<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 March 31, 1999
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: 001-8988
ECC International Corp.
(Exact name of registrant as specified in its charter)
Delaware 23-1714658
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2001 West Oak Ridge Road, Orlando, FL 32809-3803
(Address of principal executive offices) (Zip Code)
(407) 859-7410
(Registrant's telephone number, including area code)
Not Applicable
(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 the past 90 days.
[ X ] Yes [ ] No
As of March 31, 1999, there were 8,363,603 shares of the Registrant's
Common Stock, $.10 par value per share, issued and outstanding.
<PAGE> 2
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 AND
1998 (In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
3/31/99 3/31/98
----------- -----------
<S> <C> <C>
Net Sales $ 34,432 $ 37,054
Cost of Sales 25,169 30,668
--------- ---------
Gross Profit 9,263 6,386
--------- ---------
Expenses:
Selling, General & Administrative 8,394 9,649
Systems Development 705 1,958
Non-Recurring Expenses 3,160 --
--------- ---------
Total Expenses 12,259 11,607
--------- ---------
Operating Loss (2,996) (5,221)
--------- ---------
Other Income (Expense):
Interest Income 275 202
Interest Expense (844) (886)
Other - Net 182 99
--------- ---------
Total Other Expense - Net (387) (585)
--------- ---------
Loss From Continuing Operations Before Income
Taxes (3,383) (5,806)
Benefit From Income Taxes (213) (1,247)
--------- ---------
Loss From Continuing Operations (3,170) (4,559)
--------- ---------
Discontinued Operations:
Loss on Disposal (net of applicable income tax
benefit of $199 in 1998) -- (370)
--------- ---------
Net Loss $ (3,170) $ (4,929)
========= =========
Loss Per Common Share - Basic and Assuming Dilution:
Loss Per Common Share From Continuing Operations (0.38) (0.56)
Loss Per Common Share From Discontinued Operations -- (0.04)
--------- ---------
Net Loss Per Common Share $ (0.38) $ (0.60)
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 3
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND
1998 (In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/99 3/31/98
------------ ------------
<S> <C> <C>
Net Sales $ 10,053 $ 12,378
Cost of Sales 6,703 10,457
--------- ---------
Gross Profit 3,350 1,921
--------- ---------
Expenses:
Selling, General & Administrative 2,515 3,426
Systems Development 135 432
Non-Recurring Expenses 1,288 --
--------- ---------
Total Expenses 3,938 3,858
--------- ---------
Operating Loss (588) (1,937)
--------- ---------
Other Income (Expense):
Interest Income 155 114
Interest Expense (258) (213)
Other - Net (33) 108
--------- ---------
Total Other Income/(Expense) - Net (136) 9
--------- ---------
Loss From Continuing Operations Before Income Taxes (724) (1,928)
Provision/(Benefit) for Income Taxes 210 (340)
--------- ---------
Net Loss $ (934) $ (1,588)
========= =========
Net Loss Per Common Share - Basic and Assuming Dilution
$ (0.11) $ (0.19)
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 4
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
3/31/99 3/31/98
Net Loss $ (3,170) $ (4,929)
Other Comprehensive Income (Expense):
Foreign Currency Translation Adjustments 247 (39)
--------- ---------
Total Comprehensive Loss $ (2,923) $ (4,968)
========= =========
See accompanying notes to the consolidated financial statements
<PAGE> 5
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
(Unaudited)
Three Months Three Months
Ended Ended
3/31/99 3/31/98
Net Loss $ (934) $ (1,588)
Other Comprehensive Income (Expense):
Foreign Currency Translation Adjustments 394 (63)
--------- ---------
Total Comprehensive Loss $ (540) $ (1,651)
========= =========
See accompanying notes to the consolidated financial statements
<PAGE> 6
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
3/31/99 6/30/98
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 7,324 $ 4,830
Accounts Receivable, Net 2,728 8,097
Cost and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 15,098 16,391
Inventories
Raw Material 4,105 4,149
Work in Process 1,451 1,053
Prepaid Expenses and Other 3,089 6,868
--------- ---------
Total Current Assets 33,795 41,388
Property, Plant and Equipment - Net 19,267 20,994
Other Assets 671 1,976
--------- ---------
Total Assets $ 53,733 $ 64,358
========= =========
</TABLE>
Continued...
<PAGE> 7
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands Except Share and Per Share Data)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
3/31/99 6/30/98
LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities:
<S> <C> <C>
Current Portion of Long-Term Debt $ 7,208 $ 11,132
Accounts Payable 2,261 6,263
Advances on Long-Term Contracts -- 4,683
Accrued Expenses and Other 10,799 7,925
---------- ----------
Total Current Liabilities 20,268 30,003
---------- ----------
Deferred Income Taxes 918 918
---------- ----------
Other Long-Term Liabilities 1,934 --
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.10 par; authorized
20,000,000 shares at 3/31/99 and
6/30/98; issued and outstanding,
8,363,603 shares at 3/31/99 and
8,318,058 at 6/30/98 836 832
Preferred stock, $.10 par; authorized 1,000,000
shares at 3/31/99 and at 6/30/98; none issued
and outstanding at 3/31/99 and 6/30/98 -- --
Note Receivable from Stockholder (146) (146)
Capital in Excess of Par 24,899 24,804
Retained Earnings 4,763 7,933
Accumulated Other Comprehensive Income 261 14
---------- ----------
Total Stockholders' Equity 30,613 33,437
---------- ----------
Total Liabilities & Stockholders' Equity $ 53,733 $ 64,358
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 8
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
3/31/99 3/31/98
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (3,170) $ (4,929)
Items Not Requiring (Providing) Cash:
Depreciation 3,257 3,298
Gain on Sale of Assets (337) --
Provision for Discontinued Operations -- 569
Changes in Certain Assets and Liabilities:
Accounts Receivable 5,369 2,415
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 1,293 6,502
Inventories (354) (1,436)
Prepaid Expenses and Other 3,779 (807)
Accounts Payable (856) (27)
Advances on Long-Term Contracts (3,277) 1,418
Accrued Expenses and Other 299 (1,601)
----------- ----------
Net Cash Provided By Operating Activities 6,003 5,402
----------- ----------
Cash Flows From Investing Activities:
Proceeds From Sale of Discontinued Operations -- -- 7,881
Proceeds From Sales of Assets 529 --
Additions to Property, Plant and Equipment (1,722) (2,662)
Other 1,613 (255)
----------- ----------
Net Cash Provided By Investing Activities 420 4,964
----------- ----------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock, Options
Exercised and Warrants, Including Related Tax Benefit 56 97
Repayments under Term Loan -- (2,250)
Repayments under Revolving Credit Facility, Net (3,985) (5,479)
----------- ----------
Net Cash Used In Financing Activities (3,929) (7,632)
----------- ----------
Net Increase in Cash 2,494 2,734
Cash at Beginning of the Period 4,830 3,888
----------- ----------
Cash at End of the Period $ 7,324 $ 6,622
=========== ==========
</TABLE>
Continued...
<PAGE> 9
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 1998 (Continued)
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
3/31/99 3/31/98
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
<S> <C> <C>
Interest $ 830 $ 840
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 43 $ 69
Issuance of Employee Stock Incentives $ -- $ 421
Extended Payment Terms in Connection with
Novation Agreement $ 4,552 --
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 10
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, 1998 consolidated 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 the accompanying unaudited 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 periods presented. These
unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
2. For the nine and three-month periods ended March 31, 1998 the Company's
consolidated statements of operations and consolidated statements of cash
flows were restated for the following in order to conform to the
presentation in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998.
In accordance with Statement of Position 98-5 "Reporting on the Cost of
Start-Up Activities," in the fourth quarter of fiscal year 1998, the
Company changed its method of accounting for pre-contract costs from
deferring costs incurred for specific anticipated contracts and including
those costs in contract sales and costs when the contract award was
assured to expensing the costs as incurred. The retroactive effect of the
change on the nine and three-month periods ended March 31, 1998, was to
increase net loss by $409,000 ($0.05 per share) (of which $106,000
represents the cumulative effect of this change) and $138,000 ($0.02 per
share), respectively.
3. Basic loss per common share is computed by dividing net loss available to
common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted loss per share is computed by
dividing net loss available to common shareholders by the
weighted-average number of common shares outstanding during the period
adjusted for the number of shares that would have been outstanding if the
dilutive potential common shares had been issued. The diluted loss per
share does not assume the exercise of options that would have an
antidilutive effect on loss per share.
The weighted-average number of common shares outstanding for the basic
and diluted per share calculations are identical since the assumed
exercise of all outstanding options would be antidilutive.
The weighted-average number of common shares outstanding for each period
presented is as follows:
3/31/99 3/31/98
Nine-months ended 8,350,805 8,160,122
Three-months ended 8,372,128 8,204,292
4. The Company's financial statements have been presented on the basis that
it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the
<PAGE> 11
normal course of business. The Company has suffered substantial losses in
recent fiscal years and for the first nine months of fiscal year 1999.
This factor raises substantial doubt about the Company's ability to
continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
On January 22, 1999 the Company entered into an Agreement with First
Union National Bank which extended the maturity date of the Company's
credit line with the bank to October 12, 1999, reduced the availability
of credit from $11.4 million to $8.7 million and waived all past events
of default. In addition, the Agreement provides for the maintenance of
minimum cash balances, fixed charge coverage ratio, current ratio, debt
to equity ratio and minimum tangible net worth through the maturity date.
Pursuant to the terms of the Agreement, the Company made payments on the
credit line totaling $2.7 million during the third quarter of fiscal year
1999. The Company is required to make monthly payments totaling $700,000
between April 1, 1999 and October 1, 1999, with the remaining balance due
on October 12, 1999. There is currently approximately $7.2 million
outstanding under the credit line.
The Company has entered into a commitment letter agreement with Mellon
Bank, N.A. to provide a $12,500,000 revolving line of credit with an
initial term of four years. This new financing agreement is expected to
be completed by June 30, 1999 and is subject to standard conditions and
terms, including completion of an appraisal of the Company's real estate.
When concluded, the Mellon Bank Agreement will replace the Company's
current credit line.
On December 10, 1998, the Company's wholly owned subsidiary, ECC
Simulation Limited ("Simulation"), entered into a Novation Agreement with
Lockheed Martin ASIC ("Lockheed"). Under the agreement Simulation
assigned all rights and obligations under a certain contract to Lockheed.
The terms of the novation permit Simulation to extend payments, already
owing to Lockheed, to monthly installments through December 2000. At
March 31, 1999, the total outstanding due to Lockheed was approximately
$4.1 million. The current portion of this agreement was $2.4 million and
is included in Accrued Expenses and Other on the Consolidated Balance
Sheet. The balance is included in Other Long-Term Liabilities.
5. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), in the first quarter of
fiscal year 1999. SFAS No. 130 establishes standards for reporting
comprehensive income and its components, classified by their nature, in a
full set of annual financial statements. The components of other
comprehensive income for the Company have generally only included foreign
currency translation adjustments.
6. Non-Recurring Expenses
During the first quarter of fiscal year 1999, the Board of Directors
announced the approval of a plan to wind-down and discontinue the
operations of Simulation. The Simulation wind-down is expected to be
completed in May 1999. In addition, on September 30, 1999, the Company
relocated its corporate headquarters staff and Instructional Systems
Development Group from Wayne, Pennsylvania to the Company's principal
Systems Design and Production Center in Orlando, Florida. As a result of
the efforts to wind-
<PAGE> 12
down the UK operation and the relocation of the corporate headquarters,
the Company recorded non-recurring charges of approximately $1.2 million,
$700,000 and $1.3 million during the three-month periods ended September
30, 1998, December 31, 1998 and March 31, 1999, respectively. These
charges primarily relate to employee termination benefits and lease
termination costs. Management expects to record additional charges,
principally relating to employee termination benefits, during the
remainder of fiscal year 1999 of approximately $600,000. The following
table sets forth the details and the cumulative activity in the various
accruals associated with the wind down of Simulation and relocation of
the Wayne office in the Consolidated Balance Sheet at March 31, 1999:
<TABLE>
<CAPTION>
Cash Non-Cash Accrual
Provisions Reductions Activity at 03/31/99
<S> <C> <C> <C> <C>
Severance $ 1,570 $ (1,417) $ -- $ 153
Lease Obligations 1,393 (183) (7) 1,203
Other 197 (6) (40) 151
--------- -------- ------- ---------
Total $ 3,160 $ (1,606) $ (47) $ 1,507
-------- -------- ------- ---------
</TABLE>
<PAGE> 13
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended
to identify forward-looking statements. There are a number of factors
that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Operating Results."
a) Material Changes in Financial Condition
During the nine-month period ended March 31, 1999, the Company's
principal sources of cash were billings and receipts on accounts
receivable, costs and estimated earnings in excess of billings on
uncompleted contracts, federal tax refunds, proceeds from the sale of
real estate, cash surrender of life insurance policies for terminated
employees and refunds on deposits. The principal uses of these funds
were to reduce debt, make vendor, severance and lease termination
payments and fund improvements to the Orlando facility.
Accounts Receivable decreased primarily due to the receipt of payments
on the Company's domestic training contracts including the CCTT LRIP,
Javelin multi-year, F-18, C-17 and Saudi Vigs programs.
Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts decreased primarily due to the wind-down of the UK subsidiary
partially offset by progress on domestic operation programs. (See Note
4 to the Unaudited Consolidated Financial Statements.)
Work in Process inventory increased primarily due to unabsorbed
overhead. Overhead is absorbed on an annualized projected rate.
Management expects that volume during the remainder of fiscal 1999 will
support the currently budgeted overhead rate.
Prepaid Expenses and Other decreased primarily due to a Federal tax
refund received during the third quarter of fiscal year 1999.
Other Assets decreased primarily as a result of the surrender of
certain executive insurance policies and refunds of deposits related to
the Company's profit sharing plan.
Accounts Payable decreased primarily due to the UK subsidiary's
novation of a contract to Lockheed, as well as improved accounts
payable aging in the domestic operation. (See Note 4 to the Unaudited
Consolidated Financial Statements.)
<PAGE> 14
Advances on Long-Term Contracts decreased primarily due to the UK
subsidiary's novation of a contract to Lockheed and the wind-down of
its operations (See Notes 4 and 6 to the Unaudited Consolidated
Financial Statements.)
Accrued Expenses and Other increased primarily as a result of accruals
recorded for non-recurring expenses, including employee termination
benefits and lease termination costs, associated with the relocation of
the corporate headquarters and wind-down of the UK operation. These
accruals were partially offset by employee termination benefits and
lease termination costs paid during the second and third quarters of
fiscal year 1999. (See Note 6 to the Unaudited Consolidated Financial
Statements.)
In addition, Accrued Expenses and Other increased due to amounts
payable to Lockheed pursuant to a Novation Agreement. (See Note 4 to
the Unaudited Consolidated Financial Statements.)
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of
business. The Company has suffered substantial losses in recent fiscal
years and for the first nine months of fiscal year 1999. This factor
raises substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
On January 22, 1999 the Company entered into an Agreement with First
Union National Bank which extended the maturity date of the Company's
credit line with the bank to October 12, 1999, reduced the availability
of credit from $11.4 million to $8.7 million and waived all past events
of default. In addition, the Agreement provides for the maintenance of
minimum cash balances, fixed charge coverage ratio, current ratio, debt
to equity ratio and minimum tangible net worth through the maturity
date.
The Company has entered into a commitment letter agreement with Mellon
Bank, N.A. to provide a $12,500,000 revolving line of credit with an
initial term of four years. This new financing agreement is expected to
be completed by June 30, 1999 and is subject to standard conditions and
terms, including completion of an appraisal of the Company's real
estate. When concluded, the Mellon Bank Agreement will replace the
Company's current credit line.
On December 10, 1998, Simulation entered into a Novation Agreement with
Lockheed. Under the agreement, Simulation assigned all rights and
obligations under a certain contract to Lockheed. The terms of the
novation permit Simulation to extend payments, already owing to
Lockheed, to monthly installments through December 2000. At March 31,
1999, the total outstanding due to Lockheed was approximately $4.1
million. The current portion of this agreement was $2.4 million and is
included in Accrued Expenses and Other. The balance is included in
Other Long-Term Liabilities.
During the remainder of fiscal year 1999, the Company anticipates
spending approximately $100,000 for new machinery and equipment and to
continue to refurbish the Orlando facility.
Other than as stated above, the Company currently has no other material
commitments for capital expenditures.
<PAGE> 15
b.) Material Changes in Results of Operations.
Net Sales decreased for the three and nine-month periods ended March
31, 1999 as compared to the same periods ended March 31, 1998. The
decrease is primarily the result of reduced activity in the UK
operation related to the wind-down of the subsidiary. Partially
offsetting the decrease was progress on existing domestic operation
programs including: Javelin multi-year; CCTT LRIP; F-18 E/F; Engagement
Skills Trainers (EST); as well as several additions to other ongoing
contracts.
Overall Gross Margin as a percentage of net sales increased for the
three and nine-month periods ended March 31, 1999 versus the same
periods ended March 31, 1998. Domestic training contract gross margin
levels improved as a result of the completion of many large "cost plus"
type contracts which have historically had lower gross margins than the
"fixed price" type. In addition, the Company's cost reduction
initiatives during fiscal year 1999 reduced overhead cost, thus
improving gross margins. In addition, gross margins in the UK operation
improved over the corresponding periods in the prior fiscal year as a
result of the accrual for loss contracts recorded at June 30, 1998.
Selling, General and Administrative expenses decreased for the three
and nine-month periods ended March 31, 1999 over the corresponding
prior year periods ended March 31, 1998. These decreases are primarily
the result of cost containment initiatives, closure of the corporate
headquarters in Wayne, Pennsylvania and the near completion of the
wind-down of the UK operation. Partially offsetting these decreases
were costs related to increased utilization of consulting services
related to marketing, refinancing of debt, outplacement and executive
search services and increased legal fees.
System Development Expense decreased for the three and nine-month
periods ended March 31, 1999 over the corresponding prior year periods
ended March 31, 1998. These decreases are the result of more focused
initiatives, cost containment efforts and continuation of system
development costs now included as part of the EST contract and recorded
in cost of sales since the award of the contract in the second quarter
of fiscal year 1999.
During the first quarter of fiscal year 1999, the Board of Directors
announced the approval of a plan to wind-down and discontinue the
operations of Simulation. The Simulation wind-down is expected to be
completed in May 1999. In addition, on September 30, 1998, the Company
relocated its corporate headquarters staff and Instructional Systems
Development Group from Wayne, Pennsylvania to the Company's principal
Systems Design and Production Center in Orlando, Florida. As a result
of the efforts to wind-down the UK operation and the relocation of the
corporate headquarters, the Company recorded non-recurring charges of
approximately $1.2 million, $700,000 and $1.3 million during the three-
month periods ended September 30, 1998, December 31, 1998 and March 31,
1999, respectively. These charges primarily relate to employee
termination benefits and lease termination costs. The Company
terminated the leases for both of its facilities in the UK during the
second and third quarter of fiscal year 1999 and as such recorded
charges of approximately $455,000 and $862,000, respectively.
Management expects to record additional charges, principally relating
to employee termination benefits, during the remainder of fiscal year
1999 of approximately $600,000.
Interest Expense decreased for the nine-month period ended March 31,
1999 versus the corresponding period in the previous fiscal year,
primarily due to a reduction in the
<PAGE> 16
Company's revolving credit facility. Interest expense increased for the
three-month period ended March 31, 1999, versus the corresponding
period in the previous fiscal year, primarily due to bank fees.
Other - Net increased for the nine-month period ended March 31, 1999,
versus the corresponding period in the previous fiscal year, primarily
as a result of a gain associated with the sale of real estate during
the second quarter of fiscal year 1999. This gain was partially offset
by foreign exchange rate losses associated with converting the UK
subsidiary's portion of the revolving credit facility to dollars. The
UK subsidiary's debt was previously denominated in pounds sterling.
Other-Net decreased for the three-month period ended March 31, 1999
versus the corresponding period in the prior year primarily due to the
previously described foreign exchange rate losses in the UK subsidiary.
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.
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, 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.
The maturity date on the Company's line of credit with First Union
National Bank is October 12, 1999. There is currently approximately
$7.2 million outstanding under the line of credit and the Company is
obligated to make monthly payments aggregating $700,000 through October
1, 1999 with the balance due on the maturity date. The Company has
entered into a commitment letter agreement with Mellon Bank, N.A. to
provide a $12,500,000 revolving line of credit with an initial term of
four years. This new financing agreement is expected to be completed by
June 30, 1999 and is subject to standard conditions and terms,
including completion of an appraisal of the Company's real estate. When
concluded, the Mellon Bank Agreement will replace the Company's
current credit line.
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.
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. 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> 17
Year 2000 Issue
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with
"19", but may not properly recognize the year 2000. If a computer
system or software application used by the Company or a third party
dealing with the Company fails because of the inability of the system
or application to properly read the year "2000" the results could
conceivably have a material adverse effect on the Company if not
adequately remedied by the Company, its suppliers and customers, on a
timely basis.
The Company has formally addressed the Year 2000 Issue since November
1997 when a Year 2000 Compliance Program was initiated. A complete
evaluation was made on all internal systems, including voice mail,
automated badge entry, e-mail, payroll, accounting, facilities and
products. In addition, the Company is working with its prime
contractors to identify year 2000 problems that may affect the
integration of the Company's product with those of the prime
contractor. The Company will work with its prime contractors to
remediate any problems as they are identified.
For its information technology, the Company currently utilizes a
network of Unix and Windows NT platforms, which provide company-wide
access to all of the Company's business application programs. Employees
access the network application software through individual PC's
(approximately 400), all of which are compliant. Substantially all
operating systems related to the Company's network have been updated to
comply with Year 2000 requirements. Periodically, new application
programs and updated versions of existing programs are added to the
system. The Company has an ongoing program to confirm that all such
added software programs are compliant with Year 2000 requirements. The
Company expects to perform a final re-verification test of all systems
by July 1999 to allow time for any unexpected remediation that may need
to occur. Although there can be no assurance that the Company will
identify and correct every Year 2000 problem found in its computer
applications, the Company believes that it has in place a comprehensive
program to identify and correct any such problems.
The Company has reviewed its building and utility systems (heat, light,
phones, etc.) for the impact of Year 2000. Almost all of the systems in
this area are Year 2000 ready. While the Company has no reason to
believe that its utility suppliers will not meet their required Year
2000 compliance targets, there can be no assurance that these suppliers
will in fact meet the Company's requirements. The failure of any such
supplier to fully remediate its systems for Year 2000 compliance could
cause a partial shutdown of the Company's plant, which could impact the
Company's ability to meet its obligations to supply products to its
customers.
The Company is satisfied that its customer base is aware of the Year
2000 issue and is proactively working to ensure that there are no
problems associated with the Year 2000. The Company is aware of this
because all major customers have asked the Company for its Year 2000
status. In the process, they have revealed their Year 2000 plans and
stated that they are actively engaged in solving any problems.
The Company also previously commenced a program to determine the Year
2000 compliance efforts of its equipment and material suppliers. The
Company has sent requests to all of its significant suppliers regarding
their Year 2000 compliance, requesting that they warrant their ability
to provide services and supplies in the Year 2000. More than half of
the suppliers have warranted their ability to provide supplies in the
Year 2000, and the remainder have presented a plan to have their
company compliant
<PAGE> 18
by the end of calendar year 1999. This program will be ongoing and the
Company's efforts with respect to specific problems identified will
depend in part upon its assessment of the risk that any such problems
may cause the shutdown of a customer's plant or its operations.
Unfortunately, the Company cannot fully control the conduct of its
suppliers, and there can be no guarantee that Year 2000 problems
originating with a supplier will not occur. The Company has developed
contingency plans in the event of a Year 2000 failure caused by a
supplier or third party. In some cases, especially with respect to its
utility vendors, alternative suppliers may not be available.
The Company believes the cost of Year 2000 compliance for its
information and productions systems has not and will not be material to
its consolidated results of operations and financial position.
If the Company does not become Year 2000 compliant in a timely manner,
the Year 2000 issue could have a material impact on the business,
financial condition and results of operations. Delays in Year 2000
compliance could also adversely affect the Company's reputation and
competitive position and impair its ability to process customer
transactions and orders and payments of supplier merchandise. The most
reasonably likely worst case scenarios would include (1) corruption of
data contained in the Company's internal information systems, (2)
hardware failure and (3) the failure of infrastructure services
provided by third parties (e.g. electricity, phone service, etc.). The
Company has completed its contingency plan for high, medium, and low
risk areas. The plans include, among other things, manual
"work-arounds" for software and hardware failures, as well as
substitutions of systems, if necessary.
The foregoing shall be considered a Year 2000 readiness disclosure to
the maximum extent allowed under the Year 2000 Information and
Readiness Disclosure Act.
Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 4.1 - Amendment No. 2 to Rights Agreement, dated as of March
12, 1999, between the Company and Chase Mellon Shareholder Services,
L.L.C., as successor to Mellon Bank, N.A., is incorporated herein by
reference to Exhibit 3 to the Company's Amendment No. 1 to Registration
Statement on Form 8-K/A (File No. 001-8988.)
Exhibit 10.1 - Agreement, dated as of January 22, 1999, by and among
the Company, First Union National Bank, ECC Simulation Limited, ECC
International, Inc. and Educational Computer Corporation International,
Inc. is incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated January 22, 1999 (File No.
001-8988.)
Exhibit 27.1 - Financial Data Schedule
b. Reports on Form 8-K
On January 27, 1999, the Company filed a Current Report on Form 8-K,
dated January 22, 1999, to report under Item 5 (Other Events) that the
Company had entered into an Agreement with First Union National Bank.
No financial statements were required to be filed with such report.
<PAGE> 19
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 May 14, 1999 /s/ Melissa Van Valkenburgh
------------------------ ---------------------------
Melissa Van Valkenburgh
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 20
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 May 14, 1999 /s/ Melissa Van Valkenburgh
------------------------ ---------------------------
Melissa Van Valkenburgh
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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