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 May 31, 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 (l) 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 July 15, 1996 is: 2,928,944
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3 Months Ended
($000's, except per share data, Unaudited)
<TABLE>
<CAPTION>
May 31, 1996 May 26, 1995
<S> <C> <C>
Net Sales $ 4,509 $ 3,712
Cost of goods sold 3,114 2,286
Gross profit 1,395 1,426
Operating expenses:
Selling and administrative 904 1,056
Research and development 52 40
956 1,096
Operating income 439 330
Other expenses:
Interest expense 226 213
Letter of credit fees 7 8
Other, net 31 -
264 221
Income before income taxes 175 109
Provision (benefit) for income taxes 55 39
Net income $ 120 $ 70
Earnings per common share
(primary and fully diluted) $ .04 $ .02
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
<TABLE>
<CAPTION>
ASSETS May 31, 1996 February 23, 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4 $ 31
Cash equivalents restricted for
letters of credit 644 859
Accounts receivable, net 6,534 7,710
Costs and estimated earnings
in excess of billings on un-
completed long-term contracts 4,454 4,024
Inventories 4,009 3,611
Prepaid expenses and other current
assets 652 574
Total current assets 16,297 16,809
Property, plant, and equipment,
at cost, net 2,453 2,498
Software development costs, net
of accumulated amortization of
$2,119 at May 26 and
$1,991 at February 24 1,604 1,617
Other assets 2 2
Total assets $ 20,356 $ 20,926
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
<TABLE>
<CAPTION>
LIABILITIES May 31, 1996 February 23, 1996
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 7,380 $ 2,441
Accounts payable - trade 2,118 1,586
Billings in excess of costs and
estimated earnings on
uncompleted long-term contracts 2,577 3,355
Customer deposits 9 104
Accrued income taxes 209 188
Net arbitration award 295 445
Accrued liabilities 847 812
Total current liabilities 13,435 8,931
Long-term debt, less current portion
credit facility payable to banks
due March 31, 1997 - 5,214
Other 295 300
295 5,514
Deferred income taxes 370 370
Total liabilities 14,100 14,815
Commitments and Contingencies (Note 6) - -
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 1,717 1,692
Retained earnings 4,246 4,126
Total stockholders' equity 6,256 6,111
Total liabilities and
stockholders' equity $ 20,356 $ 20,926
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 Months Ended
($000's, Unaudited)
<TABLE>
<CAPTION>
May 31, 1996 May 26, 1995
<S> <C> <C>
Increase (decrease) in cash:
Reconciliation of net income to net cash
provided by (used in) operating
activities:
Net income $ 120 $ 70
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 290 226
(Increase) decrease in assets:
Accounts receivable 1,176 1,784
Costs and estimated earnings
in excess of billings
on uncompleted long-term
contracts (430) (85)
Inventories (398) (369)
Prepaid expenses
and other current assets (78) (306)
(Decrease) increase in liabilities:
Accounts payable 532 (422)
Billings in excess
of costs and estimated earnings
on uncompleted long-term
contracts (778) (131)
Customer deposits (95) (104)
Payments Under Settlement Agreements (250) -
Accrued liabilities and income taxes 56 (88)
Net cash provided by (used in)
operating activities 145 575
Cash flows from investing activities:
Acquisition of equipment (58) (41)
Increase in software development costs (149) (103)
Decrease in other assets - 42
Net cash used in investing activities (207) (169)
Cash flows from financing activities:
Borrowings under credit facility - 192
Increase (Decrease) in cash equivalents
restricted for letters of credit 215 (67)
Payments under credit facility (175) (500)
Principal payments of capital leases
and other long-term debt (5) (5)
Proceeds from issuance of common stock - 68
Net cash provided by (used in)
financing activities 35 (245)
Net increase (decrease) in cash
and cash equivalents (27) 161
Cash and cash equivalents
at beginning of period 31 66
Cash and cash equivalents
at end of period $ 4 $ 227
Supplemental schedule of cash flow information:
Interest paid $ 128 $ 203
Income taxes paid, net 34 -
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($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 79,550 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
2,922,000 (primary and fully diluted) in 1996 and 2,874,000
(primary) in 1995.
4. Inventories consist of the following:
May 31, 1996 February 23, 1996
Raw materials $ 708 $ 696
Work in process 3,301 2,915
Finished goods - -
$ 4,009 $ 3,611
<PAGE>
5. The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
May 31, 1996 February 23, 1996
<S> <C> <C>
U. S. Government receivables
billed and unbilled
contract costs
subject to negotiation $ 3,767 $ 3,848
U.S. receivables billed 522 746
International:
Receivables billed 995 1,866
Unbilled contract costs
subject to negotiation 1,374 1,374
6,658 7,834
Less allowance for doubtful
accounts (124) (124)
$ 6,534 $ 7,710
</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. 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. 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.
International unbilled contract costs subject to
negotiation:
Unbilled contract costs subject to negotiation represent
claims made or to be made against the Royal Thai Air Force
("RTAF"). In the first quarter of fiscal 1995, the Company
recorded approximately $1.1 million of claims receivable
(but no claims revenue) for letters of credit drawn related
to the same contract. 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 1997. The total net claim filed includes these
amounts and are subject to arbitration and negotiation with
the foreign government.
6. Contingencies:
Claims and Litigation:
In October 1993, the Company was notified by the RTAF that
the RTAF was terminating a certain $4.6 million 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 $1.1 million of
advance payment letters of credit. The RTAF has also
asserted liquidated damages 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 $1.1 million 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 damages 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
May 31, 1996
(Unaudited)
Material Changes in Financial Condition
Cash provided from operations decreased from $575,000 in the
prior year period to $145,000 in the current three months ended
May 31, 1996. The decrease primarily resulted from an increase
in costs and estimated earnings in excess of billings on
uncompleted long-term contracts coupled with a decrease in
billings in excess of costs and estimated earnings on uncompleted
long-term contracts, both of which resulted in uses of cash from
operations. The change in both of these accounts reflected the
stage of billing/production for many of the long-term contract
jobs in the current period. Many of the existing contracts have
passed the initial start-up period (where billing normally
exceeds cost expenditures) and are into the middle/pre-shipment
phase where production costs normally exceed billing balances.
Because of the anticipated receipt of revenues in the next
quarter, the Company will have sufficient liquidity to fund
continuing operations and to meet all obligations as they become
due.
The Company has a revolving credit agreement with two banks,
which provides financing of up to $9.0 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 May 31, 1996, there were outstanding letters of
credit of approximately $644,000 and the Company had borrowings
of approximately $7.3 million under the credit facility.
The Company's sales backlog at May 31, 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 $26,000,000 and $23,000,000,
respectively.
Material Changes in Results of Operations
Net sales of approximately $4.5 million for the three months
ended May 31, 1996 increased in comparison to the equivalent
prior year's quarter. Increases were evidenced across all
product lines except environmental which had a temporary slow-
down reflecting reduced bookings at the end of last year. The
most significant increase was evidenced in sterilizers with an
83% increase.
Although sales increased, gross profit decreased in the current
quarter to $1,395,000, 30.9% of net sales, from $1,426,000, 33.8%
of net sales, in the prior year's period. This decrease was
primarily attributable to the aforementioned sales mix shift to
sterilizers (from a higher mix of aircrew training sales in the
prior period) as sterilizers generally produce lower margins than
the aircrew training systems line.
Operating expenses decreased $140,000, 12.8%, reflecting
continuing stringent cost controls.
Interest expense increased from the prior year as a reduced
balance was offset by a higher interest rate.
Other expenses in the current period reflected amortization
expense of $25,000 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 6 in Part I.
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
May 31, 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 Deaner
Duane Deaner,
Chief Financial Officer (authorized
officer and principal financial
officer)
Date: July 15, 1996
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> MAY-31-1996
<CASH> 648,000
<SECURITIES> 0
<RECEIVABLES> 6,658,000
<ALLOWANCES> 124,000
<INVENTORY> 4,009,000
<CURRENT-ASSETS> 16,297,000
<PP&E> 8,290,000
<DEPRECIATION> 5,837,000
<TOTAL-ASSETS> 20,356,000
<CURRENT-LIABILITIES> 6,055,000
<BONDS> 7,675,000
0
0
<COMMON> 293,000
<OTHER-SE> 5,963,000
<TOTAL-LIABILITY-AND-EQUITY> 20,356,000
<SALES> 4,509,000
<TOTAL-REVENUES> 4,509,000
<CGS> 3,114,000
<TOTAL-COSTS> 3,114,000
<OTHER-EXPENSES> 956,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226,000
<INCOME-PRETAX> 175,000
<INCOME-TAX> 55,000
<INCOME-CONTINUING> 120,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
