<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 December 31, 1998
-------------------------------------------------
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 of (I.R.S. Employer Identification No.)
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 December 31, 1998, there were 8,330,309 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
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
12/31/98 12/31/97
---------- ---------
<S> <C> <C>
Net Sales $ 24,379 $ 24,676
Cost of Sales 18,466 20,211
--------- ---------
Gross Profit 5,913 4,465
--------- ---------
Expenses:
Selling, General & Administrative 5,879 6,223
Systems Development 570 1,526
Non-Recurring Expenses 1,872 --
--------- ---------
Total Expenses 8,321 7,749
--------- ---------
Operating Loss (2,408) (3,284)
--------- ---------
Other Income (Expense):
Interest Income 120 88
Interest Expense (586) (673)
Other - Net 215 (9)
--------- ---------
Total Other Expense - Net (251) (594)
--------- ---------
Loss From Continuing Operations Before Income
Taxes (2,659) (3,878)
Benefit From Income Taxes (423) (907)
--------- ---------
Loss From Continuing Operations (2,236) (2,971)
Discontinued Operations:
Loss on Disposal (net of applicable income tax
benefits of $199 in 1997) -- (370)
--------- ---------
Net Loss $ (2,236) $ (3,341)
--------- ---------
Loss Per Common Share - Basic and Assuming Dilution:
Loss Per Common Share From Continuing Operations (0.27) (0.37)
Loss Per Common Share From Discontinued Operations -- (0.05)
--------- ---------
Net Loss Per Common Share $ (0.27) $ (0.42)
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 3
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
12/31/98 12/31/97
------------ ------------
<S> <C> <C>
Net Sales $13,968 $12,520
Cost of Sales 10,479 10,553
------- -------
Gross Profit 3,489 1,967
------- -------
Expenses:
Selling, General & Administrative 2,818 3,311
Systems Development 50 843
Non-Recurring Expenses 706 --
------- -------
Total Expenses 3,574 4,154
------- -------
Operating Loss (85) (2,187)
------- -------
Other Income (Expense):
Interest Income 45 5
Interest Expense (342) (283)
Other - Net 111 58
------- -------
Total Other Expense - Net (186) (220)
------- -------
Loss From Continuing Operations Before Income Taxes (271) (2,407)
Provision/(Benefit) for Income Taxes 181 (547)
------- -------
Loss From Continuing Operations (452) (1,860)
Discontinued Operations:
Loss on Disposal (net of applicable income tax
benefits of $199 in 1997) -- (370)
Net Loss $ (452) $(2,230)
======= =======
Loss Per Common Share -Basic and Assuming Dilution:
Loss Per Common Share From Continuing Operations (0.05) (0.23)
Loss Per Common Share From Discontinued Operations -- (0.05)
------- -------
Net Loss Per Common Share $ (0.05) $ (0.28)
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 4
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
12/31/98 12/31/97
--------- ---------
<S> <C> <C>
Net Loss $(2,236) $(3,341)
Other Comprehensive Income (Expense):
Foreign Currency Translation Adjustments (147) 24
------- -------
Total Comprehensive Loss $(2,383) $(3,317)
======== =======
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE> 5
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
12/31/98 12/31/97
--------- ---------
<S> <C> <C>
Net Loss $(452) $(2,230)
Other Comprehensive Income (Expense):
Foreign Currency Translation Adjustments (22) (54)
----- -------
Total Comprehensive Loss $(474) $(2,284)
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE> 6
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
12/31/98 6/30/98
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 4,721 $ 4,830
Accounts Receivable, Net 7,529 8,097
Cost and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 12,198 16,391
Inventories
Raw Material 4,143 4,149
Work in Process 838 1,053
Prepaid Expenses and Other 7,405 6,868
------- -------
Total Current Assets 36,834 41,388
Property, Plant and Equipment - Net 20,230 20,994
Other Assets 478 1,976
------- -------
Total Assets $57,542 $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)
12/31/98 6/30/98
----------- --------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 9,834 $11,132
Accounts Payable 2,741 6,263
Advances on Long-Term Contracts 347 4,683
Accrued Expenses and Other 10,385 7,925
------- -------
Total Current Liabilities 23,307 30,003
------- -------
Deferred Income Taxes 918 918
------- -------
Other Long Term Liabilities 2,239 --
------- -------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.10 par; authorized
20,000,000 shares at 12/31/98 and
6/30/98; issued and outstanding,
8,330,309 shares at 12/31/98 and
8,318,058 at 6/30/98 833 832
Preferred stock, $.10 par; authorized
1,000,000 shares at 12/31/98 and at
6/30/98; none issued and outstanding
at 12/31/98 and 6/30/98 -- --
Note Receivable from Stockholder (146) (146)
Capital in Excess of Par 24,827 24,804
Retained Earnings 5,697 7,933
Cumulative Translation Adjustment (133) 14
------- -------
Total Stockholders' Equity 31,078 33,437
------- -------
Total Liabilities & Stockholders' Equity $57,542 $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 SIX MONTHS ENDED
DECEMBER 31, 1998 AND 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
12/31/98 12/31/97
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(2,236) $(3,341)
Items Not Requiring (Providing) Cash:
Depreciation 2,095 2,284
Gain on Sale of Assets (311) --
Provision for Discontinued Operations -- 569
Changes in Certain Assets and Liabilities:
Accounts Receivable 568 432
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 4,193 2,884
Inventories 221 (1,455)
Prepaid Expenses and Other (537) (661)
Accounts Payable (376) (1,098)
Advances on Long-Term Contracts (2,930) 1,484
Accrued Expenses and Other 171 (1,615)
------- -------
Net Cash Provided By (Used In) Operating Activities 858 (517)
------- -------
Cash Flows From Investing Activities:
Proceeds From Sale of Discontinued Operations -- 7,881
Proceeds From Sales of Assets 501 --
Additions to Property, Plant and Equipment (1,521) (1,886)
Other 1,332 (17)
------- -------
Net Cash Provided By Investing Activities 312 5,978
------- -------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock, Options
Exercised and Warrants, Including Related Tax Benefit 1 519
Repayments under Term Loan -- (2,250)
Repayments under Revolving Credit Facility, Net (1,280) (5,542)
------- -------
Net Cash Used In Financing Activities (1,279) (7,273)
------- -------
Net Decrease in Cash (109) (1,812)
Cash at Beginning of the Period 4,830 3,888
------- -------
Cash at End of the Period $ 4,721 $ 2,076
======= =======
</TABLE>
Continued...
<PAGE> 9
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998 AND 1997 (Continued)
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
12/31/98 12/31/97
---------- ----------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 552 $707
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 23 $ 41
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 six and three-month periods ended December 31, 1997 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 precontract 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 six and three-month periods ended December 31, 1997, was to increase
net loss by $271,000 ($0.03 per share) and $153,000 ($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:
<TABLE>
<CAPTION>
12/31/98 12/31/97
--------- ---------
<S> <C> <C>
Six-months ended 8,346,269 8,138,517
Three-months ended 8,346,610 8,157,716
</TABLE>
<PAGE> 11
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 normal course of business. The Company
has suffered substantial losses in recent fiscal years and for the first
six months of fiscal year 1999. In addition, the Company is experiencing
difficulty generating sufficient cash flow to meet its obligations and
sustain operations. These factors raise 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 a $1.1 million
payment on the Company's credit line with the bank in January 1999. The
Company is required to make additional payments totaling $2.4 million
between February 1, 1999 and October 12, 1999.
The Company continues to seek alternate sources of financing, however,
there can be no assurance that such financing will be obtained.
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, of approximately $4.6 million to monthly installments through
December 2002. At December 31, 1998, 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 by March 1999. In addition, the Company announced
the relocation of 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. The
relocation was completed on September 30, 1998. As a result of the efforts
to wind down the UK operation and the relocation of the corporate
headquarters, the Company recorded non-
<PAGE> 12
recurring charges of approximately $1.2 million and $700,000 during the
three-month periods ended September 30, 1998 and December 31, 1998,
respectively. These charges primarily relate to employee termination
benefits and lease termination costs. The Company is in the process of
finalizing the lease termination for one of its facilities in the UK and as
such recorded a charge during the second quarter of fiscal year 1999 of
approximately $455,000. Management expects to record additional charges,
principally relating to employee termination benefits, during the remainder
of fiscal year 1999 of $1.1 million. Management continues to evaluate
options with respect to the remaining leased facility in the UK including
subletting the facility or terminating the lease. Any resulting charge will
be determined after the evaluation is complete. 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 December 31, 1998:
<TABLE>
<CAPTION>
Cash Non-Cash Accrual
Provisions Reductions Activity at 12/31/98
---------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Severance $ 1,137 $ (731) $ -- $ 406
Lease Obligations 538 (41) 0 497
Other 197 (2) (40) 155
-------- -------- ------- ---------
Total $ 1,872 $ (774) $ (40) $ 1,058
-------- -------- ------- ---------
</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 six-month period ended December 31, 1998, 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, 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 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 and Saudi Vigs programs, as well as receipts by the UK
subsidiary.
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 decreased primarily due to the completion of
parts built for stock. This decrease was partially offset by an increase in
unabsorbed overhead. Overhead is absorbed on an annualized projected rate.
Management expects that volume during the remaining fiscal 1999 quarters
will support the currently budgeted overhead rate.
Prepaid Expenses and Other increased primarily due to the Federal tax
benefit recorded for the Federal net operating loss realized during the
six-month period ended December 31, 1998.
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.
<PAGE> 14
Accounts Payable decreased primarily due to the UK subsidiary's novation of
a contract to Lockheed. (See Note 4 to the Unaudited Consolidated Financial
Statements.)
Advances on Long-Term Contracts decreased primarily due to the UK
subsidiary's novation of a contract to Lockheed. (See Note 4 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 paid during the
second quarter 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
six months of fiscal year 1999. In addition, the Company is experiencing
difficulty generating sufficient cash flow to meet its obligations and
sustain operations. These factors raise 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 continues to seek alternate sources of financing, however,
there can be no assurance that such financing will be obtained.
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, of
approximately $4.6 million to monthly installments through December 2002.
At December 31, 1998, 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 $500,000 for new machinery and equipment and to continue to
refurbish the Orlando facility.
<PAGE> 15
Other than as stated above, the Company currently has no other material
commitments for capital expenditures.
b.) MATERIAL CHANGES IN RESULTS OF OPERATIONS.
Net Sales increased for the three-month period ended December 31, 1998 as
compared to the same period ended December 31, 1997. The increase is
primarily due to progress on existing domestic operation programs
including: Javelin multi-year; CCTT LRIP; a Saudi Vigs contract; as well as
several additions to other ongoing contracts. In addition, the Company was
awarded a contract to deliver Engagement Skills Trainers (EST) to the US
Army. EST uses modified weapons, projected three dimensional computer
imagery and laser pointing devices to teach small arms marksmanship and
combat engagement skills. The contract includes options for over 1,100
subsystems and 7,500 weapons estimated to be delivered for deployment over
the next eight years. The contracts total program value is approximately
$90 million, including in service support. The Company's initial award was
$6.1 million.
Net Sales decreased slightly for the six-month period ended December 31,
1998 as compared to the same period ended December 31, 1997. The decrease
is primarily the result of reduced activity in the UK operation as the wind
down of the subsidiary is expected to be completed by March 1999.
Overall Gross Margin as a percentage of net sales increased for the three
and six-month periods ended December 31, 1998 versus the same periods ended
December 31, 1997. 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
six-month periods ended December 31, 1998 over the corresponding prior year
periods. These decreases are primarily the result of cost containment
initiatives, closure of the corporate headquarters in Wayne, Pennsylvania
and the commencement of the wind down of the UK operation. Partially
offsetting these decreases were increased marketing and bid and proposal
costs as the Company seeks new business awards, such as the EST program;
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 six-month periods
ended December 31, 1998, over the corresponding prior year periods. These
decreases are the result of more focused initiatives, cost containment
efforts and continuing 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 by March 1999. In addition, on September 30, 1998,
the Company relocated its corporate headquarters staff and Instructional
Systems Development Group from Wayne,
<PAGE> 16
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 and $700,000
during the three month periods ended September 30, 1998 and December 31,
1998, respectively. These charges primarily relate to employee termination
benefits and lease termination costs. The Company is in the process of
finalizing the lease termination for one of its facilities in the UK and as
such recorded a charge during the second quarter of fiscal year 1999 of
approximately $455,000. Management expects to record additional charges,
principally relating to employee termination benefits, during the remainder
of fiscal year 1999 of $1.1 million. Management continues to evaluate
options with respect to the remaining leased facility in the UK including
subletting the facility or terminating the lease. Any resulting charge will
be determined after the evaluation is complete.
Interest Expense decreased for the six-month period ended December 31, 1998
versus the corresponding period in the previous fiscal year, primarily due
to a reduction in the Company's revolving credit facility. Interest expense
increased for the three-month period ended December 31, 1998, versus the
corresponding period in the previous fiscal year, primarily due to bank
fees, partially offset by a reduction in interest resulting from pay downs
of the Company's revolving credit facility.
Other - Net increased for the three and six-month periods ended December
31, 1998, versus the corresponding periods in the previous fiscal year,
primarily as a result of a gain associated with the sale of real estate.
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.
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 $8.6 million
outstanding under the line of credit and the Company is obligated to make
payments aggregating $2.3 million through the maturity date. The Company
continues to seek alternate sources of financing, however, there can be no
assurance that such financing will be obtained on terms acceptable to the
Company, if at all.
<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 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.
YEAR 2000 ISSUE
The "Year 2000" issue 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 (about 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. The Company
will perform a final re-verification test of all systems in the second
quarter of calendar year 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. The Meridian Voice Mail system is not yet
compliant and is currently being upgraded to a version that is compliant.
This is expected to be completed in the first quarter of calendar year
1999. 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
<PAGE> 18
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 has also 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. Approximately 50% 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 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 plan on 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 not yet developed contingency plans in the event of
a Year 2000 failure caused by a supplier or third party, but would intend
to do so if a specific problem is identified through the programs described
above. 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 is in the process of completing its contingency
planning for high risk areas at this time and is scheduled to commence
contingency planning for medium to low risk areas the second quarter of
calendar year 1999. The Company expects its contingency plans to 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.
<PAGE> 19
PART II. OTHER INFORMATION
ECC INTERNATIONAL CORP.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on December 3,
1998, the following proposals were adopted by the vote specified
below:
<TABLE>
<CAPTION>
Votes Votes Broker
Proposal For Against Abstain NonVotes
<S> <C> <C> <C> <C>
(1) To elect the Board of Directors
Bruce A. Beda 6,196,749 1,081 - 57,532
Julian Demora 4,351,450 1,846,380 - 1,872,831
James C. Garrett 6,189,533 8,297 - 34,748
Martin S. Kaplan 5,813,720 384,110 - 410,561
Jesse Krasnow 5,811,020 386,810 - 413,261
Thomas E. McGrath 6,010,419 187,411 - 213,862
Merrill A. McPeak 6,164,494 33,336 - 59,787
(2) To approve the Company's 1999 Employee Stock Purchase Plan.
5,903,202 289,912 13,660 2,122,635
(3) To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the fiscal year ending
June 30, 1999.
6,221,230 35,513 14,493 2,058,173
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 27.1 - Financial Data Schedule.
Exhibit 10.1 - Forbearance Agreement and Amendment dated as of
October 8, 1998 by and among the Company and First Union National
Bank, is incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated October 8, 1998
(commission File No. 001-8988).
<PAGE> 20
b. REPORTS ON FORM 8-K
On October 19, 1998, the Company filed a Current Report on Form
8-K, dated October 8, 1998, to report under Item 5 (Other Events)
that the Company had entered into a Forbearance Agreement and
Amendment with First Union National Bank. No financial statements
were required to be filed with such report.
On November 12, 1998, the Company filed a Current Report on Form
8-K, dated November 5, 1998 to report under Item 5 (Other Events)
the departure of a Vice President and his resignation from the
Board of Directors. No financial statements were required to be
filed with such report.
<PAGE> 21
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 February 12, 1999 /s/ James C. Garrett
----------------------------------
James C. Garrett
President and
Chief Executive Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,721
<SECURITIES> 0
<RECEIVABLES> 7,529
<ALLOWANCES> 0
<INVENTORY> 4,981
<CURRENT-ASSETS> 36,834
<PP&E> 57,145
<DEPRECIATION> 36,915
<TOTAL-ASSETS> 57,542
<CURRENT-LIABILITIES> 23,307
<BONDS> 0
0
0
<COMMON> 833
<OTHER-SE> 5,564
<TOTAL-LIABILITY-AND-EQUITY> 57,542
<SALES> 24,379
<TOTAL-REVENUES> 24,379
<CGS> 18,466
<TOTAL-COSTS> 18,466
<OTHER-EXPENSES> 8,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 586
<INCOME-PRETAX> (2,659)
<INCOME-TAX> (423)
<INCOME-CONTINUING> (2,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,236)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
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