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 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission File 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 August 30, 1996 is: 2,928,944.
<PAGE>
PART I - Financial Information
Item 1. Financial Statements:
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
6 Months Ended
($000's, except per share data, unaudited)
August 30, 1996 August 25, 1995
Net sales $9,406 $7,271
Cost of goods sold 6,429 4,594
Gross profit 2,977 2,677
Operating expenses:
Selling and administrative 1,883 1,964
Research and development 74 83
1,957 2,047
Operating income 1,020 630
Other expenses:
Interest expense 515 432
Letter of credit fees 11 12
other, net 64 8
590 452
Income before income
taxes 430 178
Provision for income
taxes 138 63
Net income $ 292 $ 115
Earnings per common share
(primary and fully diluted) $ .10 $ .04
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)
August 30, 1996 August 25, 1995
Net sales $4,897 $3,559
Cost of goods sold 3,315 2,308
Gross profit 1,582 1,251
Operating expenses:
Selling and administrative 979 908
Research and development 22 43
1,001 951
Operating income 581 300
Other expenses:
Interest expense 289 219
Letter of credit fees 4 4
other, net 33 8
326 231
Income before income
taxes 255 69
Provision for income
taxes 83 24
Net income $ 172 $ 45
Earnings per common share
(primary and fully diluted) $ .06 $ .02
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, unaudited)
ASSETS August 30, 1996
February 23, 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -
$ 31
Cash equivalents restricted for
letters of credit 394
859
Accounts receivable, net 7,742
7,710
Costs and estimated earnings
in excess of billings on un-
completed long-term contracts 3,965
4,024
Inventories 4,082
3,611
Prepaid expenses and other current
assets 493
574
Total current assets 16,676
16,809
Property, plant, and equipment,
at cost, net 2,424
2,498
Software development costs, net
of accumulated amortization of
$2,896 at August 30 and
$2,563 at February 23 1,586
1,617
Other assets 2
2
Total assets $20,688
$20,926
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, unaudited)
LIABILITIES August 30, 1996
February 23, 1996
<S> <C>
<C>
Current liabilities:
Current portion of long-term debt $ 7,230
$ 2,441
Accounts payable - trade 2,133
1,586
Billings in excess of costs and
estimated earnings on
uncompleted long-term contracts 2,580
3,355
Customer deposits 125
104
Accrued income taxes 262
188
Net arbitration award 195
445
Accrued liabilities 1,048
812
Total current liabilities 13,573
8,931
Long-term debt, less current portion
Credit facility payable to banks
due March 31, 1997 -
5,214
Other 292
300
292
5,514
Deferred income taxes 370
370
Total liabilities 14,235
14,815
Commitments and contingencies (Note 7) -
-
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000
shares $.10 par value; 2,928,944
shares issued and outstanding 293
293
Capital contributed in excess of par
value of common stock 1,742
1,692
Retained earnings 4,418
4,126
Total stockholders' equity 6,453
6,111
Total liabilities and
stockholders' equity $20,688
$20,926
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
6 Months Ended
($000's, unaudited)
August 30, 1996
February 23, 1996
<S> <C>
<C>
Increase (decrease) in cash
Reconciliation of net income
to net cash provided
by (used in) operating
activities:
Net income $ 292
$ 115
Adjustments to reconcile net
income to net cash
used in operating activities:
Depreciation and amortization 571
457
(Increase) decrease in assets
Accounts receivable (32)
2,432
Costs and estimated earnings
in excess of billings 59
(779)
Inventories (471)
(23)
Prepaid expenses
and other current assets 81
(269)
(Decrease) increase in liabilities 555
(248)
Accounts payable
Billings in excess of costs
and estimated earnings (775)
(357)
Customer deposits 21
(118)
Payments under settlement
agreements (350)
--
Accrued liabilities and income
taxes 310
(57)
Net cash provided by operating
activities 261
1,153
Cash flows from investing activities:
Acquisition of equipment (115)
(124)
Increase in software development costs (309)
(291)
Decrease in other assets --
42
Net cash used in investing activities (424)
(373)
Cash flows from financing activities:
Borrowings under credit facility
375
Increase in cash equivalents restricted
for letters of credit 465
(227)
Payments under credit facility (325)
(1,000)
Principal payments of capital leases
and other long-term debt (8)
(65)
Proceeds from issuance of common stock --
71
Net cash provided by (used in)
financing activities 132
(846)
Net decrease in cash (31)
(66)
Cash at beginning of period 31
66
Cash at end of period $ --
$ --
Supplemental schedule of cash flow information:
Interest paid $ 515
$ 342
Income taxes paid 60
--
</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 23, 1996.
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 124,550 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
2,960,000 (primary and fully diluted) in 1996 and 2,874,000
(primary) in 1995.
4. Inventories consist of the following:
August 30, 1996 February 23, 1996
Raw materials $ 733 $ 696
Work in Process 3,349 2,915
Finished Goods -- --
$4,082 $3,611
5. The components of accounts receivable are as follows:
August 30, 1996 February 23, 1996*
U.S. Government receivables
billed and unbilled
contract costs subject
to negotiation $ 4,530 $ 3,848
U.S. receivables billed 286 746
International receivables
billed 3,050 3,240
7,866 7,834
Less allowance for
doubtful accounts (124) (124)
$ 7,742 $ 7,710
*Restated to conform to current classifications.
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. In
fiscal 1995, the Company recorded approximately $1.4 million
of claims revenue related to two certain aircrew training
systems contracts. No claims revenue was recorded in fiscal
1996 or 1997. 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 1997. 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 $7.3 million, 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.
See also footnote number 6.
6. Subsequent Event
On October 1, 1996, the Company was notified of the results
of an arbitration award concerning a large contract with the
Royal Thai Air Force (the "RTAF"). In October 1993, the
Company had been notified by the RTAF that the RTAF was
terminating a certain $4.6 million simulator contract with
the Company, alleging a failure to completely perform. In
connection with this termination, the RTAF made a call on a
$229,000 performance bond, as well as a drew on
approximately $1.1 million of advance payment letters of
credit. The RTAF also asserted liquidated damages against
the Company. In October 1993, the surety made payment on
the $229,000 performance bond, and in the first quarter of
fiscal 1995, it made payment on the approximately $1.1
million advance payment letters of credit.
On October 1, 1996, the Thai Trade Arbitration Council
rendered its decision, under which the contract was
reinstated in full, and the Company was instructed to
complete the remainder of the contract work. Upon
completion of the contract, the RTAF will pay the Company
the 10% balance due, and will also release the performance
bond and advance payment guarantee that were called.
Additionally, no penalties will be assessed against the
Company. An amount of $1,374,000 related to this settlement
is included in International receivables billed at August 30
and February 23, 1996.
7. Contingencies
Certain 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>
Item 2. Management's Discussion and Analysis:
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
August 30, 1996
Material Changes in Financial Condition
Cash provided from operations decreased from $1,153,000 in the
prior year period to $261,000 in the current six months ended
August 30, 1996. The decrease primarily resulted from reduced
cash from accounts receivable partially offset by increased
accounts payable and accrued liabilities and reduced prepaid
expenses. Although the accounts receivable balance was basically
constant from February 23 to August 30, 1996, the prior period
reflected a large decrease due to collection of receivables
billed on two certain international aircrew training systems
contracts and two certain domestic sterilizer contracts.
Increases in the current period in accounts payable and accrued
liabilities reflected the overall increased purchase activity,
while the decrease in prepaid expenses resulted from amortization
of prepaid commissions.
The Company has a revolving credit agreement with two banks,
which provides financing of up to $7.7 million. The facility
expires by its terms on March 31, 1997. 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 30, 1996, there were outstanding letters of
credit of approximately $190,000 and borrowings of approximately
$7.2 million under the credit facility.
The Company's sales backlog at August 30, 1996 and February 23,
1996 for work to be performed, training and maintenance
contracts, and prospective revenue to be recognized after that
date under written agreements was approximately $31,500,000 and
$23,000,000 respectively.
Material Changes in Results of Operations
Net sales of approximately $9.4 million for the six months and
approximately $4.9 million for the three months ended August 30,
1996 increased by 29% and 38% in comparison to the respective
equivalent prior year's periods. Increases were evidenced across
all product lines except environmental which was negatively
impacted by reduced bookings at the end of last year. The most
significant increases for the current six month period was
evidenced in sterilizers (up 78%) and aircrew training systems
(up 46%).
Gross profit increased by $300,000 for the six months and
$331,000 for the three months ended August 30, 1996 as compared
to the prior year's respective periods. The increases reflected
the aforementioned sales increases partially offset by a sales
mix shift to lower-margin sterilizer sales in the current
periods.
Operating expenses were up $50,000 for the three months ended
August 30, 1996, but fiscal year to date are down by $90,000
versus the prior year. As a percent of net sales, operating
expenses for the six months ended August 30, 1996, decreased to
20.8% versus 28.2% in the prior year's period.
Interest expense increased in both respective current periods
reflecting an increase in the interest rate charged by the
Company's primary lender coupled with additional interest expense
paid on a federal tax settlement.
The increase in other expenses for both current periods resulted
from amortization of a deferred finance charge associated with
warrants issued in conjunction with the Company's credit facility
which expires in March, 1997.
<PAGE>
PART II - Other Information
Item 1. Legal proceedings:
See Note 7 in Part I.
Item 4. Submission of Matters to Vote of Security Holders
The 1996 Annual Meeting of Shareholders (the "Meeting")
of the Company was held on August 9, 1996. Notice of
the Meeting was mailed to shareholders on or about
July 15, 1996.
The Meeting was held:
1. To elect five directors to serve until their
successors have been elected and qualified.
2. To consider and act upon a proposal to amend the
Company's Articles of Incorporation to authorize
1,000,000 shares of preferred stock ("Matter
No. 2").
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:
Nominee For Withheld
Richard E. McAdams 2,552,612 53,976
William F. Mitchell 2,552,612 53,976
Michael A. Mulshine 2,552,612 53,976
Pete L. Stephens 2,552,612 53,976
Philip L. Wagner 2,483,412 54,176
Matter No. 2 was approved by shareholders at the
Meeting. The votes cast for this matter were as
follows:
Abstentions and
For Against Broker Non-Votes
1,847,654 2,991 3,641
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K
No reports on Form 8-K were filed
during the three months ended
August 30, 1996.<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/ Duane D. Deaner
Duane D. Deaner, Chief
Financial Officer and
Principal Accounting Officer
Date: October 14, 1996
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-30-1996
<CASH> 394,000
<SECURITIES> 0
<RECEIVABLES> 7,866,000
<ALLOWANCES> 124,000
<INVENTORY> 4,082,000
<CURRENT-ASSETS> 16,676,000
<PP&E> 8,347,000
<DEPRECIATION> 5,923,000
<TOTAL-ASSETS> 20,688,000
<CURRENT-LIABILITIES> 6,343,000
<BONDS> 7,522,000
0
0
<COMMON> 293,000
<OTHER-SE> 6,160,000
<TOTAL-LIABILITY-AND-EQUITY> 20,688,000
<SALES> 9,406,000
<TOTAL-REVENUES> 9,406,000
<CGS> 6,429,000
<TOTAL-COSTS> 6,429,000
<OTHER-EXPENSES> 1,957,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515,000
<INCOME-PRETAX> 430,000
<INCOME-TAX> 138,000
<INCOME-CONTINUING> 292,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
