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 30, 1997
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 of (IRS Employer
incorporation or organization) Identification 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 June 30, 1997 is: 2,983,001
<PAGE>
PART I - Financial Information
Item 1. Financial Statements:
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3 Months Ended
($000's, except per share data, Unaudited)
May 30, 1997 May 31, 1996
Net Sales $6,644 $4,509
Cost of goods sold 4,684 3,114
Gross profit 1,960 1,395
Operating expenses:
Selling and administrative 1,130 904
Research and development 40 52
1,170 956
Operating income 790 439
Other expenses:
Interest expense 217 226
Letter of credit fees 16 7
Other, net 11 31
244 264
Income before income taxes 546 175
Provision for income taxes 186 55
Net income $ 360 $ 120
Earnings per common share
Primary $ .11 $ .04
Fully diluted $ .10 $ .04
See notes to consolidated financial statements.
<PAGE>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
ASSETS May 30, 1997 February 28, 1997
Current assets:
Cash and cash equivalents $ 129 $ 189
Cash equivalents restricted for
letters of credit 259 665
Accounts receivable, net 10,304 11,352
Costs and estimated earnings
in excess of billings on
uncompleted long-term
contracts 4,910 3,345
Inventories 2,576 2,719
Prepaid expenses and other
current assets 608 92
Total current assets 18,786 18,362
Property, plant, and equipment,
at cost, net 2,460 2,480
Software development costs, net
of accumulated amortization of
$3,394 at May 30 and $3,244 at
February 28, 1997 1,370 1,430
Other assets 197 37
Total assets $22,813 $22,309
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000's, Unaudited)
LIABILITIES May 30, 1997 February 28, 1997
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 119 $ 119
Convertible notes payable-related parties 800 1,300
Accounts payable - trade 974 1,799
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 2,519 2,051
Customer deposits 1,202 1,746
Accrued income taxes 244 271
Net arbitration award 34 109
Accrued liabilities 1,559 1,419
Total current liabilities 7,451 8,814
Long-term debt, less current portion
Credit facility payable to banks 2,234 6,714
Subordinated Debt 3,202
Other 256 283
5,692 6,997
Deferred income taxes 89 89
Total liabilities 13,232 15,900
Redeemable Cumulative Preferred Stock, $100 par and re-
demption value: authorized - 25,000 shares; issued
and outstanding - 25,000 shares at May 30, 1997 2,292 -
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares $.10 par
value; 2,972,001 and 2,963,083 shares issued and
outstanding at May 30, 1997 and February 28, 1997,
respectively 297 296
Capital contributed in excess of par value of common
stock 2,564 2,007
Retained earnings 4,428 4,106
Total stockholders' equity 7,289 6,409
Total liabilities and stockholders' equity $22,813 $22,309
</TABLE>
See notes to consolidated financial statements.<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 Months Ended
($000's, Unaudited)
May 30, 1997 May 31, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 360 $ 120
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 301 290
Increase in allowance for doubtful accounts 25 -
(Increase) decrease in assets:
Accounts receivable 1,023 1,176
Costs and estimated earnings in excess of billings
on uncompleted long-term contracts (1,565) (430)
Inventories 143 (398)
Prepaid expenses and other current assets (516) (78)
Other assets (184) -
(Decrease) increase in liabilities:
Accounts payable (825) 532
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 468 (778)
Customer deposits (544) (95)
Accrued income taxes (27) 21
Net arbitration awards 214 -
Other accrued liabilities (87) 35
Payments under settlement agreements (75) (250)
Net cash (used in) provided by operating activities (1,289) 145
Cash flows from investing activities:
Acquisition of equipment (87) (58)
Software development costs capitalized (90) (149)
Net cash used in investing activities (177) (207)
Cash flows from financing activities:
Borrowings under credit facility 2,234
Proceeds from subordinated debt, net 3,190
Proceeds from preferred stock, net 2,292
Net payments under credit facility (6,714) (175)
Decrease in cash equivalents restricted for letters of
credit 406 215
Decrease in notes payable - related party (500) -
Net principal payments of other long-term debt (27) (5)
Proceeds from issuance of common stock/warrants 557 -
Other (32) -
Net cash provided by (used in) financing activities 1,406 35
Net increase (decrease) in cash and cash
equivalents (60) (27)
Cash and cash equivalents at beginning of period 189 31
Cash and cash equivalents at end of period $ 129 $ 4
Supplemental schedule of cash flow information:
Interest paid 265 128
Income taxes paid 213 34
</TABLE>
See notes to consolidated financial statements.<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.
Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
The Company's effective tax rate for the year ended
February 28, 1997, reflected the impact of significant
bookings for inventory and receivable reserves and
software amortization. The estimated effective tax
rate incorporated in the fiscal quarter ended May 30,
1997, has been adjusted to reflect current forecasts
for fiscal 1998 activity.
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 87,500 shares were currently
outstanding as of May 30, 1997.
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 and the conversion of notes payable and preferred
stock) outstanding. Weighted average number of common
shares and equivalents outstanding were approximately
3,138,000 (primary) and 3,465,000 (fully diluted) at May 30,
1997 and 2,922,000 (primary and fully diluted) at May 31,
1996.
The Financial Accounting Standards Board has issued SFAS
No. 128, "Earnings Per Share," which is effective for
financial statements issued after December 15, 1997. The
new standard eliminates primary and fully diluted earnings
per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per
share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income
available to common shareholders by the weighted average
common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were
exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of
the entity. It is not known at this time what impact this
statement will have on reported earnings per share.
4. Inventories consist of the following:
May 30, 1997 February 28, 1997
Raw Materials $ 417 $ 417
Work in Process 2,159 2,302
Finished Goods - -
$2,576 $2,719
5. The components of accounts receivable are as follows:
May 30, 1997 February 28, 1997
U. S. Government receivables
billed and unbilled contract
costs subject to negotiation $ 5,039 $ 5,284
U.S. receivables billed 613 2,477
International receivables billed 4,914 3,828
10,566 11,589
Less allowance for doubtful
accounts (262) (237)
$10,304 $11,352
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 under
a contract for a centrifuge. These costs were recorded
during fiscal years 1994 and 1995. The Company has recorded
claims, amounting to $2.8 million, including $150 recorded
in the current quarter, 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 1998. 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 currently
has approximately $8.6 million in claims filed with the U.S.
Government. The U.S. Government has responded to the claims
with either denials or deemed denials that the Company has
appealed. In the current quarter, the Company recorded an
additional $150 in claims revenue reflecting additional
expenditures on the centrifuge contract that will be
incorporated into additional claims to be filed with the
U.S. Government. Additional amounts are currently under
review for the period November 1995 through October 1996 to
determine what, if any, additional amounts above the $150
recorded in the current quarter can be filed as supplemental
claims. Such claims are subject to negotiation and audit by
the U.S. Government.
In November 1996, the Company invoiced the balance due under
the centrifuge contract; at May 30, 1997, approximately
$1.7 million was included in U.S. Government receivables.
Given the U.S. Government's lack of response, on June 27,
1997, a claim was submitted to the Contracting Officer in an
attempt to expedite payment of most of the outstanding
amount still open under the centrifuge contract.
Collectability of these amounts may be dependent upon the
resolution of the above claims.
International receivables billed:
International receivables billed includes $1.3 million
related to a certain contract with the Royal Thai Air Force
(see Note 6).
6. Contingencies:
Claims and Litigation:
In October 1993, the Company was notified by the Royal Thai
Air Force ("RTAF") that the RTAF was terminating a certain
$4.6 million simulator contract with the Company. Although
the Company had 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
$229,000 performance bond, as well as a draw on an
approximately $1.1 million of advance payment letter of
credit. Work under this contract had stopped while under
arbitration, but on October 1, 1996, the Thai Trade
Arbitration Counsel rendered its decision under which the
contract was reinstated in full and the Company was given a
period of nine months to complete the remainder of the work.
Upon completion of the contract, the RTAF will pay the
Company the open receivables balance, consisting of the
performance bond and the advance payment, plus the 10% due
on the balance of the contract. Except as noted in the
award, the rights and obligations of the parties remain as
per the original contract. Should the Company fail to
perform under the contract in the time period allotted, the
RTAF could invoke penalties against the Company, including
termination of the contract and delay penalties. Based on
the progress to date and recent discussions with the RTAF,
the Company estimates it will probably exceed the nine-month
contract completion period due to an extended delay in
obtaining an export license for certain hardware required to
complete the job. This license has been cleared and the
hardware is in the country. The Company has submitted a
request for a contract extension under the "force majeure"
clause of the RTAF contract, and the customer has agreed to
an extension to complete the installation and training.
A lawsuit was commenced against the Company in April 1997 in
the United States District Court for the District of Puerto
Rico by an employee of a customer who claims to have been
injured as a result of an alleged malfunction of a
sterilizer manufactured by the Company. The plaintiff is
seeking $3 million in damages. The Company has up to
$10 million of products liability coverage, subject to a
$100,000 deductible. The outcome of this litigation is not
currently predictable.
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
MAY 30, 1997
($000)
Material Changes in Financial Condition
On March 27, 1997, the Company executed a revolving credit
agreement (the "Credit Agreement") with a new bank, establishing
a credit facility of $10 million. The facility bears interest at
the bank's prime rate and expires on May 31, 1999. Substantially
all of the Company's short-term financing is provided by this
bank. Additionally, the Company issued $4 million of
subordinated debentures, bearing interest at 12% per annum, due
March 27, 2004 to a financial investor. In connection with the
subordinated debentures, warrants were issued to acquire
166,410 shares of the Company's common stock at an exercise price
of $1.00 per share. $499 of the proceeds from the sale of the
debentures was allocated to the warrants and will be charged to
retained earnings over the term of the debentures. The Company
also issued 25,000 shares of 11%, redeemable convertible
preferred stock for $2.5 million. Each share of preferred stock
is convertible, at the option of the shareholder, into
13.33 shares of the Company's common stock at a price of
$7.50 per share. Total financing fees amounted to approximately
$849, of which $311 and $208 was netted against the proceeds from
the subordinated debt and the preferred stock, respectively.
The proceeds from these transactions were used to repay amounts
outstanding under the Credit Facility with a prior lender.
As a result of recognizing a net loss of $20 for the fiscal year
ended February 28, 1997, as of June 6, 1997, the bank made all
credit availability under the Credit Agreement subject to
specific prior approval by the bank pending a review of the
Company's financial condition. On July 1, 1997, this restriction
was lifted.
In connection with the 1996 extension of the old credit facility
to March 31, 1997, the Company issued to the former bank warrants
to purchase 100,000 shares of the Company's common stock at a
price equal to $5.18. Pursuant to the antidilution provisions of
the warrants, the number of shares covered by the warrants has
increased to 106,433 shares and the exercise price has been
reduced to $4.87. The Company has filed a registration statement
with the Securities and Exchange Commission (the "SEC") to
register the common stock issuable upon exercise of the warrants.
If the registration statement is not effective prior to July 15,
1997, the Company will forfeit a $375,000 escrow to the former
bank. The Company has been notified by the SEC that the
Registration Statement has been accorded "no review" status and,
therefore, the Company, pursuant to its request, expects the SEC
to declare the Registration Statement effective prior to July 15,
1997. The Company anticipates return of the $375,000 escrow
shortly after the Registration Statement is declared effective by
the SEC.
Cash decreased $60 in the three months ended May 30, 1997. Net
cash from operations was a use of $1,289. Uses of cash primarily
included an increase of costs and estimated earnings in excess of
billings on uncompleted long-term contracts as manufacturing
costs were expended in the production cycle, increased prepaid
expenses (primarily financing costs associated with the Company's
refinancing in March, 1997), a reduction of accounts payable and
a reduction of customer deposits.
Partially affecting these uses was net cash provided from
financing activities. Borrowing under the Company's new credit
facility, and net proceeds from the subordinated debt and
preferred stock were only partially offset by repaying the open
balance on the previous bank facility and $500 in related party
notes.
Material Changes in Results of Operations
Net sales of approximately $6,644 for the three months ended
May 30, 1997, increased $2,135, or 47%, over the prior year's
period. Increases were evidenced across all product lines except
sterilizers with Aircrew Training Systems up 156% and Simulation
up 92%. Sterilizer sales suffered from delayed bookings
beginning the fiscal year because a significant amount of new
sterilizer contracts were not entered into until February, 1997.
The increase in sales resulted in a significant increase in
overall gross margin because the volume increase was only
partially offset by a slightly reduced gross margin rate as a
percent of sales. The majority of the reduction in gross margin
resulted from booking an accrual of $64 (net of additional claims
revenue) for an arbitration award to one of the Company's
subcontractors associated with the Company's outstanding claim
with the U.S. Navy. The Company is currently reviewing
expenditures made through October 1996 on the centrifuge project
claims to determine which, if any, additional amounts will be
added to the existing claims.
Operating expenses increased $214 or 22%, but as a percent of
sales decreased from 21% in the prior period to 18% in the
current period. The increase in expenditure primarily reflected
increased commissions expense on the higher sales, a higher mix
of commissionable sales and higher accruals for professional
fees.
Interest expense decreased due to lower bank interest. This
resulted from a lower balance at a reduced rate.
Other expenses increased slightly on higher net letter of credit
fees.
The Company's sales backlog at May 30, 1997 and february 28, 1997
for work to be performed, training and maintenance contracts, and
prospective revenue to be recognized after that date under
written agreements was approximately $42,900,000 and $30,900,000,
respectively.
<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
On April 10, 1997, a Form 8-K was filed with the
Securities and Exchange Commission. The Form 8-K
reported under Item 5 a recapitalization
arrangement with First Union National Bank, and
Sirrom Capital Corporation of Nashville,
Tennessee. No financial statements were included
with the filing.
<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 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-27-1998
<PERIOD-END> MAY-30-1997
<CASH> 388,000
<SECURITIES> 0
<RECEIVABLES> 10,566,000
<ALLOWANCES> 262,000
<INVENTORY> 2,576,000
<CURRENT-ASSETS> 18,786,000
<PP&E> 8,814,000
<DEPRECIATION> 6,354,000
<TOTAL-ASSETS> 22,813,000
<CURRENT-LIABILITIES> 7,451,000
<BONDS> 5,781,000
2,292,000
0
<COMMON> 297,000
<OTHER-SE> 6,992,000
<TOTAL-LIABILITY-AND-EQUITY> 22,813,000
<SALES> 6,644,000
<TOTAL-REVENUES> 6,644,000
<CGS> 4,684,000
<TOTAL-COSTS> 4,684,000
<OTHER-EXPENSES> 1,170,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,000
<INCOME-PRETAX> 546,000
<INCOME-TAX> 186,000
<INCOME-CONTINUING> 360,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
</TABLE>
