<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-8988
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ECC International Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1714658
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
175 Strafford Avenue, Suite 116, Wayne, PA 19087-3377
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(Address of principal executive offices) (Zip Code)
(610) 687-2600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
[X] Yes [ ] No
As of September 30, 1996, there were 7,845,862 shares of the Registrant's
Common Stock, $.10 par value per share, issued and outstanding.
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- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In Thousands Except Share and Per Share Data)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
9/30/96 9/30/95
---------- ----------
<S> <C> <C>
Net Sales $ 24,420 $ 26,980
Cost of Sales 19,701 20,630
---------- ----------
Gross Profit 4,719 6,350
---------- ----------
Expenses:
Selling, General & Administrative 3,708 3,259
Systems Development 162 58
---------- ----------
Total Expenses 3,870 3,317
---------- ----------
Operating Income 849 3,033
---------- ----------
Other Income (Expense):
Interest Income 48 63
Interest Expense (440) (464)
Other - Net (14) (59)
---------- ----------
Total Other Expense (406) (460)
---------- ----------
Income Before Income Taxes 443 2,573
Provision for Income Taxes 229 886
---------- ----------
Net Income $ 214 $ 1,687
========== ==========
Earnings Per Common Share and
Common Share Equivalents $ 0.03 $ 0.21
========== ==========
Weighted Average Number of Common and
Common Share Equivalents Outstanding 8,015,351 7,957,873
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 3
<TABLE>
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited) (Audited)
9/30/96 6/30/96
----------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 853 $ 5,057
Accounts Receivable, Net 8,878 11,136
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 35,057 35,251
Inventories
Raw Material 8,240 8,027
Work in Process 3,646 3,069
Finished Goods 2,741 1,888
Prepaid Expenses and Other 2,216 2,190
------- -------
Total Current Assets 61,631 66,618
Property, Plant and Equipment - Net 26,675 26,686
Other Assets 1,828 2,093
------- -------
Total Assets $90,134 $95,397
======= =======
</TABLE>
Continued...
<PAGE> 4
<TABLE>
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
<CAPTION>
(Unaudited) (Audited)
9/30/96 6/30/96
----------- ---------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 4,998 $ 4,272
Accounts Payable 6,668 10,967
Accrued Compensation 2,170 3,878
Advances on Long-Term Contracts 12 856
Accrued Profit Sharing 731 --
Other Accrued Expenses 1,947 2,409
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Total Current Liabilities 16,526 22,382
------- -------
Deferred Income Taxes 1,434 1,434
------- -------
Long-Term Debt 19,000 18,706
------- -------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.10 par; authorized
20,000,000 shares at 9/30/96 and
6/30/96; reserved for stock options
and other obligations to issue stock,
1,246,111 shares at 9/30/96 and
1,190,499 shares at 6/30/96; issued
and outstanding, 7,845,862 shares
at 9/30/96 and 7,833,143 at 6/30/96 785 782
Preferred stock, $.10 par; authorized
1,000,000 shares at 9/30/96 and at
6/30/96; issued and none outstanding
at 9/30/96 and 6/30/96 -- --
Capital in Excess of Par 22,899 22,831
Retained Earnings 29,498 29,284
Cumulative Translation Adjustment (8) (22)
------- -------
Total Stockholders' Equity 53,174 52,875
------- -------
Total Liabilities & Stockholders' Equity $90,134 $95,397
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 5
<TABLE>
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
9/30/96 9/30/95
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 214 $ 1,687
Items Not Requiring Cash:
Depreciation 1,044 945
Provision for Doubtful Accounts -- 20
Deferred Income Taxes -- --
Changes in Certain Assets and Liabilities:
Accounts Receivable 2,258 872
Cost and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 194 71
Inventories (1,643) (2,117)
Prepaid Expenses and Other (26) 155
Accounts Payable (4,299) 3,903
Advances on Long-Term Contracts (844) (40)
Accrued Expenses (1,439) (503)
------- -------
Net Cash (Used In) Provided By Operating Activities (4,541) 4,993
------- -------
Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment (1,033) (1,244)
Other 279 (9)
------- -------
Net Cash Used In Investing Activities (754) (1,253)
------- -------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock, Options
Exercised and Warrants, Including Related Tax Benefit 71 165
Repayments under Term Loan (750) (750)
New Borrowings under Revolving Credit Facility, Net 1,770 (3,076)
------- -------
Net Cash Provided By (Used In) Financing Activities 1,091 (3,661)
------- -------
Net (Decrease) Increase in Cash (4,204) 79
Cash at Beginning of the Period 5,057 3,535
------- -------
Cash at End of the Period 853 3,614
======= =======
</TABLE>
Continued...
<PAGE> 6
<TABLE>
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 (Continued)
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
9/30/96 9/30/95
------------ ------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 420 $ 500
Income Taxes $ 922 $ 861
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The accompanying statements are unaudited and have been prepared by ECC
pursuant to the rules and regulations of the Securities and Exchange
Commission. The June 30, 1996 balance sheet was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management such
consolidated financial statements contain all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows for
the interim period presented. The aforementioned consolidated financial
statements have been prepared substantially in conformity with the
accounting principles reflected in the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
2. Earnings per share for the three-month periods ended September 30, 1996 and
1995 are based on net income divided by the weighted average number of
common share and common share equivalents outstanding.
Common stock equivalents (stock options, warrants and Employee Stock
Purchase Plan) are excluded from the calculation of per share data when
their dilutive effect is not material.
3. The Company did not comply with the minimum fixed charge coverage ratio at
September 30, 1996 under its Term Loan and Revolving Credit Agreement and,
accordingly, has received an irrevocable waiver with respect to such
covenant from its bank lender. The Company's term loan requires quarterly
principal payments of $750,000 during fiscal year 1997.
<PAGE> 8
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a) Material Changes in Financial Conditions.
-----------------------------------------
During the three-month period ended September 30, 1996, the Company's
principal sources of cash were receipts on accounts receivable and
borrowings under the revolving credit facility. The principal uses of these
and existing funds were to make payments on the term loan and accounts
payable and to finance the increase in inventories as well as acquisitions
of property, plant and equipment.
Work in progress inventory increased primarily due to unabsorbed overhead.
Overhead is absorbed on an annualized projected rate. Management expects
that volume during the remaining fiscal 1997 quarters will support the
currently budgeted overhead rate.
Finished goods inventory increased primarily due to the continued
production of vending machines in anticipation of future sales orders.
The decrease in other assets was primarily a result of the return of
deposits made for the purchase of computer equipment.
The decrease in accounts payable of approximately $4.3 million was
primarily the result of a substantial slow-down in material purchases as
two of the Company's largest contracts will be completed or substantially
completed during fiscal year 1997.
Advances on long-term contracts decreased as the U.K. division progressed
on its two major contracts which provided advance payments.
Other accrued expenses decreased as a result of federal income tax payments
made during the first quarter of fiscal year 1997.
The Company did not comply with the minimum fixed charge coverage ratio at
September 30, 1996 under its Term Loan and Revolving Credit Agreement and,
accordingly, has received an irrevocable waiver with respect to such
covenant from its bank lenders. The Company's term loan requires quarterly
principal payments of $750,000 during fiscal year 1997.
During fiscal year 1997, the Company anticipates spending approximately
$4.2 million for new machinery and equipment, computers and to continue to
refurbish the Orlando facility.
Other than as stated above, the Company has no other material commitments
for capital expenditures. Management believes that with proceeds from the
revolving credit facility and its projected cash flow the Company will have
sufficient resources to meet current and future operating commitments.
<PAGE> 9
b) Material Changes in Results of Operations.
------------------------------------------
Net sales decreased for the three-month period ended September 30, 1996 as
compared to the same period ended September 30, 1995. The decrease in net
sales was primarily the result of low volume in the Company's vending
subsidiary during the first quarter. The decrease was also a result of
several major training division contracts which have reduced activity as
they are expected to be completed during fiscal year 1997 or the first
quarter of fiscal year 1998. Sales volume in the U.K. division increased
substantially over the corresponding period in the prior fiscal year due to
continued efforts on it's two major contracts.
Gross margin as a percentage of sales decreased in the quarter ended
September 30, 1996 versus the quarter ended September 30, 1995. The
decrease in gross margin was primarily the result of low sales volume in
the vending subsidiary which was not sufficient to cover overhead costs for
the first quarter. In addition, gross margin in the U.K. division decreased
as a result of contract adjustments recorded, during the fourth quarter of
fiscal year 1996, on two major contracts due to extended testing on one
contract and increased complexity on the trainer of another contract.
The gross margin of the domestic training division is relatively consistent
with the corresponding period in the prior fiscal year. This reflects the
change during the last year in contract mix to more cost plus type
contracts which generally yield lower margins than fixed price type
contracts.
Systems development increased during the first quarter of fiscal year 1997
versus the corresponding period in fiscal year 1996. The increase reflects
efforts in the domestic training division to develop and/or enhance
technologies and processes in order to remain competitive in the industry.
<PAGE> 10
c) 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 Quarterly Report on Form 10-Q and presented elsewhere by
management from time to time. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements.
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 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.
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 effect on the Company's financial
condition and results of operations. In addition, many of the Company's
competitors have substantially greater financial resources and generate
higher revenues than the Company.
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 effect 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> 11
PART II. OTHER INFORMATION
ECC INTERNATIONAL CORP.
Item 1.
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.
The Company has received a letter from the Department of The Air Force
Contracting Officer stating that it intends to issue a unilateral modification
to the contract in the amount of $190,000 for the EPA. The Company intends to
file an appeal with the United States Court of Federal Claims during the second
quarter of fiscal year 1997.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
Exhibit 11 - Schedule of Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
-------------------
The Company filed two Current Reports on Form 8-K during the
quarter for which this report is filed. On August 13, 1996, the
Company filed a Current Report on Form 8-K, dated August 6, 1996,
to report an amendment to the Rights Agreement, dated as of July
28, 1986, between the Company and Mellon Bank, N.A. On September
4, 1996, the Company filed a Current Report on Form 8-K, dated
August 27, 1996 to report (i) an amendment to the Rights
Agreement, dated as of July 28, 1986, between the Company and
Mellon Bank, N.A., and (ii) the declaration by the Board of
Directors of the Company of a dividend distribution of one
Preferred Share Purchase Right for each outstanding share of the
Company's Common Stock to stockholders of record on September 17,
1996, pursuant to a Rights Agreement, dated as of August 27,
1996, between the Company and Mellon Bank, N.A.
<PAGE> 12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECC INTERNATIONAL CORP.
Date November 12, 1996 /s/ George W. Murphy
------------------------ ---------------------
George W. Murphy, President,
Chief Executive Officer and
Principal Executive Officer
Date November 12, 1996 /s/ Relland Winand
----------------- ------------------
Relland Winand
Vice President, Finance and
Principal Financial and
Accounting Officer
<PAGE> 1
Exhibit 11
<TABLE>
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
September 30 September 30
1996 1995
<S> <C> <C>
Primary
- -------
Net Income $ 214 $ 1,687
========== ==========
Weighted Average Shares Outstanding 7,878,605 7,686,490
Incremental Shares from Assumed
Exercise of Stock Options 136,746 271,383
---------- ----------
Total Shares 8,015,351 7,957,873
========== ==========
Primary Per Share Amounts
- -------------------------
Net Income $ 0.03 $ 0.21
========== ==========
Fully Diluted *
- -------------
Net Income $ 214 $ 1,687
========== ==========
Weighted Average Shares Outstanding 7,878,605 7,686,490
Incremental Shares from Assumed
Exercise of Stock Options 136,746 295,715
---------- ----------
Total Shares 8,015,351 7,982,205
========== ==========
Fully Diluted Per Share Amounts
- -------------------------------
Net Income $ 0.03 $ 0.21
========== ==========
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 853
<SECURITIES> 0
<RECEIVABLES> 9,013
<ALLOWANCES> 135
<INVENTORY> 14,627
<CURRENT-ASSETS> 61,631
<PP&E> 59,004
<DEPRECIATION> 32,329
<TOTAL-ASSETS> 90,134
<CURRENT-LIABILITIES> 16,526
<BONDS> 19,000
<COMMON> 785
0
0
<OTHER-SE> 52,389
<TOTAL-LIABILITY-AND-EQUITY> 90,134
<SALES> 24,420
<TOTAL-REVENUES> 24,420
<CGS> 19,701
<TOTAL-COSTS> 19,701
<OTHER-EXPENSES> 128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440
<INCOME-PRETAX> 443
<INCOME-TAX> 229
<INCOME-CONTINUING> 214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
