any other account of the Borrower at the Bank shall be
conclusively presumed to have been properly authorized by the
Borrower.
5. Bank Records of Advance. The Bank may enter in its business
records the date and the amount of each advance, each conversion
from one interest rate basis to another and each payment made
pursuant to this Note and the Loan Agreement. The Bank's records
of such advance, conversion or payment shall, in the absence of
manifest error, be conclusively binding upon the Borrower. In the
event the Bank gives notice or renders a statement by mailing
such notice or statement to the Borrower, concerning any such
advance, conversion or payment, or the amount of principal and
interest due on this Note, the Borrower agrees that, unless the
Bank receives a written notification of exceptions to this
statement within forty-five (45) calendar days after such
statement or notice is mailed, the statement of notice shall be
an account stated, correct and acceptable and binding upon the
Borrower.
6. Advance Requests Exceeding Maximum Principal Amount. The Borrower
shall not request the Bank to make any advances under this Note
or the Loan Agreement which exceeds the Maximum Principal Amount
set forth in Section A.2.b. of the Loan Agreement. In the event
that the principal balance outstanding under this Note exceeds at
any time the Maximum Principal Amount, the Borrower shall
immediately, and without demand from the Bank, pay to the Bank
the amount in excess thereof, and the Borrower agrees that until
such excess is paid to the Bank, this Note shall evidence and be
enforceable with respect to any and all amounts outstanding
hereunder including such excess.
7. Application of Payments. All payments received on this Note shall
be applied first to the Bank's fees, costs and expenses which the
Borrower is obligated to pay pursuant to the terms hereof and
under any other Loan Document, then to accrued and unpaid
interest and then to principal or such payments may be applied in
such other order as the Bank in its sole discretion shall
determine.
2
<PAGE> 8
8. Default Rate. At the Bank's option, interest will be assessed on
any principal which remains unpaid at the maturity of this Note,
whether by acceleration or otherwise, or upon and following any
Event of Default, at a rate which is four percent (4%) higher
than the rate otherwise charged hereunder (the "Default Rate")
provided that at no time shall the Default Rate exceed the
highest rate of interest allowed by law. Such Default Rate of
Interest shall also be charged on the amounts owed by the
Borrower to the Bank pursuant to any judgments entered in favor
of Bank in respect of this Note or any other Loan Document.
9. Prepayment. Prepayment of principal may be made subject to
payment of all amounts required to be paid in connection with
such prepayment as provided in the Loan Agreement.
B. Remedies.
---------
1. Generally. Upon and following an Event of Default, the Bank, at
its option, may exercise any and all rights and remedies it has
under this Note, the Loan Agreement and/or the other Loan
Documents and under applicable law, including, without
limitation, the right to charge and collect interest on the
principal portion of the amounts outstanding hereunder at the
Default Rate. Upon and following an Event of Default, the Bank
may proceed to protect and enforce the Bank's rights under any
Loan Document and/or under applicable law by action at law, in
equity, or other appropriate proceeding, including, without
limitation, an action for specific performance to enforce or aid
in the enforcement of any provision contained herein or in any
other Loan Document.
2. Remedies Cumulative; No Waiver. The remedies hereunder and under
the other Loan Documents are cumulative and concurrent, and are
not exclusive of any other remedies available to the Bank. No
failure or delay on the part of the Bank in the exercise of any
right, power, remedy or privilege shall operate as a waiver
thereof, nor shall any single or partial exercise of any right,
power, remedy or privilege preclude any other or further exercise
thereof, or the exercise of any other right, power, remedy or
privilege.
C. Miscellaneous.
--------------
1. Governing Law. This Note shall be construed in accordance with
and governed by the substantive laws of the Commonwealth of
Pennsylvania without reference to conflict of laws principles.
3
<PAGE> 9
2. Integration. This Note and the other Loan Documents constitute
the sole agreement of the parties with respect to the subject
matter hereof and thereof and supersede all oral negotiations and
prior writings with respect to the subject matter hereof and
thereof.
3. Amendment; Waiver. No amendment of this Note, and no waiver of
any one or more of the provisions hereof shall be effective
unless set forth in writing and signed by the parties hereto.
4. Successors and Assigns. This Note (i) shall be binding upon the
Borrower and the Bank and their respective successors and
permitted assigns, and (ii) shall inure to the benefit of the
Borrower and the Bank and their respective successors and
permitted assigns; provided, however, that the Borrower may not
assign its rights or obligations hereunder or any interest herein
without the prior written consent of the Bank, and any such
assignment or attempted assignment by the Borrower shall be void
and of no effect with respect to the Bank.
5. Severability. The illegality or unenforceability of any provision
of this Note or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or
enforceability of the remaining provisions of this Note or any
instrument or agreement required hereunder. In lieu of any
illegal or unenforceable provision in this Note, there shall be
added automatically as part of this Note a legal and enforceable
provision as similar in terms to such illegal or unenforceable
provision as may be possible.
6. Inconsistencies. The Loan Documents are intended to be
consistent. However, in the event of any inconsistencies among
any of the Loan Documents, such inconsistency shall not affect
the validity or enforceability of each Loan Document. The
Borrower agrees that in the event of any inconsistency or
ambiguity in any of the Loan Documents, the Loan Documents shall
not be construed against any one party but shall be interpreted
consistent with the Bank's policies and procedures.
7. Headings. The headings of sections and paragraphs have been
included herein for convenience only and shall not be considered
in interpreting this Note.
8. Schedules. If a Schedule and/or an Exhibit is attached hereto,
the provisions thereof are incorporated herein.
4
<PAGE> 10
9. Judicial Proceeding; Waivers.
a. THE BORROWER AGREES THAT ANY SUIT, ACTION OR PROCEEDING,
WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE
BANK OR THE BORROWER OR ANY SUCCESSOR OR ASSIGN OF THE BANK
OR THE BORROWER, ON OR WITH RESPECT TO THIS NOTE OR ANY
OTHER LOAN DOCUMENT OR THE DEALINGS OF THE PARTIES WITH
RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A COURT
AND NOT BY A JURY.
b. THE BANK AND THE BORROWER EACH HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY
SUCH SUIT, ACTION OR PROCEEDING. FURTHER, THE BORROWER
WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY
SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY,
PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN,
OR IN ADDITION TO, ACTUAL DAMAGES.
c. THE BORROWER ACKNOWLEDGES AND AGREES THAT THIS SECTION IS A
SPECIFIC AND MATERIAL ASPECT OF THIS NOTE AND THAT THE BANK
WOULD NOT EXTEND CREDIT TO THE BORROWER IF THE WAIVERS SET
FORTH IN THIS SECTION WERE NOT A PART OF THIS NOTE.
IN WITNESS WHEREOF, the Borrower has duly executed and delivered to the Bank
this Note as of the date first above written.
ATTEST: ECC INTERNATIONAL CORP.
By:
- --------------------------- ------------------------------
Name: Relland Winand Name: George W. Murphy
Title: V.P. - Finance Title: President
Address: 175 Stafford Avenue
Wayne, PA 19087
Telecopier No.
----------------
5
<PAGE> 11
EXHIBIT A
Notice of Borrowing Under
Revolving Credit
Date of Borrowing:
-------------------------
Date of Note:
------------------------------
Amount Requested: $
------------------------
Interest Rate Basis:
-----------------------
Interest Period (if applicable):
-----------
The Borrower hereby notifies the Bank that it requires a borrower
("Borrowing") under the Term Loan and Revolving Credit Agreement, dated
September 20, 1994 (together with any amendments or modifications thereto in
effect from time to time, the "Loan Agreement") established for the Borrower in
the amount set forth above. The Borrowing will be deposited in the Borrower's
Account No. ____________________. In order to induce the Bank to fund such
Borrowing, the Borrower hereby affirms the following:
1. The representations and warranties of the Borrower contained in the
Loan Agreement are correct on and as of the date of this Notice of
Borrowing Under Revolving Credit.
2. No Event of Default (as defined in the Loan Agreement) has occurred
and is continuing.
3. There has been no change in the Borrower's or any Obligor's condition,
financial or otherwise, since the date of the Loan Agreement, which
would have a Material Adverse Affect (as defined in the Loan
Agreement).
4. All of the Loan Documents (as defined in the Loan Agreement) remain in
full force and effect, without modification.
6
<PAGE> 12
5. Use of Borrowing will be to: .
--------------------------------
Date: , 19 ECC INTERNATIONAL CORP.
-------------- --
By:
----------------------------
Name:
Title:
7
<PAGE> 1
Exhibit 11
<TABLE>
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Data)
<CAPTION>
Fiscal Years Ended June 30
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Primary
-------
Net Income ............................ $ 2,878 $ 7,318 $ 3,929
========== ========== ==========
Weighted Average Shares Outstanding ... 7,775,391 7,616,437 6,387,763
Incremental Shares from Assumed
Exercise of Stock Options ........... 113,954 277,744 503,270
---------- ---------- ----------
Total Shares .......................... 7,889,345 7,894,181 6,891,033
========== ========== ==========
Primary Per Share Amounts
-------------------------
Net Income ............................ 0.36 0.93 0.57
========== ========== ==========
Fully Diluted *
-------------
Net Income ............................ 2,878 7,318 3,929
========== ========== ==========
Weighted Average Shares Outstanding ... 7,775,391 7,616,437 6,387,763
Incremental Shares from Assumed
Exercise of Stock Options ........... 113,954 277,744 634,580
---------- ---------- ----------
Total Shares .......................... 7,889,345 7,894,181 7,022,343
========== ========== ==========
Fully Diluted Per Share Amounts
-------------------------------
Net Income ............................ $ 0.36 $ 0.93 $ 0.56
========== ========== ==========
<FN>
* Fully diluted earnings per share calculation is presented in accordance
with Regulation S-K item 601(b)(11) although not required by footnote 2 to
paragraph 14 of Accounting Principles Board Opinion No. 15 because it
results in dilution of less than 3%.
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The Company has four subsidiaries, ECC Vending Corp., a Delaware
corporation, Educational Computer International, Inc., a Delaware corporation,
ECC International Inc., a Virgin Islands corporation, and ECC Simulation
Limited, a U.K. corporation all of which are wholly owned.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements of ECC International Corp. and subsidiaries of our report dated
August 20, 1996, on our audits of the consolidated financial statements of ECC
International Corp. and subsidiaries as of June 30, 1996 and 1995, and for the
fiscal years ended June 30, 1996, 1995 and 1994, which report is included in
this Annual Report on Form 10-K:
Form S-8 (File No. 2-85483)
Form S-8 (File No. 33-02768)
Form S-8 (File No. 33-11904)
Form S-8 (File No. 33-37224)
Form S-8 (File No. 33-46671)
Form S-8 (File No. 33-68550)
Form S-8 (File No. 333-10725)
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,057
<SECURITIES> 0
<RECEIVABLES> 11,271
<ALLOWANCES> 135
<INVENTORY> 12,984
<CURRENT-ASSETS> 66,618
<PP&E> 57,971
<DEPRECIATION> 31,285
<TOTAL-ASSETS> 95,397
<CURRENT-LIABILITIES> 22,382
<BONDS> 18,706
<COMMON> 782
0
0
<OTHER-SE> 52,093
<TOTAL-LIABILITY-AND-EQUITY> 95,397
<SALES> 117,156
<TOTAL-REVENUES> 117,156
<CGS> 95,712
<TOTAL-COSTS> 95,712
<OTHER-EXPENSES> 565
<LOSS-PROVISION> 84
<INTEREST-EXPENSE> 1,570
<INCOME-PRETAX> 4,523
<INCOME-TAX> 1,645
<INCOME-CONTINUING> 2,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,878
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
