FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 25, 1995
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 No. 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1714256
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) No.)
COUNTY LINE INDUSTRIAL PARK
SOUTHAMPTON, PENNSYLVANIA 18966
(Address of principal executive offices)
(Zip Code)
(215) 355-9100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days.
Yes x No
The number of shares outstanding of the registrant's common
stock as of October 10, 1995 is: 2,927,332
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
<TABLE>
<CAPTION>
ASSETS August 25, 1995 February 24, 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 66
Cash equivalents restricted for
letters of credit 819 592
Accounts receivable, net 7,199 9,631
Costs and estimated earnings
in excess of billings on un-
completed long-term contracts 3,930 3,151
Inventories 3,167 3,144
Prepaid expenses and other current
assets 405 136
Total current assets 15,520 16,720
Property, plant, and equipment,
at cost, net 2,478 2,547
Software development costs, net
of accumulated amortization of
$2,253 at August 25 and
$1,991 at February 24 1,517 1,488
Other assets 4 48
Total assets $ 19,519 $ 20,803
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
<TABLE>
<CAPTION>
LIABILITIES August 25, 1995 February 24, 1995
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 8,429 $ 2,278
Accounts payable - trade 1,399 1,647
Billings in excess of costs and
estimated earnings on
uncompleted long-term contracts 986 1,343
Customer deposits 429 547
Accrued income taxes 285 205
Net arbitration award 746 746
Accrued liabilities 779 916
Total current liabilities 13,053 7,682
Long-term debt, less current portion
Credit facility payable to banks
due February 28, 1996 - 6,739
Other 292 394
292 7,133
Deferred income taxes 252 252
Total liabilities 13,597 15,067
Commitments and Contingencies (Note 6) - -
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000
shares $.10 par value; 2,927,332
shares issued and outstanding at
August 25 and 2,906,980 shares issued
and outstanding at February 24 293 291
Capital contributed in excess of par
value of common stock 1,687 1,618
Retained earnings 3,942 3,827
Total stockholder's equity 5,922 5,736
Total liabilities and
stockholders' equity $ 19,519 $ 20,803
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
6 Months Ended
($000's, except per share data, Unaudited)
<TABLE>
<CAPTION>
August 25, 1995 August 26, 1994
<S> <C> <C>
Net Sales $ 7,271 $ 8,082
Cost of goods sold 4,594 6,595
Gross profit 2,677 1,487
Operating expenses:
Selling and administrative 1,964 2,091
Research and development 83 241
2,047 2,332
Operating income (loss) 630 (845)
Other expenses:
Interest expense 432 372
Letter of credit fees 12 19
Other, net 8 48
452 439
Income (loss) before income taxes 178 (1,284)
Provision (benefit) for income taxes 63 (483)
Net income (loss) $ 115 $ (801)
========== =========
Earnings (loss) per common share
(primary and fully diluted) $ .04 $ (.28)
========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3 Months Ended
($000's, except per share data, Unaudited)
<TABLE>
<CAPTION>
August 25, 1995 August 26, 1994
<S> <C> <C>
Net Sales $ 3,559 $ 3,868
Cost of goods sold 2,308 3,178
Gross profit 1,251 690
Operating expenses:
Selling and administrative 908 961
Research and development 43 69
951 1,030
Operating income (loss) 300 (340)
Other expenses:
Interest expense 219 219
Letter of credit fees 4 8
Other, net 8 15
231 242
Income (loss) before income taxes 69 (582)
Provision (benefit) for income taxes 24 (220)
Net income (loss) $ 45 $ (362)
========== =========
Earnings (loss) per common share
(primary and fully diluted) $ .02 $ (.13)
========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
6 Months Ended
($000's, Unaudited)
<TABLE>
<CAPTION>
August 25, 1995 August 26, 1994
<S> <C> <C>
Increase (decrease) in cash:
Reconciliation of net income (loss) to net cash
provided by (used in) operating
activities:
Net income (loss) $ 115 $ (801)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 457 488
(Increase) decrease in working capital:
Accounts receivable 2,432 (1,103)
Costs and estimated earnings
in excess of billings (779) (1,149)
Inventories (23) (166)
Prepaid expenses
and other current assets (269) 19
Accounts payable (248) 23
Billings in excess
of costs and estimated earnings (357) 559
Customer deposits (118) 342
Accrued liabilities and income taxes (57) (391)
Decrease in deferred income taxes - -
Net cash provided by (used in)
operating activities 1,153 (2,179)
Cash flows from investing activities:
Increase in cash equivalents restricted
for letters of credit (227 (936)
Acquisition of equipment (124) (93)
Increase in software development costs (291) (486)
Decrease in other assets 42 -
Net cash used in investing activities (600) (1,515)
Cash flows from financing activities:
Borrowings under credit facility 375 3,878
Payments under credit facility (1,000) (500)
Principal payments of capital leases
and other long-term debt (65) (24)
Proceeds from issuance of common stock 71 85
Net cash provided by (used in)
financing activities (619) 3,439
Net increase (decrease) in cash (66) (255)
Cash at beginning of period 66 260
Cash at end of period $ - $ 5
========== ============
Supplemental schedule of cash flow information:
Interest paid $ 342 $ 246
Income taxes paid - 275
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's)
1. The information in this report reflects all adjustments
which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented.
There has been no significant change in the Company's
effective tax rate since February 24, 1995.
2. Under the Company's 1988 Incentive Stock Option Plan,
500,000 shares of the Company's common stock are currently
reserved for issuance in connection with the exercise of
options, and options to acquire 88,550 shares are currently
outstanding.
3. Earnings per common share are based on net income divided by
the number of common and common stock equivalent shares
(shares issuable upon the exercise of stock options and
warrants) outstanding. Weighted average number of common
shares and equivalents outstanding were approximately
2,928,000 (primary) in 1995 and 2,874,000 (primary) in 1994.
4. Inventories consist of the following:
<TABLE>
<CAPTION>
August 25, 1995 February 24, 1995
<S> <C> <C>
Raw Materials $ 854 $ 676
Work in Process 2,313 2,468
Finished Goods - -
$ 3,167 $ 3,144
</TABLE>
5. The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
August 25, 1995 February 24, 1995
<S> <C> <C>
U.S. Government receivables
billed and unbilled
contract costs
subject to negotiation $ 3,820 $ 3,947
U.S. receivables billed 517 1,724
International:
Receivables billed 1,583 2,681
Unbilled contract costs
subject to negotiation 1,374 1,374
7,294 9,726
Less allowance for doubtful
accounts (95) (95)
$ 7,199 $ 9,631
========= =========
</TABLE>
U.S. Government receivables billed and unbilled
contract costs subject to negotiation:
Unbilled contract costs subject to negotiation represent
claims made or to be made against the U.S. Government. The
Company has recorded claims to the extent of contract costs
incurred. These costs have been incurred in connection with
U.S. Government-caused delays, errors in specifications and
designs, and other unanticipated causes and may not be
received in full during fiscal 1996. In accordance with
generally accepted accounting principles, revenue recorded
by the Company from a claim does not exceed the incurred
contract costs related to the claim. The Company estimates
that the total net claims filed and to be filed approximate
$7,300, a portion of which has been included in U.S.
Government receivables billed and unbilled contract costs
subject to negotiation. Such claims are subject to
negotiation and audit by the U.S. Government.
International unbilled contract costs subject to
negotiation:
Unbilled contract costs subject to negotiation represent
claims made or to be made against a certain foreign
government (see Note 6). The Company has recorded claims to
the extent of the drawn letters of credit and called
performance bond, which may not be recovered in full in
fiscal 1996. The total net claim filed includes these
amounts, as discussed in Note 6. Such claims are subject to
arbitration and negotiation with the foreign government.
6. Contingencies:
Claims and Litigation:
A suit was commenced against the Company in March 1988 in
the Court of Common Pleas of Bucks County, Pennsylvania by
an employee of a customer for an unspecified amount alleging
negligence and strict products liability in the design,
manufacture, distribution, and servicing of a sterilizer
manufactured by the Company which resulted in an injury
sustained by the plaintiff in 1986. On June 20, 1995, the
parties entered into a settlement agreement and judgment by
consent. The agreement and judgment, in which the Company
expressly disclaims liability with respect to the underlying
claims of the plaintiffs in the action, and which expressly
declares that the rights of the Company's lenders under
existing credit agreements or extensions thereof are
superior to those of the plaintiffs, calls for the
plaintiffs to receive a total sum of no more than $1,200, in
the following manner: (1) funds previously deposited by the
Company's products liability carrier with the U.S. District
Court, together with accrued interest thereon, in a total
amount of slightly more than $550, have been released to
plaintiffs; (2) the Company paid approximately $50 on
July 20, 1995; (3) the Company will pay an additional sum of
$100 by April 20, 1996; (4) beginning on July 31, 1996, and
each year thereafter, the Company will pay a total of $495
at the rate of $55 per year over nine years, unless in any
given year the Company cannot make such a payment because
(a) it is or, as a result of such payment, would be in
default of any of its obligations under its credit
agreements with its lenders, and (b) the lenders object to
such payment. In the event that plaintiffs consider any
such objection to payment to be unreasonable, they would
have the right to petition the Bucks County Court of Common
Pleas for a determination. A greater payment, up to a
maximum of $165, will be made in any year if and to the
extent the Company can do so without being in violation of
any of its obligations to its lenders under its credit
agreements. The Company's installment payment obligations
will be discharged when the Company has paid a total of
$495. No interest accrues on this judgment. At
February 24, 1995, the Company recognized this obligation as
a note payable in the face amount of $648 (the $1,195
judgment less the $547 escrowed funds), less a discount of
$228 based on an imputed interest rate of 11%. Under the
payment terms of the note payable, the Company does not
anticipate that the settlement will have a material adverse
effect on the Company's liquidity.
In fiscal 1991, the Company entered into a contract with a
subcontractor for the design and development of software to
operate and control a certain large aircrew training system
for the U.S. Government. The contract between the Company
and the subcontractor called for arbitration of all matters
pertaining to the contract which were in dispute between the
parties and could not be resolved. In August 1993, the
Company terminated the subcontractor for default by reason
of its refusal to deliver its software. The subcontractor
refused to deliver the software due to claims for cost
overruns under the contract. Hearings were conducted before
the American Arbitration Association (AAA) during the period
of January through April, 1995. In June 1995, the AAA
rendered a net award to the subcontractor in the amount of
$746. In August 1995, the Court entered judgment on the
award. However, the Court also granted ETC's Motion to
Compel Arbitration with respect to the issue of the
subcontractor's duty to submit to an audit of its costs.
ETC and the subcontractor are currently negotiating with
respect to the judgment and the Court's order compelling
arbitration. At this time, the Company does not have
sufficient funds to make immediate payment of the entire
award in judgment.
In October 1993, the Company was notified by the Royal Thai
Air Force (RTAF) that the RTAF was terminating a certain
$4,600 simulator contract with the Company. Although the
Company has performed in excess of 90% of the contract, the
RTAF alleged a failure to completely perform. In connection
with this termination, the RTAF made a call on a $229
performance bond, as well as a draw on approximately $1,100
of advance payment letters of credit (see Note 2). The RTAF
has also asserted liquidated damages pursuant to the
contract against the Company. In October 1993, the surety
made payment on the $229 performance bond, and in the first
quarter of fiscal 1995, it made payment on the approximately
$1,100 advance payment letters of credit. The Company has
commenced arbitration with the RTAF. In the arbitration,
the Company is asserting claims against the RTAF for
reimbursement of the costs incurred on the bond and letters
of credit called, as well as claims for costs incurred in
connection with RTAF-directed changes in the work and RTAF-
caused delays and damage to the Company's work. The Company
is also claiming that the termination was wrongful and that
the Company is entitled to complete the work and to be paid
the balance of the contract price. The case is pending
before the Thailand Arbitration Board. Management believes
the Company has meritorious claims in excess of claims made
by the RTAF, as well as meritorious grounds to support
nonpayment of the performance bond and letters of credit.
The Company has also denied the RTAF claims and believes
they are without merit. Accordingly, no provision for any
liability that may result has been made in the accompanying
financial statements. Management and legal counsel believe
that the ultimate outcome of these matters will not have a
material adverse effect on the Company's financial position
or results of operations.
Certain other claims, suits and complaints arising in the
ordinary course of business have been filed or are pending
against the Company. In the opinion of management, after
consultation with legal counsel, all such matters are
reserved for or adequately covered by insurance or, if not
so covered, are without merit or are of such kind, or
involve such amounts, as would not have a significant effect
on the financial position or results of operations of the
Company if disposed of unfavorably.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
August 25, 1995
Material Changes in Financial Condition
Working capital decreased for the six months ended August 25,
1995, from approximately $9.0 million at February 24, 1995 to
approximately $2.5 million at August 25, 1995 primarily due to
the reclassifying of the Company's credit facility (expiring
February 28, 1996) from a long-term to a short-term liability on
its balance sheet. The change in working capital was also caused
by an increase in cash equivalents restricted for letters of
credit; an approximately $2.4 million decrease in accounts
receivable primarily due to collection of receivables billed on
two certain international aircrew training systems contracts and
two certain domestic sterilizers contracts; a $1.1 million net
increase in costs/billings in excess primarily due to increased
completion on various domestic sterilizer contracts and a certain
international simulator contract; an increase in prepaid expenses
due to the prepayment of certain insurance premiums; a decrease
in accounts payable; a decrease in customer deposits due to
revenue recognition on certain training and maintenance
contracts; and a decrease in accrued liabilities due to payment
of certain sales and use taxes accrued.
The Company has a revolving credit agreement with two banks,
which provides financing of up to $8.5 million. The facility
expires by its terms on February 28, 1996. The credit facility
permits both direct borrowing for working capital and other
corporate purposes and the issuance of letters of credit for the
Company. At August 25, 1995, there were outstanding letters of
credit of approximately $1 million (of which approximately
$800,000 were cash collateralized pursuant to a separate letter
of credit facility at August 25, 1995) and the Company had
borrowed approximately $8.3 million under the credit facility.
At August 25, 1995, the Company has no availability under the
credit facility. Such borrowings were used to cover the
difference between cash received from the Company's customers and
the Company's cash expenses - primarily payments to suppliers and
employees, acquisition of equipment, and software development.
The Company expects to continue to use this credit facility to
support its working capital needs. Though the Company shows
operating profit for the three-month period ended August 25,
1995, the Company was not in compliance with its interest
coverage ratio as of August 25, 1995. The Company is currently
in discussions with its lenders to receive waivers for the
additional events of noncompliance. While it is management's
belief that a satisfactory arrangement will be achieved, should
the lenders declare an event of default and accelerate the
maturity of the credit facility, the Company would not have
sufficient funds to repay the approximately $8.3 million of debt
outstanding at August 25, 1995.
In July 1995, the Company negotiated an amendment to the credit
facility, pursuant to which the maturity date of the facility was
extended to February 28, 1996, certain financial covenants were
modified, and the parties agreed to reduce, in stages, the
availability under the credit facility to $7.5 million during the
term. The grant of the extension of the facility was based on
the Company's ability to meet its fiscal 1996 operating plan.
This plan includes continuing its rate of collections on
outstanding accounts receivable, continued implementation of
operating cost controls, successfully procuring new contract
awards and completing performance on contracts in its backlog.
Although the Company is requesting waivers of certain events of
noncompliance at August 25, 1995, the Company is required to
comply with these covenants on a quarterly basis for the
remainder of fiscal year 1996. Management believes it is
probable that the Company will meet these covenants and borrowing
base requirements based on its operating plan for fiscal 1996 and
through the credit agreement expiration date of February 28,
1996. If the Company fails to meet its covenant requirements it
will have to obtain additional waivers from its lenders.
The Company's sales backlog at August 25, 1995 and February 24,
1995 for work to be performed and prospective revenue to be
recognized after that date under written agreements was
approximately $18,100,000 and $12,200,000, respectively. In
addition, the Company's backlog for training and maintenance
contracts at August 26, 1995 and February 24, 1995 for work to be
performed and prospective revenue to be recognized after that
date under written agreements was approximately $3,000,000 and
$3,500,000, respectively.
Material Changes in Results of Operations
Net sales of approximately $3.6 million for the three months and
approximately $7.3 million for the six months ended August 25,
1995 decreased in comparison to net sales of approximately $3.9
million for the three months and approximately $8.1 million for
the six months ended August 26, 1994. This was primarily due to
significant completion on a certain large volume domestic
sterilizer contract in place during the first half of fiscal
1995, which was completed later that fiscal year. Over the same
period in fiscal 1996, sales in the aircrew training systems
segment increased by approximately $1.3 million.
Gross profit increased by approximately $600,000 for the three
months ended August 25, 1995, compared with the three months
ended August 26, 1994, and approximately $1.2 million with
respect to the six-month periods ended on such dates primarily
due to an increase in aircrew training system sales, which are
generally sold at higher margins than other Company products.
Operating expenses decreased due to the implementation of
stringent cost controls, the benefits of which did not begin to
be realized until the second half of fiscal 1995.
Interest expense increased primarily due to an increase in the
interest rate charged the Company on direct borrowings, partially
offset by decreased utilization of the credit facility.
The increase in gross profit combined with the decrease in
operating expenses resulted in net income for the three-month and
six-month periods ended August 25, 1995.
<PAGE>
Part II - Other Information
Item 1. Legal proceedings:
See Note 6 in Part I.
Item 4. Submission of Matters to Vote of Security Holders
The 1995 Annual Meeting of Shareholders (the "Meeting")
of the Company was held on August 16, 1995. Notice of
the Meeting was mailed to shareholders on or about
July 31, 1995.
The Meeting was held to elect five directors to serve
until the next Annual Meeting of Shareholders and until
their respective successors are elected and qualified.
There was no solicitation in opposition to the nominees
of the Board of Directors for election to the Board of
Directors. All nominees of the Board of Directors were
elected. The number of votes cast for, as well as the
number of votes withheld, for each of the nominees for
election to the Board of Directors were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
Richard E. McAdams 1,613,061 19,919
William F. Mitchell 1,613,261 19,719
Michael A. Mulshine 1,613,061 19,919
Pete L. Stephens 1,613,261 19,719
Philip L. Wagner 1,613,261 19,719
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits
Exhibit 11 - Schedule of Computation
of Earnings per Share
b. Reports on Form 8-K
No reports on Form 8-K were filed
during the three months ended
August 25, 1995.
<PAGE>
EXHIBITS
Item 6 (a). Exhibit 11 - Statement re Computation of Per Share
Earnings (Loss).
6 Months Ended
(000's, except per share data, Unaudited)
<TABLE>
<CAPTION>
August 25, 1995 August 26, 1994
<S> <C> <C>
Income (loss) for primary & fully
diluted earnings per share $ 115 $ (801)
========= ==========
Equivalent shares for primary
computation:
Weighted average shares outstanding 2,917 2,874
Common stock equivalents (shares issuable
for employee stock purchase plan and
upon exercise of stock options and
stock warrants outstanding) based on
average market price 11 0
Total equivalent shares for
primary and fully diluted
computation 2,928 2,874
========= ==========
Per share amounts:
Primary:
Net income (loss) $ .04 $ (.28)
========= ==========
Fully diluted:
Net income (loss) $ .04 $ (.28)
========= ==========
</TABLE>
<PAGE>
EXHIBITS
Item 6 (a). Exhibit 11 - Statement re Computation of Per Share
Earnings (Loss).
3 Months Ended
(000's, except per share data, Unaudited)
<TABLE>
<CAPTION>
August 25, 1995 August 26, 1994
<S> <C> <C>
Income (loss) for primary & fully
diluted earnings per share $ 45 $ (362)
========= ==========
Equivalent shares for primary
computation:
Weighted average shares outstanding 2,917 2,874
Common stock equivalents (shares issuable
for employee stock purchase plan and
upon exercise of stock options and
stock warrants outstanding) based on
average market price 11 0
Total equivalent shares for
primary and fully diluted
computation 2,928 2,874
========= ==========
Per share amounts:
Primary:
Net income (loss) $ .02 $ (.13)
========= ==========
Fully diluted:
Net income (loss) $ .02 $ (.13)
========= ==========
</TABLE>
<PAGE>
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.
ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)
By: /S/ William F. Mitchell
William F. Mitchell
President, Acting Chief Financial
Officer and Principal Accounting
Officer
Date: October 16, 1995
