FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act Of 1934 For the fiscal year ended
February 27, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [no fee required]
For the transition period from ____________ to ____________.
Commission File Number 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of small business issuer in its charter)
Pennsylvania 23-1714256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
County Line Industrial Park
Southampton, Pennsylvania 18966
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (215) 355-9100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 the past 90 days.
Yes x No ___
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[x]
As of May 15, 1998, the aggregate market value of the
Registrant's common stock held by non-affiliates of the
Registrant was approximately $16,944,000.
As of May 15, 1998, there were 3,065,106 shares of Registrant's
common stock, $0.10 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Registrant's
1998 Annual Report to Stockholders (the "Annual Report") are
incorporated by reference in Part II, Items 5, 6, 7, and 8.
Transitional Small Business Disclosure Format: Yes ___ No x
<PAGE>
PART I
Item 1. Description of Business
(a) Business Development
Environmental Tectonics Corporation ("ETC" or the
"Company"), a Pennsylvania corporation, incorporated in 1969, is
principally engaged in the manufacture and sale of products used
in controlling, modifying, simulating and measuring environmental
factors such as temperature, humidity, pressure, and vacuum.
These products include aircrew training systems, sterilizers,
environmental and other products which involve similar
manufacturing techniques and engineering technologies.
Since February 28, 1997, there has been no material change
in the Company's mode of conducting business.
(b) Business of the Company
The company operates in two primary business segments,
Aircrew Training Systems and Process Simulation.
Aircrew Training Systems. This segment includes four
primary product groups.
The Company's aircrew training devices are used for medical
research, advanced flight training, and for the indoctrination
and testing of military and commercial pilots. The major devices
sold in this product area are commercial flight simulators, high
altitude decompression chambers, hyperbaric (high-pressurized
oxygen) chambers, night vision trainers, water survival training
equipment, disorientation training equipment, human centrifuges,
and ejection seat trainers. The Company provides operation and
maintenance services for installed equipment it manufactures as
well as equipment produced by others.
The Company's entertainment products consist of motion-based
simulation rides.
The Company's Disaster Management Systems line includes
real-time interactive training programs that allow instruction on
various disaster situations.
The Company's Hyperbaric line includes monoplace and
multiplace chambers for decompression and wound care
applications.
The aircrew training system class of products as a whole
represented 75% and 61% of consolidated revenues of the Company
for the years ended February 27, 1998 and February 28, 1997,
respectively.
Process Simulation. This segment also includes two primary
product groups:
Sterilizers. The Company manufactures steam and gas
sterilizers. Steam sterilizers are used for hospital, medical
research laboratory, and industrial purposes. Gas sterilizers
are used for the sterilization of packaged products such as food,
spices, pharmaceutical, and disposable and reusable medical
devices. The Company's sterilizers range in price from
approximately $25,000 to over $1,000,000, and in chamber size
from three cubic feet to over 4,000 cubic feet, although the
Company concentrates on marketing the larger custom-designed
sterilizers to the pharmaceutical and medical device industries.
The sterilizer class of products represented 19% and 28% of
consolidated revenues of the Company for the years ended
February 27, 1998 and February 28, 1997, respectively.
Environmental Systems and Other Products. The Company's
environmental systems business consists of the design and
fabrication of sampling and analysis systems, and test equipment
and systems used in measuring, monitoring and testing air
pollution. The Company also designs and manufactures
environmental simulation systems to meet specific needs of its
customers. The simulation systems generally consist of an
enclosed chamber with instrumentation and equipment which enable
the customer to control and modify such environmental factors as
temperature, pressure, humidity, wind velocity and gas content to
produce desired conditions. These products include controlled
air systems for automotive companies and environmental chambers
Sales of these products were 6% and 11% of consolidated
revenues of the Company for the years ended February 27, 1998 and
February 28, 1997, respectively.
The Company also provides repair and maintenance service for
its own and other manufacturers' equipment.
Marketing
The Company currently markets its products and services
primarily through its officers and employees. At February 27,
1998, approximately 16 employees were committed to sales and
marketing functions. The Company uses branch offices in the
United Kingdom, the Middle East, and Asia as well as the services
of approximately 100 independent sales organizations in seeking
foreign orders for its products.
Product Development
New products and improvements in existing products are being
continually developed in response to inquiries from customers and
to management's determination that particular products should be
produced or significantly improved. Although the Company does
not have a separate research and development group, there are a
few technical personnel whose main activity is the development
and integration of new technologies into our existing products.
These personnel include the Vice-President of New Product
Development whose additional activity is the introduction of
product extensions and new applications of existing technology.
The Company is currently focusing its product development
efforts in the aircrew training systems segment, with a
particular emphasis on enhancing the related control systems and
software graphics, and exploring commercial possibilities. The
Company's product development efforts will be focused on two
areas:
- Disaster Management Simulation. The Company in Fiscal
1997 completed a Firefighting Command and Control
System and Trainer for a foreign governmental agency.
Product extensions into other disaster situations are
currently being investigated.
- Gyro-Product Line. These products address the need for
a relatively low cost flight and spatial disorientation
trainer.
The Company reported research and development costs of
approximately $148,000 and $167,000 for the years ended
February 27, 1998 and February 28, 1997, respectively. However,
the majority of the Company's research and development efforts
are not separately identified and recorded. Instead, they are
expressed as part of project job costs in the cost of sales.
Supplies
The components being used in the assembly of systems and the
parts used to manufacture the Company's products are purchased
from equipment manufacturers, electronics supply firms and
others. To date, the Company has had no difficulty in obtaining
supplies. Further, all raw materials, parts, components, and
other supplies used by the Company in the manufacture of its
products can be obtained at competitive prices from alternate
sources should existing sources of supply become unavailable.
Patents and Trademarks
The Company has no patents or trademarks which it considers
significant to its operations, except a patent on the GYROLAB
Spatial Disorientation Trainer which expires in December 2004.
Customers
In the current year and recent past, it has been the
Company's experience that a substantial portion of sales are made
to a small number of customers that vary within any given year.
The Company's business does not depend upon repeat orders from
these same customers. Sales of aircrew training systems are made
principally to U.S. and foreign governmental agencies. Sales of
sterilizers and environmental systems are made to commercial and
governmental entities worldwide.
In fiscal 1998, the Company's major customers included the
United Kingdom, Japan and the U.S. Government, which accounted
for $5,492,000, $3,266,000 and $2,936,000 of the Company's sales,
respectively. These governmental entities do not have any
relationship with the Company other than as customers.
Foreign and Domestic Operations and Export Sales
During the years ended February 27, 1998 and February 28,
1997, approximately $2,936,000 (10%) and $2,082,000 (10%),
respectively, of the Company's net revenues were attributable to
contracts with agencies of the U.S. Government or with other
customers who had prime contracts with agencies of the federal
government.
During the years ended February 27, 1998 and February 28,
1997, approximately $17,490,000 (60%) and $15,422,000 (70%),
respectively, of the Company's net revenues were attributable to
export sales or sales for export. (See Note 10 to the Company's
consolidated financial statements incorporated herein by
reference to the Annual Report.) On export sales, customers'
obligations to the Company are secured by irrevocable letters of
credit based on the credit worthiness of the Customer.
The Company does not believe that the distribution of its
sales for any particular period is necessarily indicative of the
distribution expected for any other period.
A large portion of the Company's sales are under long-term
contracts requiring more than one year to complete. The Company
accounts for sales under long-term contracts on the percentage of
completion basis. See Notes 1 and 3 to consolidated financial
statements.
The Company's U.S. Government contracts contain standard
terms permitting termination for the convenience of the
Government. In the event of termination of such contracts, the
Company is entitled to receive reimbursement on the basis of work
completed (cost incurred plus a reasonable profit), recording the
amounts anticipated to be recovered from termination claims in
income as soon as those amounts can be reasonably determined
rather than at the time of final settlement. All costs
applicable to a termination claim are charged as an offsetting
expense concurrently with the recognition of income from the
claim.
Backlog
The Company's sales backlog at February 27, 1998 and
February 28, 1997 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $27,523,000 and $25,800,000, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 27, 1998 and February 28, 1997 for work to be
performed and revenue to be recognized after that date under
written agreements was approximately $2,925,000 and $5,100,000,
respectively. Of the 1998 backlog, approximately $29,135,000 is
under contracts for aircrew training systems and maintenance
support. Approximately 60% of the 1998 backlog is expected to be
completed prior to February 26, 1999.
Competition
The Company's business strategy in recent years has been to
seek niche markets in which there are not numerous competitors.
However, in some areas of its business the Company competes with
well-established firms, some of which have substantially greater
financial and personnel resources.
Some competitor firms have technical expertise and
production capabilities in one or more of the areas involved in
the design and production of physiological flight training
equipment, environmental systems, and other specially designed
products, and compete with the Company for this business. The
competition for any particular project generally is determined by
the technological requirements of the project, with consideration
also being given to a bidder's reliability, product performance,
past performance, and price.
The Company faces particularly intense competition from a
number of firms in the sale of hospital sterilizers but faces
less competition in the sale of the larger custom-designed
industrial sterilizers.
The Company believes that it is a significant participant in
the markets in which it competes, especially in aircrew training
systems in which the Company believes it is a principal provider
of this type of equipment and training in its market area.
Compliance with Environmental Laws
The Company has not incurred during fiscal 1998 nor does it
anticipate incurring during fiscal 1999 any material capital
expenditures to maintain compliance with Federal, state and local
statutes, rules and regulations concerning the discharge of
materials into the environment, nor does the Company anticipate
that compliance with these provisions will have a material
adverse effect on its earnings or competitive position.
Employees
On February 27, 1998, the Company had 185 full-time
employees, of whom 5 were employed in executive positions, 29
were engineers, engineering designers, or draftpeople, 47 were
administrative (sales, accounting, etc.) and clerical personnel,
and 104 were engaged principally in production and operations.
Item 2. Description of Property
The Company owns its executive offices and principal
production facilities located on a 5-acre site in the County Line
Industrial Park, Southampton, Pennsylvania in an approximately
70,000 square foot steel and masonry building. Approximately
55,000 square feet are devoted to manufacturing, and
15,000 square feet to office space. The original building was
erected in 1969 and additions were made in 1973, 1976, 1985 and
1991. This property collateralizes the Company's revolving
credit facility.
The Company considers its machinery and plant to be in
satisfactory operating condition and adequate for the Company's
present level of business. Increases in the level of operations
beyond that expected in the current fiscal year might require the
Company to obtain additional facilities and equipment.
Item 3. Legal Proceedings
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.
Based on the available information, the Company believes that it
possesses meritorious defenses to such action. The Company has
up to $10 million of products liability coverage, subject to a
$100,000 deductible. The Company has notified its insurer of
the lawsuit, and the Company's insurer has engaged counsel to
defend the Company in this matter.
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, all such
matters are reserved for or are 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 of the Company if disposed of unfavorably.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
See information appearing under the heading "Market for the
Registrant's Common Stock and Related Stockholder Matters" in the
Annual Report, attached hereto as Exhibit 13 and incorporated
herein by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
See information appearing under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report, attached hereto as Exhibit 13
and incorporated herein by reference.
Item 7. Financial Statements
See the information appearing under the headings
"Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements" in the Annual Report, attached hereto as
Exhibit 13 and incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information with
respect to the directors of the Registrant:
<TABLE>
<CAPTION>
Served
as Principal Occupations
Director and Positions and
or Officer Offices with the
Name Age Since(1) Company
<S> <C> <C> <C>
William F. Mitchell(2) 56 1969 Chairman of the Board,
President and Director
Richard E. McAdams(3) 62 1985 Executive Vice President
and Director
Philip L. Wagner, Ph.D.(4) 61 1993 Director
Pete L. Stephens, M.D.(5) 60 1974 Director
Craig Macnab(6) 42 1997 Director
Duane D. Deaner(7) 50 1996 Chief Financial
Officer
____________________
</TABLE>
(1) Directors serve one-year terms.
(2) Mr. Mitchell has been Chairman of the Board, President and
Chief Executive Officer of the Company since 1969, except
for the period from January 24, 1986 through January 24,
1987, when he was engaged principally in soliciting sales
for the Company's products in the overseas markets.
(3) Mr. McAdams has been with the Company since 1970. He became
a Vice President in 1978 with responsibility for contract
administration. Mr. McAdams became Executive Vice President
of the Company in 1990.
(4) Dr. Wagner is an organic chemist with over 30 years of
diversified experience managing research and development and
new business development at E.I. du Pont de Nemours &
Company and thereafter founded Chadds Ford Technologies,
Inc., a consulting firm. He is currently President of
Chadds Ford Technologies, Inc.
(5) Dr. Stephens has been a physician engaged in the private
practice of medicine for 30 years.
(6) Mr. Macnab has served as Director of the Company since
June 1997. Since January 1997, Mr. Macnab has been the
President of Tandem Capital, Inc. which makes investments
in micro-cap public companies. From 1993 to 1996, Mr.
Macnab served as the general partner of MacNiel Advisors,
Inc., the general partner of three private funds that
invested in the publicly traded securities of small public
companies. From 1987 to 1993, Mr. Macnab was a partner of
J.C. Bradford & Co., a regional brokerage firm, jointly
responsible for the merger and acquisition department and a
private mezzanine capital fund. From 1981 to 1987, Mr.
Macnab was employed by Lazard Freres & Co. Mr. Macnab is
also a director of JDN Realty, Smart Choice Automotive Group
and Teltronics, Inc.
(7) Mr. Deaner has served as Chief Financial Officer of the
Company since January 1996. Mr. Deaner served as Vice
President of Finance for Pennfield Precision Incorporated
from September 1988 to December 1995.
Committees of the Board of Directors
During the year ended February 27, 1998, the Company had an
Audit Committee consisting of the following directors:
Messrs. Mitchell, Philip L. Wagner and Dr. Pete L. Stephens. The
independent outside directors also served on the Company's
Compensation Committee during the year ended February 27, 1998.
The Audit Committee is charged with reviewing and overseeing the
Company's financial systems and internal control procedures and
conferring with the Company's independent accountants with
respect thereto. The Compensation Committee is charged with
reviewing the compensation and incentive plans of officers and
key personnel.
During the year ended February 27, 1998, the Board of
Directors held 5 meetings and the Audit Committee and
Compensation Committee each held 1 meeting. All members of the
Board attended all of the meetings of the Board held while they
were members of the Board. All members of the Audit Committee
and Compensation Committee attended all meetings of the Committee
held while they were members thereof.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and
the American Stock Exchange. Officers, directors and greater
than ten percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) Forms they
file. The rules of the SEC regarding the filing of such
statement require that "late filings" of such statements be
disclosed in the Company's proxy statement.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the
Company believes that, during the fiscal year ended February 27,
1998, its officers, directors and greater than ten percent
beneficial owners complied with all applicable filing
requirements.
Item 10. Executive Compensation
REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth compensation paid by the
Company to the Chief Executive Officer for services rendered
during fiscal years 1998, 1997 and 1996. There are no other
executive officers whose total annual salary and bonus exceeds
$100,000. The footnotes to the table provide additional
information concerning the Company's compensation and benefit
programs.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Name and Annual All Other
Principal Fiscal Compen- Compen-
Position Year Salary($) Bonus($) sation($)(1) sation($)(2)
<S> <C> <C> <C> <C> <C>
William F. Mitchell, 1998 $178,450 $ - $ - $3,876
President and Chief 1997 113,780 - - 2,731
Executive Officer 1996 119,531 - - 2,473
</TABLE>
(1) The Company's executive officers receive certain
perquisites. For fiscal years 1998, 1997 and 1996, the
perquisites received by Mr. Mitchell did not exceed the
lesser of $50,000 or 10% of his salary and bonus.
(2) These amounts represent the Company's contribution to the
Retirement Savings Plan.
Directors of the Company who are not officers of the Company are
paid $600 for Board of Directors meetings which they attend.
Additional compensation is not paid for committee meetings.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of May 15, 1998, the
number of shares and percentage of the Company's Common Stock
owned beneficially by each director, each executive officer named
in the Summary Compensation Table, and each person holding, to
the Company's knowledge, more than 5% of the outstanding Common
Stock. The table also sets forth the holdings of all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership Class
<S> <C> <C>
William F. Mitchell (1) 933,949 30.5%
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966
Pete L. Stephens, M.D. (2) 325,100(3) 10.6%
1 Eleni Lane
West Chester, PA 19382
Richard E. McAdams (4) 17,026(5) 1.0%
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966
Philip L. Wagner, Ph.D. (6) 6,000(7) *
Chadds Ford Technologies, Inc.
P.O. Box 377
Chadds Ford, PA 19317
Craig Macnab 499,660(8) 14.0%
C/o Tandem Capital
500 Church Street, Suite 200
Nashville, TN 37219
Sirrom Capital Corporation 499,660(8) 14.0%
500 Church Street , Suite 200
Nashville, TN 37219
All directors and executive
officers as a group (7 persons) 1,782,860(9) 50.0%
* less than 1%
- --------------------
</TABLE>
(1) Chairman of the Board, President and Director of the
Corporation. Shares of Common Stock include 100,000 shares
held by Mr. Mitchell's wife.
(2) Director of the Corporation.
(3) Includes 9,000 shares held by or for the benefit of
Dr. Stephens' wife and two of his children.
(4) Director of the Corporation.
(5) Includes options to purchase 500 shares of Common Stock held
under the Company's Incentive Stock Option Plan which are
presently exercisable.
(6) Director of the Corporation.
(7) Includes 4,000 shares of Common Stock held by or for the
benefit of Dr. Wagner's wife.
(8) Shares listed for Craig Macnab and Sirrom Capital
Corporation are the shares beneficially owned by Sirrom
Capital Corporation. These shares include 333,250 shares of
Common Stock underlying 25,000 shares of Series A Preferred
Stock that are presently convertible and 166,410 shares of
Common Stock underlying a presently exercisable warrant to
purchase such shares.
(9) Includes options to purchase 1,625 shares of Common Stock
held under the Company's Incentive Stock Option plan of
which are presently exercisable.
Item 12. Certain Relationships and Related Transactions
Set forth below is information concerning loans made to the
Company by certain affiliates.
<TABLE>
<CAPTION>
Outstanding
Principal
Original Balance of Annual
Principal Loan as of Percentage
Name of Date of Amount March 27, Interest Maturity
Lender(s) Loan of Loan 1997 Rate Date
<S> <C> <C> <C> <C> <C>
Pete L. Stephens(1) 12/11/96 $100,000.00 $100,000.00 10% 1/1/98 (2)
Pete L. Stephens(1) 1/2/97 $ 60,000.00 $ 60,000.00 10% 1/1/98 (2)
Pete L. Stephens(1) 1/8/97 $100,000.00 $100,000.00 10% 1/1/98 (2)
Pete L. and Anita Stephens(3) 1/8/97 $ 40,000.00 $ 40,000.00 10% 1/1/98 (2)
John Mitchell(4) 1/8/97 $400,000.00 $400,000.00 10% 1/1/98 (5)
Christine Walters(6) 1/8/97 $ 35,000.00 $ 35,000.00 10% 1/1/98 (7)
Christine Walters(6) 1/8/97 $165,000.00 $165,000.00 10% 1/1/98 (7)
William F. Mitchell(8) 2/7/97 $300,000.00 $300,000.00 10% 1/1/99
</TABLE>
(1) Director of the Corporation.
(2) Loan was satisfied on April 14, 1998.
(3) Dr. Stephens is a director of the Corporation.
Anita Stephens is the spouse of Doctor Stephens.
(4) Mr. John Mitchell is the brother of William F. Mitchell,
Chairman of the Board, President and Director of the
Corporation.
(5) Loan was satisfied on April 30, 1997.
(6) Christine Walters is the daughter of William F. Mitchell,
Chairman of the Board, President and Director of the
Corporation.
(7) Loan was satisfied March 6, 1998.
(8) Mr. Mitchell is Chairman of the Board, President and
Director of the Corporation.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Item
3.1 Registrant's Articles of
Incorporation, as amended, were filed
as Exhibit 3.1. to Registrant's Form 10-K
for the year ended February 28, 1997 and
are incorporated herein by reference.
3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and are
incorporated herein by reference.
4.1 12% Subordinated Debenture due
March 27, 2004 was filed as
Exhibit 4.1 to Registrant's Form 10-K
for the year ended February 28, 1997
and is incorporated herein by reference.
10.1 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*
10.2 Registrant's Employee Stock
Purchase Plan was filed on July 6,
1988 as Exhibit A to the Prospectus
included in Registrant's
Registration Statement (File
No. 33-42219) on Form S-8 and is
incorporated herein by reference.*
10.3 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*
10.4 Form of 1996 Warrant Agreement between
the Registrant and Chase Manhattan
Capital Corporation, filed as
Exhibit 10(xiv) to the Registrant's
Form 10-KSB for the fiscal year ended
February 23, 1996 and is incorporated
herein by reference.
10.5 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank was filed as Exhibit 10.6 to
Registrant's Form 10-K for the year
ended February 28, 1997 and is
incorporated herein by reference.
10.6 Amendment to Revolving Credit
Agreement dated as of November 28,
1997.
10.7 Debenture Purchase Agreement, dated
March 27, 1997, between the Registrant
and Sirrom Capital Corporation was filed
as Exhibit 10.7 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.
10.8 Preferred Stock Purchase Agreement,
dated March 27, 1997, between the
Registrant and Sirrom Capital
Corporation was filed as Exhibit 10.8
to the Registrant's Form 10-KSB for
the fiscal year ended February 28,
1997 and is incorporated herein by
reference.
10.9 Stock Purchase Warrant, dated March 27,
1997, issued by the Registrant to
Sirrom Capital Corporation was filed as
Exhibit 10.9 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.
13 Portions of Registrant's 1998 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.
21 List of subsidiaries.
23 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule
- ---------------
* Represents a management contract or
a compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
ENVIRONMENTAL TECTONICS CORPORATION
By/s/ William F. Mitchell
William F. Mitchell,
President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.
Name Position Date
/s/ William F. Mitchell Chairman of the Board, May 28, 1998
William F. Mitchell Chief Executive Officer,
President and Director
/s/ Duane D. Deaner Chief Financial May 28, 1998
Duane D. Deaner Officer (Principal
Accounting Officer)
/s/ Richard E. McAdams Director May 28, 1998
Richard E. McAdams
/s/ Craig Macnab Director May 28, 1998
Craig Macnab
/s/ Pete L. Stephens Director May 28, 1998
Pete L. Stephens, M.D.
/s/ Philip L. Wagner Director May 28, 1998
Philip L. Wagner, Ph.D.
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
3.1 Registrant's Articles of
Incorporation, as amended, were filed
as Exhibit 3.1 to Registrant's Form 10-K
for the year ended February 28, 1997 and
are incorporated herein by reference.
3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and are
incorporated herein by reference.
4.1 12% Subordinated Debenture due
March 27, 2004 was filed as
Exhibit 4.1 to Registrant's Form 10-K
for the year ended February 28, 1997
and is incorporated herein by reference.
10.1 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*
10.2 Registrant's Employee Stock
Purchase Plan was filed on July 6,
1988 as Exhibit A to the Prospectus
included in Registrant's
Registration Statement (File
No. 33-42219) on Form S-8 and is
incorporated herein by reference.*
10.3 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*
10.4 Form of 1996 Warrant Agreement between
the Registrant and Chase Manhattan
Capital Corporation, filed as
Exhibit 10(xiv) to the Registrant's
Form 10-KSB for the fiscal year ended
February 23, 1996 and is incorporated
herein by reference.
10.5 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank was filed as Exhibit 10.6 to
Registrant's Form 10-K for the year
ended February 28, 1997 and is
incorporated herein by reference.
10.6 Amendment to Revolving Credit
Agreement dated as of November 28,
1997.
10.7 Debenture Purchase Agreement, dated
March 27, 1997, between the Registrant
and Sirrom Capital Corporation was filed
as Exhibit 10.7 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.
10.8 Preferred Stock Purchase Agreement,
dated March 27, 1997, between the
Registrant and Sirrom Capital
Corporation was filed as Exhibit 10.8
to the Registrant's Form 10-KSB for
the fiscal year ended February 28,
1997 and is incorporated herein by
reference.
10.9 Stock Purchase Warrant, dated March 27,
1997, issued by the Registrant to
Sirrom Capital Corporation was filed as
Exhibit 10.9 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.
13 Portions of Registrant's 1997 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.
21 List of subsidiaries.
23 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule
- ---------------
* Represents a management contract or
a compensatory plan or arrangement.
FIRST AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT ("First
Amendment"), dated as of November 28, 1997 between ENVIRONMENTAL
TECTONICS CORPORATION, a Pennsylvania corporation (the
"Borrower") and FIRST UNION NATIONAL BANK, a national banking
association (the "Bank").
W I T N E S E T H
WHEREAS, the Borrower and the Bank are parties to a
Revolving Credit Agreement dated as of March 27, 1997 (the
Agreement") pursuant to which the Bank agreed to make available
to the Borrower certain loans upon the terms and conditions
specified in the Agreement;
WHEREAS, the parties wish to amend certain terms and
conditions of the Agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and
mutual agreements herein contained, the parties hereto, intending
to be legally bound hereby, agree to amend the Agreement as
herein stated.
1. Effect of Prior Agreements.
This First Amendment is intended to amend the
Agreement, as it has been in effect to the date hereof and as it
shall be amended on and after the date hereof. All capitalized
terms used herein as defined terms shall have the meanings
ascribed to them in the Agreement unless herein provided to the
contrary.
2. Amendments.
(a) The following definitions contained in
Article I of the Agreement are hereby amended and restated in
their entirety to read as follows:
"Letter of Credit Fee Reduction" shall
mean a reduction in the standby letter
of credit fee otherwise charged by the
Bank to the Borrower pursuant to Section
2.1(b)-(2) of this Agreement. The Letter
of Credit Fee Reduction shall equal one-
quarter of one percent (0.25%) if the
Borrower's Leverage Ratio is greater
than 0.75 and less than 1.00. The Letter
of Credit Fee Reduction shall equal
sixty-five one hundredths of one percent
(0.65%) if the Borrower's Leverage Ratio
is less then or equal to 0.75.
"LIBOR" shall mean the rate per annum
(rounded upwards, if necessary, to the
nearest 1/100 of 1%) determined by the
Bank pursuant to the following formula:
London InterBank Offered Rate
LIBOR = 1 - Reserve Percentage
For purposes of this Agreement, the term
"London InterBank Offered Rate" shall
mean, for any Interest Period, as
applied to any Adjusted LIBO Rate Loan,
the rate per annum determined by the
Bank (which determination shall be
conclusive) as the rate at approximately
11:00 a.m. London time (or as soon
thereafter as practicable) two
Eurodollar Business Days prior to the
first day of such Interest Period at
which leading banks in the London
InterBank Market offer deposits of U.S.
Dollars for a period and in an amount
comparable to the Interest Period and
principal amount of such Adjusted LIBO
Rate Loan which rates appear on the
Reuters Screen LIBO Page, provided that
(i) if more than one such offered rate
appears on the Reuters Screen LIBO Page,
the "London Interbank offered Rate" will
be the arithmetic average (rounded
upward, if necessary, to the next higher
1/100th of 1%) of such offered rates;
(ii) if no such offered rates appear on
such page, the "London Interbank Offered
Rate" for such Interest Period will be
as determined by the Bank from another
recognized source of interbank
quotation.
(b) Article I of the Agreement is hereby
supplemented by adding the following definitions thereto in the
Appropriate alphabetical order;
"Reserve Percentage" shall mean, for any
Adjusted LIBO Rate Loan for any Interest
Period therefor, the daily average of
the stated maximum rate (expressed as a
decimal) at which reserves (including,
without limitation, any basic,
supplemental, marginal or emergency
reserves) are required to be maintained
during such Interest Period against
Eurocurrency Liabilities (as that term
is defined in Regulation D of the
Federal Reserve Board), as prescribed by
the Federal Reserve Board (or any
successor or any other banking authority
to which the Bank is subject, including
any board or governmental or
administrative agency of the United
States or any other jurisdiction to
which the Bank is subject). The
Adjusted LIBO Rate shall be adjusted on
and as of the effective day of any
change in the Reserve Percentage
applicable to it.
"Spot Rate of Exchange" shall mean on a
particular day the Bank's spot rate of
exchange for the purchase of Sterling in
the London Foreign Exchange Market with
US Dollars at or about 10:00 a.m. London
time on such day. In the event no such
spot rate of exchange is available, such
spot rate shall be determined by the
Bank, in conjunction with the Borrower,
by mutual agreement of the Bank and the
Borrower.
"Sterling" and "L" shall mean the lawful
currency of the United Kingdom.
"US Dollar or $" shall mean the lawful
currency of the United States of
America;
"US Dollar Amount" shall mean on any
particular day the principal amount in
US Dollars which is outstanding under
the Revolving Credit Facility determined
by converting into US Dollars that part
of the principal balance of the
Revolving Credit Facility that was
advanced in Sterling at the Spot Rate of
Exchange on the date of determination
and adding to such amount the principal
balance of the Revolving Credit Facility
advanced in US Dollars.
(c) Section 2.1(a) of the Agreement is hereby
amended and restated in its entirety to read as follows:
At any time and from time to time during
the period commencing on the Closing
Date and ending on the Termination Date,
upon the request of the Borrower, the
Bank shall provide to the Borrower a
loan or loans which shall be used by the
Borrower for working capital and/or
repayment of indebtedness existing at
the time of the Closing (the "Line of
Credit"). Such loans shall be made in
U.S. Dollars or, subject to
Section 2.1(f), in Sterling. Subject to
Section 2.2(b)(2), any loan request by
the Borrower shall be in a minimum
amount of $100,000.00. To the extent a
loan request exceeds $100,000.00, such
excess shall be in multiples of
$100,000.00. The Borrower may use the
Line of Credit during the period
referred to in the preceding sentence by
borrowing, repaying and reborrowing in
accordance with the terms of this
Agreement. On and before May 31, 1998,
the aggregate outstanding principal
under the Line of Credit (calculated in
U.S. Dollars) at any time shall not
exceed $9,000,000.00. After May 31,
1998, the aggregate outstanding
principal under the Line of Credit
(calculated in U.S. Dollars) at any time
shall not exceed $8,000,000. If, at any
time, the aggregate outstanding
principal under the Line of Credit
(calculated in U.S. Dollars) exceeds:
(i) on or before May 31, 1998,
$9,000,000.00 or (ii) after May 31,
1998, $8,000,000.00, then, without any
requirement of demand or notice from the
Bank, the Borrower shall immediately pay
to the Bank the amount of such excess.
Upon the Termination Date, unless the
same has been extended by written
agreement between the Bank and the
Borrower (which the Bank shall provide,
if at all, no later than forty-five (45)
days prior to the Termination Date), the
Bank's commitment to make Line of Credit
Loans shall terminate, all Line of
Credit Loans shall immediately mature
and all Obligations under the Revolving
Credit Facility shall be immediately due
and payable in full in US Dollars.
(d) The first two sentences of Section 2.1(b) of
the Agreement are is hereby amended and restated in its entirety
to read as follows:
In addition to making loans to the
Borrower under the Line of Credit as
provided in Section 2.1(a) hereof, the
Bank shall, upon the request of the
Borrower and subject to the terms of
this Agreement, also issue one or more
trade or standby letters of credit
("Letters of Credit") for the account of
the Borrower to support trade
obligations of the Borrower or to
benefit customers of the Borrower that
have advanced funds to the Borrower or
have executed maintenance contracts with
the Borrower. The cumulative face
amount of all outstanding Letters of
Credit, together with the Chase Letters
of Credit, shall at no time exceed
$5,000,000; provided, further, that the
cumulative face amount of all
outstanding trade Letters of Credit
shall at no time exceed $2,500,000.
(e) Section 2.1(b)(2) of the Agreement is hereby
amended and restated to read in its entirety as follows:
Issuance of Letters of Credit. Subject
to the provisions of Section 2.1(b)(1),
the Bank shall issue Letters of Credit
for the account of the Borrower,
provided that the Borrower (i) provides
a written request for each such Letter
of Credit specifying the terms thereof,
including, without limitation, the
amount and the name and address of the
beneficiary of such Letter of Credit;
(ii) executes and delivers to the Bank
an application for each such Letter of
Credit pursuant to the form provided for
such purpose by the Bank; and
(iii) executes and delivers to the Bank
such other documents and instruments
which the Bank, in its sole and absolute
discretion, deems reasonable and
necessary. The Borrower shall pay to
the Bank on the date of issuance of each
standby Letter of Credit hereunder a fee
equal to the face amount of the Letter
of Credit multiplied by 1.5% less the
Letter of Credit Fee Reduction, if any.
The Borrower shall pay to the Bank all
fees customarily charged by the Bank at
the time of issuance of any trade
Letters of Credit. The foregoing fees
may be deducted by the Bank from the
Borrower's accounts maintained at the
Bank as such fees are incurred. The
determination of whether the Borrower is
entitled to a Letter of Credit Fee
Reduction with respect to a standby
Letter of Credit shall be made in
connection with the Borrower's delivery
of the certificate required to be
delivered by the Borrower to the Bank
pursuant to Section 6.2 of this
Agreement. Letter of Credit Fee
Reductions for future standby Letters of
Credit will become effective upon the
first Business Day of the fiscal quarter
following the Bank's receipt of the
above-described certificate.
(f) Section 2.1 of the Agreement is supplemented
by adding the following Section 2.1(f)
2.1(f) Currency Provisions. All
requests for Loans shall be accompanied
by a request from the Borrower
requesting the Loan as to the type of
currency that is desired with respect to
such Loan. Advances under the Revolving
Credit Facility will be available only
in US Dollars or in Sterling, provided
however, that: (i) each Loan shall be
made in only one currency; (ii) the Bank
shall perform the notional conversion
into US Dollars of any Sterling
requested and (iii) total Sterling
borrowings shall at no time exceed
$1,000,000 (notionally converted at the
then existing Spot Rate of Exchange).
Requests by the Borrower for Advances in
Sterling shall be made to the Bank's
London Branch at 3 Bishop's Gate,
London, England EC2N3AB (telephone:
44-171-621-1477; telecopy:
44-171-929-4644). Subject to
Section 2.7 hereof, all amounts advanced
under the Revolving Credit Facility and
all of the other Obligations of the
Borrower hereunder shall be paid in US
Dollars. Borrower's request that an
advance under the Revolving Credit
Facility be made in Sterling shall be
honored by the Bank so long as there
does not exist at the time of such
Borrower's request any national or
international financial, political or
economic conditions or currency exchange
rates or exchange controls, which in the
sole and exclusive opinion of the Bank,
make it impractical or impossible for
the Bank to make such Loan in Sterling;
in such event the Bank shall give the
Borrower notice as promptly as possible
to the effect that as a result of such
event the Loan will not be made in
Sterling, but, at the option of the
Borrower, such Loan will be made
available in US Dollars. Any conversion
of Sterling into US Dollars that is
required for purposes of calculating
(i) the amounts outstanding under the
Revolving Credit Facility in US Dollars
or (ii) for any other reason, shall be
performed by the Bank by its application
of the Spot Rate of Exchange on the date
of such calculation; provided, however,
that on the last Business Day of each
month, the Bank shall calculate the
amounts outstanding under the Revolving
Credit Facility by notionally converting
Sterling borrowings by using a Spot Rate
of Exchange equal to the then existing
Spot Rate of Exchange multiplied by
1.10. To the extent that such
calculation causes the Borrower not to
be in compliance with Section 2.1(a) or
(f) hereof, the Borrower shall
immediately pay to the Bank the amount
of such excess.
(g) Section 2.2(b)(1) of the Agreement is hereby
amended and restated in its entirety to read as follows:
The Borrower may ask the Bank for
indications of LIBOR for specified Line
of Credit Loans and Interest Periods, as
applicable, at any time. If the
Borrower anticipates that it may elect
the Adjusted LIBO Rate to be applicable
to a Line of Credit Loan, the Borrower
shall request an indication of LIBOR
prior to 11:00 a.m. (Philadelphia time)
at least two Eurodollar Business Days
prior to the commencement of the
applicable Interest Period, and if the
Borrower desires to elect the Adjusted
LIBO Rate for such Interest Period, the
Borrower must accept such indication of
LIBOR by notice to the Bank in writing
or by telephone (confirmed promptly in
writing) prior to 11:00 a.m.
(Philadelphia time) on the date of
acceptance, which shall be at least two
Eurodollar Business Days prior to the
commencement of the Interest Period
selected by the Borrower. If the
Borrower does not provide the applicable
notice of election of the Adjusted LIBO
Rate, then the Borrower shall be deemed
to have requested that the Adjusted Base
Rate apply to any Line of Credit Loan
which is subject to any expiring
Interest Period and to any new Line of
Credit Loan, as the case may be, until
the Borrower shall have given
appropriate notice of a requested change
in or determination of the rate of
interest in accordance with this
Section 2.2. No acceptance of an
indication of rate hereunder shall bind
the Bank unless timely made.
(h) Section 2.7 of the Agreement is hereby
supplemented by adding the following paragraph at the end
thereof:
Notwithstanding the foregoing, to the extent
the Borrower has received advances in
Sterling in accordance with Section 2.1(f) of
this Agreement, the Borrower may repay its
obligations to the Bank in Sterling at the
Bank's London Branch at 3 Bishop's Gate,
London, England EC2N3AB (telephone:
44-171-621-1477; telecopy: 44-171-929-4644).
Upon the receipt by the Bank's London Branch
of a Sterling repayment, the Bank shall
notionally convert such payment into US
Dollars by application of the then prevailing
Spot Rate of Exchange.
(i) Schedule 6.16 of the Agreement is hereby
amended as follows:
(1) Section "A" of Schedule 6.16 is amended
and restated in its entirety to read as follows:
Current Ratio -- The Borrower shall have
at the end of each fiscal quarter a
Current Ratio of not less than 1.10 to
1.00.
(2) The definition of "Current Assets" is
amended and restated in its entirety to read as follows:
"Current Assets" shall mean, at any
time, all assets which, in accordance
with GAAP, should be classified as
current assets of the Borrower,
excluding, however, any and all accounts
receivable related to that certain
contract between the Borrower and
CENTRIFUGE-BASED FLIGHT ENVIRONMENT
TRAINER ("CFET") and any and all claims
receivable.
(3) The definition of "Current Liabilities
is amended and restated in its entirety to read as follows:
"Current Liabilities" shall mean, at any
time, all liabilities which, in
accordance with GAAP should be
classified as current liabilities of the
Borrower, plus, if the Line of Credit
Loans do not constitute current
liabilities in accordance with GAAP, the
Line of Credit Loans, plus the face
amount of all issued Letters of Credit
except those issued for advance payment
guaranties.
3. Conditions. To induce the Bank to enter into this
First Amendment and to extend the Loans contemplated herein, the
Borrower shall perform the following conditions to the Bank's
satisfaction prior to the Bank's acting in reliance hereon:
(a) The Borrower shall execute and deliver to the
Bank this First Amendment and all other documents as the Bank may
require;
(b) The Borrower shall deliver to the Bank
certified resolutions of the Board of Directors of the Borrower
authorizing the execution of this First Amendment, all in such
form as is acceptable to the Bank;
(c) The Borrower shall deliver to the Bank an
officer's certificate in form and substance satisfactory to the
Bank; and
(d) The Borrower shall deliver all other
documents and certificates reasonably requested by the Bank.
4. Representations and Warranties. The Borrower
hereby represents and warrants that:
(a) The representations and warranties contained
in the Agreement and in each certificate, document or financial
statement furnished by the Borrower in connection therewith or in
connection with any other Loan Document, are true and correct on
and as of the date hereof as though made on and as of the date
hereof.
(b) No Event of Default, and no event which with
the passage of time or the giving of notice or both could become
an Event of Default, exists on the date hereof, and no offsets or
defenses exist against the Borrower's obligations under the
Agreement or the documents delivered in connection therewith.
(c) This First Amendment have been duly
authorized, executed and delivered so as to constitute the legal,
valid and binding obligations of the Borrower, enforceable in
accordance with their terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, Moratorium or
other similar laws affecting creditors, rights generally and
general principles of equity.
(d) The execution, delivery and performance
of this First Amendment will not violate any applicable provision
of law or judgment, order or regulation of any court or of any
public or governmental agency or authority nor conflict with or
constitute a breach of or a default under any instrument to which
the Borrower is a party or by which the Borrower or the
Borrower's properties is bound, nor result in the creation of any
lien, charge or encumbrance upon any assets of the Borrower
except those liens permitted by or created under this First
Amendment.
(e) No approval, consent or authorization of, or
registration, declaration or filing with, any governmental or
public body or authority is required in connection with the valid
execution, delivery and performance by the Borrower of this First
Amendment.
5. Reaffirmation. The Borrower hereby affirms and
reaffirms to the Bank all of the terms and conditions of the
Agreement and the other Loan Documents, including, without
limitation, the confession of judgment provision contained
therein, and agrees to abide thereby until all of the Borrower's
obligations to the Bank are satisfied and/or discharged in their
entirety.
6. Guarantors' Representations. Each Guarantor
hereby represents and warrants that:
(a) The representations and warranties which it
made in its respective Guaranty Agreement are true and correct as
of the date hereof.
(b) This First Amendment has been duly authorized
by all requisite action on behalf of each Guarantor and
constitutes the legal, valid and binding obligations of each
Guarantor enforceable in accordance with its terms, except as the
same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity.
(c) The execution, delivery and performance of
this First Amendment will not violate any applicable provision of
law or judgment, order or regulation of any court or of any
public or governmental agency or authority nor conflict with or
constitute a breach of or a default under any instrument to which
each Guarantor is a party or by which any Guarantor or any of
such Guarantor's properties is bound.
All of the above representations and warranties shall
survive the making of this First Amendment.
7. Guarantors' Acknowledgments. Each Guarantor:
(a) Hereby acknowledges and consents to the
provisions of this First Amendment and confirms and agrees that
its obligations under its respective Guaranty Agreement shall be
unimpaired hereby and that all terms and conditions of its
respective Guaranty Agreement shall remain in full force and
effect and unmodified hereby and are hereby ratified and
confirmed.
(b) Hereby acknowledges the continued existence,
validity and enforceability of its respective Guaranty Agreement,
agrees that the terms, conditions, representations and covenants
of its respective Guaranty Agreement, including, without
limitation, such Guarantor's consent to the Bank entering a
judgment against it by confession, are binding upon it and
certifies that there exists no defenses, offsets or counterclaims
thereto as of the date hereof subject to limitation set forth
therein.
8. Miscellaneous.
(a) All terms, conditions, provisions and
covenants in the Agreement, the Note, the Security Agreement and
the Guaranty Agreements and all other Loan Documents delivered to
the Bank in connection therewith shall remain unaltered and in
full force and effect except as modified or amended hereby and
are hereby ratified and confirmed.
(b) This First Amendment shall be governed and
construed according to the laws of the Commonwealth of
Pennsylvania.
(c) This First Amendment shall inure to the
benefit of, and be binding upon, the parties hereto and their
respective successors and permitted assigns.
(d) This First Amendment may be executed in one
or more counterparts, and by different parties on different
Counterparts, each of which shall be deemed an original, all of
which together shall constitute one and the same instrument, and
in making proof of this First Amendment it shall be necessary
only to produce one counterpart.
(e) This First Amendment shall have effect as of
its date.
IN WITNESS WHEREOF, the parties hereto have executed
this First Amendment as of the day and year first above written.
ATTEST: ENVIRONMENTAL TECTONICS CORPORATION
By:/s/ Ann M. Allen By:/s/ Duane D. Deaner
Title: Corporate Secretary Title: C.F.O.
FIRST UNION NATIONAL BANK
By:________________________________
Title:_____________________________
ATTEST: ENVIRONMENTAL TECTONICS CORPORATION
(EUROPE) LIMITED
By: /s/ Eugene A. Davis By: /s/ Duane D. Deaner
Title: Director Title: Director and Vice President
ATTEST: ETC INTERNATIONAL CORPORATION
By:/s/ Ann M. Allen By:/s/ Duane D. Deaner
Title: Asst. Secretary Title: Vice President, C.F.O.
<PAGE>
OFFICER'S CERTIFICATE
The undersigned, Duane Deaner, the duly elected and
authorized Chief Financial Officer of Environmental Tectonics
Corporation, a Pennsylvania corporation (the "Company"), without
personal liability, does hereby certify pursuant to Section 4 of
that certain First Amendment dated November 28, 1997, to the
Revolving Credit Agreement dated March 27, 1997, between the
Company and First Union Bank as follows:
(a) The representations and warranties contained in
the Agreement and in each certificate, document or financial
statement furnished by the Borrower in connection therewith or in
connection with any other Loan Document, are true and correct on
and as of the date hereof as though made on and as of the date
hereof.
(b) No Event of Default, and no event which with the
passage of time or the giving of notice or both could become an
Event of Default, exists on the date hereof, and no offsets or
defenses exist against the Borrower's obligations under the
Agreement or the documents delivered in connection therewith.
(c) This First Amendment have been duly authorized,
executed and delivered so as to constitute the legal, valid and
binding obligations of the Borrower, enforceable in accordance
with their terms, except as the same may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' right generally and general
principles of equity.
(d) The execution, delivery and performance of this
First Amendment will not violate any applicable provision of law
or judgement, order or regulation of any court or of any public
or governmental agency or authority nor conflict with or
constitute a breach of or a default under any instrument to which
the Borrower is a party or by which the Borrower or the
Borrower's properties is bound, nor result in the creation of any
lien, charge or encumbrance upon any assets, of the Borrower
except those liens permitted by or created under this First
Amendment.
(e) No approval, consent or authorization of , or
registration, declaration or filing with, any governmental or
public body or authority is required in connection with the valid
execution, delivery and performance by the Borrower of this First
Amendment.
IN WITNESS WHEREOF, the undersigned has executed this
officer's certificate this 11th day of February, 1998.
/s/ Duane D. Deaner
Duane D. Deaner
Chief Financial Officer
ENVIRONMENTAL TECTONICS CORPORATION
1998
ANNUAL SHAREHOLDERS' REPORT
<PAGE>
FINANCIAL REVIEW
($ in thousands, except share and per share data)
<TABLE>
<CAPTION>
Fiscal Year End 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net sales $ 29,284 $ 21,884 $ 15,580 $ 16,188 $ 16,986
Gross profit 9,298 5,742 5,206 4,097 2,921
Operating income (loss) 4,208 1,196 1,492 (891) (1,671)
Net income (loss) 1,794 (20) 299 (1,405) (1,413)
Earnings (loss) per common share:
Basic .50 (.01) .10 (.49) (.50)
Diluted .47 (.01) .10 (.49) (.50)
Working capital 11,462 10,334 7,860 9,038 10,130
Long-term obligations 4,356 6,997 5,514 7,133 6,718
Total assets 22,955 23,095 20,926 20,803 18,024
Total stockholders' equity 8,579 6,409 6,111 5,736 7,050
Weighted average common shares:
Basic 2,990,000 2,965,000 2,935,000 2,874,000 2,838,000
Diluted 3,196,000 2,965,000 2,935,000 2,874,000 2,838,000
</TABLE>
No cash dividends have ever been paid on the Company's common
stock, and the Company is currently prohibited from declaring any
cash dividends under the terms of its credit facility.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Fiscal 1998 Versus Fiscal 1997
Certain statements under Item 1 and Item 7 contained herein
or as may otherwise be incorporated by reference herein
constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-
looking statements include but are not limited to: statements
regarding future product development, technological advances and
market acceptance of products. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors
include, among other things, general economic and business
conditions, competition, technological advances, political unrest
in customer countries, contract cancellations and other risk
factors that are detailed in this document and in other periodic
reports and registration statements filed by Environmental
Tectonics Corporation with the Securities and Exchange
Commission. 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 responsibility to update
any such forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future
results or trends.
The Company had net income of $1,794,000 or $.47 per share
compared to a net loss of $20,000 or $.01 per share in 1997.
Operating income was $4,208,000, an increase of $3,012,000 or
252% over 1997. These increases were primarily the result of
increased sales which were $29,284,000, up $7.4 million or 34%
over 1997.
Domestic sales increased $4,477,000 or 102% over 1997 and
accounted for 30% of the Company's total sales, up from 20% in
1997. This increase was due to the introduction of the Company's
proprietary motion-based technology into the entertainment
marketplace as well as a $1,308,000 increase in sales of
industrial sterilizers. Sales to the U.S. Government, principally
for work on two large altitude chambers and a continuation of our
contracted operator maintenance contracts on selected aircrew
training devices, increased $854,000 or 41% and accounted for 10%
of ETC's total sales, the same percentages as 1997. Sales to
international customers, principally government agencies,
increased $2,068,000 or 13% over 1997 and accounted for 60% of
the Company's total sales, down from 70% in 1997. The increase
in international sales was due principally to continued work on a
centrifuge for Japan and a multipurpose aircraft trainer for the
United Kingdom Ministry of Defence (UKMOD). Sales in 1998 to
UKMOD were approximately $9,226,000 or 32% of the Company's total
sales. Open orders for UKMOD account for 59% of the Company's
sales backlog at February 27, 1998.
On a segment basis, sales of the Company's Aircrew Training
Systems (ATS) products which create and monitor the physiological
effects of motion, including spatial disorientation and
centrifugal forces, on humans and equipment for medical,
training, research and entertainment markets were $22,055,000, an
increase of $8,808,000 or 66% over 1997. Sales of these products
accounted for 75% of ETC's sales compared to 61% in 1997. Sales
in the Company's other segment, Process Simulation, which designs
and produces chambers that create environments that are used for
sterilization, research and medical applications, decreased
$1,408,000 or 16% and accounted for 25% of ETC's total sales
compared to 39% in 1997. This reduction was due principally to
international sales of the Company's sterilizers and
environmental chambers, which were $2,533,000 lower in 1998
compared to 1997.
Gross profit increased $3,556,000 or 62%. As a percentage
of sales, gross profit was 32%, up from 26% in 1997. These
increases were attributable, in part, to the higher sales volume,
which improved plant capacity utilization, as well as an increase
in sales of higher-margined ATS products.
Operating profit increased $3,012,000 or 252% compared to
1997. On a segment basis, ATS had an operating profit of
$4,321,000, an increase of 97%, while the Process Simulation had
an operating profit of $691,000 compared to an operating loss of
$304,000 in 1997. These segment operating profits were offset,
in part, by unallocated corporate expenses of $714,000, an
increase of $61,000 or 9% over 1997.
Selling and administrative expenses increased $563,000 or
13% due principally to higher variable costs related to the
higher sales volume, such as commissions and travel expenses. As
a percentage of sales, selling and administrative expenses were
17% compared to 20% in 1997. This improvement was due, in part,
to the fixed administrative costs being spread over the higher
sales total as well as a reduction in accounting and legal fees.
Research and development expenses decreased $19,000 or 11%
from 1997. The Company's research efforts, which were and
continue to be a significant cost of its business, are included
in cost of sales for applied research for specific contracts as
well as research and development for basic research for
feasibility and technology updates. Capitalized software
development costs for 1998 were $395,000 compared to $494,000 in
1997. Amortization of software costs, which were charged to cost
of sales, were $670,000 and $681,000 for 1998 and 1997,
respectively.
Interest expense was virtually unchanged from 1998. Other
expense increased during 1998 principally due to foreign exchange
charges.
The Company's provision for taxes approximates the statutory
rate.
Fiscal 1997 Versus Fiscal 1996
Fiscal 1997 sales increased 40% over fiscal 1996 sales as
significant increases in ATS products and the Sterilizers segment
were only partially offset by a decrease in the Environmental
line (for information concerning business segments, see Note 10
to the consolidated financial statements).
Cost of goods sold as a percentage of sales increased to 74%
from 67% in fiscal 1996. Overall, this increase primarily
reflected the write-down of $556,000 of certain slow-moving
products to the lower of cost or market primarily in the ATS
segment, $143,000 of additional depreciation expense for a
demonstration unit transferred from inventory to fixed assets,
$284,000 related to the Company's outstanding claim with the U.S.
Navy, including an arbitration award in late April 1997 to one of
the Company's subcontractors in the Navy CFET project for various
work performed in the building part of the project, and $109,000
of additional amortization expense relating to capitalized
expense relating to capitalized software costs of a certain
product. The Company continues to actively market the slow-
moving items. The Company is currently reviewing the arbitration
costs as well as additional expenditures made through
October 1996 on this project to determine which, if any, will be
added to the existing claims with the U.S. Government.
The ATS segment reported a significantly higher sales level,
up $5,209,000 or 65%, as a result of continuing production on
certain large contracts and a further expansion of the Company's
COMS business. As has been reported, the Company's backlog in
the ATS segment has grown significantly in the most recent
period, reflecting to some extent a stabilization of the world
defense market. However, despite the sales increase, operating
income decreased, reflecting the aforementioned inventory write-
downs, depreciation and amortization expense, and arbitration
award as well as a larger allocated share of the selling, general
and administrative pool of expenses.
Sales in the Sterilizers segment increased $1,451,000 or
30%, reflecting the completion of certain larger contracts
coupled with increased service and spare parts activity.
Operating performance was a profit of $151,000 versus a loss in
the prior period. This profit resulted from the higher volume
coupled with a slight increase in the gross margin on a better
mix of work and only partially offset by the aforementioned
inventory write-downs.
The Environmental Systems segment experienced both decreased
sales and a higher operating loss. This segment experienced
lower bookings throughout the period coupled with higher costs on
certain products. The Company has recently implemented personnel
and product changes to strengthen operating results.
Operating and Other Expenses
Selling and administrative expenses in fiscal 1997 increased
$819,000 compared to the prior period but as a percent of sales
decreased to 20.0% from 22.8%. Approximately 90% of the increase
was comprised of increased sales commissions, advertising and
trade shows, and accounting and legal fees. The increase in
commissions reflected a greater mix of commissionable sales and
the increased sales activity. Advertising, brochures and trade
show activity increased as the Company made a conscious effort to
expand its presence and influence via technical publications,
symposiums, etc. Accounting and legal fees increased as the
Company evaluated its options for recapitalization that was
ultimately completed in March 1997. The increased costs were
partially offset by lower salaries expense in the selling and
administrative area despite the heightened activity.
Research and development expenditures increased slightly as
the Company continued to monitor this activity tightly.
Interest expense increased in fiscal 1997 over fiscal 1996.
The increase reflected amortization in the current period of a
non-cash deferred finance charge ($202,000) associated with
warrants issued in conjunction with the Company's credit facility
renewal in February 1996 coupled with interest charges for
federal and state tax settlements. Interest on bank borrowing
decreased as a result of lower average loan balances.
Other expenses decreased, primarily reflecting reduced
foreign exchange and other fees.
Liquidity and Capital Resources
On March 27, 1997, the Company executed an agreement with a
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. On May 26, 1998, the Company received a
commitment from its bank to maintain the total facility at
$10 million and to extend the maturity date of the entire
facility from May 31, 1999 to May 31, 2000. Additionally, the
Company issued $4 million of subordinated debentures, bearing
interest at 12% annum, due March 27, 2004. 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; $499,000 of the proceeds from the debentures was
allocated to the warrants and will be charged to income over the
term of the debentures. The Company also issued 25,000 shares of
11%, $100 face value, 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. The proceeds from
these transactions were used to repay amounts outstanding under
the existing credit facility at February 28, 1997. The Company
had $5,870,000 available under the Credit Agreement at
February 27, 1998. (See Note 6 of the Notes to the Consolidated
Financial Statements.)
During fiscal 1998, the Company generated $1,647,000 of cash
from operating activities. This was the result of net income and
noncash charges as well as a significant reduction in the
Company's accounts receivable. These cash sources were offset by
increases in costs and estimated earnings in excess of billings
for uncompleted long-term contracts and a reduction in billings
in excess of costs for uncompleted long-term contracts. The
Company used $1,065,000 for investing activities of acquisition
of equipment and capitalized software development costs. Funds
were provided to support these investing activities from
available borrowings under the Company's Credit Agreement. The
Company believes that cash generated from operating activities,
as well as available borrowings under the Credit Agreement, will
be sufficient to meet its obligations. At May 22, 1998, the
Company had $2.5 million available borrowings under the Credit
Agreement.
In reference to the Company's outstanding claim with the
U.S. Government, to the extent the Company is unsuccessful in
further recovering contract costs, such an event could have a
material adverse effect on the Company's liquidity and results of
operations. Historically, the Company has had good experience in
that recoveries have exceeded claims (see Note 2 of Notes to
Consolidated Financial Statements).
Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's Common Stock (the "Common Stock") is traded on
the American Stock Exchange under the symbol ETC. As of May 15,
1998, the Company had 359 shareholders of record.
The following table sets forth the quarterly ranges of high
and low sale prices, and the closing sale price, for shares of
the Common Stock for the periods indicated. Such prices
represent quotations between dealers and do not include mark-ups,
mark-downs or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Sale Prices Closing
High Low Sale Price
1998
<S> <C> <C> <C>
First Quarter $ 9-3/8 $ 6-1/2 $ 9-5/16
Second Quarter 10-1/8 7-7/8 8-1/2
Third Quarter 11-3/4 8-1/2 9-1/8
Fourth Quarter 10 7-3/8 8-3/4
1997
First Quarter 8-1/2 3 5-5/16
Second Quarter 5-7/8 4-1/2 5-5/8
Third Quarter 8 5-5/8 6-3/8
Fourth Quarter 7-1/2 6 6-5/8
</TABLE>
The Company has not paid any cash dividends on the Common
Stock in the past and does not anticipate that any cash dividends
will be declared or paid in the foreseeable future. The
Company's current line of credit facility prohibits the payment
of any dividends by the Company without the lender's prior
written consent.
Backlog
The Company's sales backlog at February 27, 1998 and
February 28, 1997 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $27,523,000 and $25,800,000, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 27, 1998 and February 28, 1997 for work to be
performed and revenue to be recognized after that date under
written agreements was approximately $2,925,000 and $5,100,000,
respectively. Of the 1998 backlog, approximately $29,135,000 is
under contracts for ATS and maintenance support. Approximately
60% of the 1998 backlog is expected to be completed prior to
February 26, 1999.
<PAGE>
Consolidated Balance Sheets
($ in thousands, except share data)
<TABLE>
<CAPTION>
February 27, February 28,
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 225 $ 189
Cash equivalents restricted for letters of credit 15 665
Accounts receivable, net 8,448 11,352
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 5,651 3,345
Inventories 3,058 2,719
Deferred tax asset 770 786
Prepaid expenses and other current assets 283 92
Total current assets 18,450 19,148
Property, plant, and equipment, at cost, net 2,837 2,480
Software development costs, net of accumulated
amortization of $3,914 and $3,244
in 1998 and 1997, respectively 1,155 1,430
Other assets 513 37
Total assets $ 22,955 $ 23,095
LIABILITIES
Current portion of long-term obligations $ 148 $ 119
Convertible notes payable - related parties 800 1,300
Accounts payable - trade 1,424 1,799
Billings in excess of costs and estimated earnings
on uncompleted long-term contracts 1,145 2,051
Customer deposits 1,373 1,746
Accrued income taxes 984 271
Net arbitration awards - 306
Other accrued liabilities 1,114 1,222
Total current liabilities 6,988 8,814
Long-term obligations, less current portion:
Credit facility payable to banks 467 6,714
Subordinated debt 3,730 -
Other 159 283
4,356 6,997
Deferred tax liability 702 875
Total liabilities 12,046 16,686
Redeemable cumulative convertible preferred stock, $100 par and
redemption value: 25,000 shares authorized; 25,000
shares issued and outstanding 2,330 -
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares, $.10 par
value; 3,006,596 and 2,963,083 shares issued and
outstanding in 1998 and 1997, respectively 300 296
Capital contributed in excess of par value of common stock 2,671 2,007
Retained earnings 5,608 4,106
Total stockholders' equity 8,579 6,409
Total liabilities and stockholders' equity $ 22,955 $ 23,095
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Consolidated Statements of Operations
($ in thousands, except share data)
Year Ended Year Ended
February 27, February 28,
1998 1997
Net sales $ 29,284 $ 21,884
Cost of goods sold 19,986 16,142
Gross profit 9,298 5,742
Operating expenses:
Selling and administrative 4,942 4,379
Research and development 148 167
5,090 4,546
Operating income 4,208 1,196
Other expenses:
Interest expense 1,244 1,247
Letter of credit fees 58 23
Other, net 146 34
1,448 1,304
Income (loss) before provision
(benefit) for income taxes 2,760 (108)
Provision (benefit) for income taxes 966 (88)
Net income (loss) $ 1,794 $ (20)
Per share information
Earnings (loss) per common share:
Basic $ .50 $ (.01)
Diluted $ .47 $ (.01)
Income (loss) available to common
stockholders $ 1,502 $ (20)
Weighted average common shares:
Basic 2,990,344 2,965,000
Diluted 3,195,801 2,965,000
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
($ in thousands, except share data)
For the years ended February 27, 1998 and February 28, 1997
<TABLE>
<CAPTION>
Capital
contributed
in excess
of par Total
value of stock-
Common stock common Retained holders'
Shares Amount stock earnings equity
<S> <C> <C> <C> <C> <C>
Balance, February 23, 1996 2,928,944 $ 293 $ 1,692 $ 4,126 $ 6,111
Net loss for the year - - - (20) (20)
Issuance of stock purchase warrants - - 202 - 202
Shares issued in connection with
employee stock purchase and
stock option plans 34,139 3 113 - 116
Balance, February 28, 1997 2,963,083 296 2,007 4,106 6,409
Net income for the year - - - 1,794 1,794
Value of warrants issued in
connection with issuance
of subordinated debt - - 499 - 499
Accretion of preferred stock - - - (38) (38)
Dividends on preferred stock - - - (254) (254)
Shares issued in connection with
employee stock purchase and
stock option plans 41,550 3 146 - 149
Shares issued in connection with
employee stock award 1,963 1 19 - 20
Balance, February 27, 1998 3,006,596 $ 300 $ 2,671 $ 5,608 $ 8,579
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
February 27, February 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,794 $ (20)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,463 1,452
Increase in allowance for accounts receivable and inventory 527 113
(Increase) decrease in assets:
Accounts receivable 2,762 (3,755)
Costs and estimated earnings in excess of billings on uncompleted
long-term contracts (2,306) 679
Inventories (882) 606
Prepaid expenses and other current assets (44) 464
Other assets (35) (17)
Increase (decrease) in liabilities:
Accounts payable (375) 213
Billings in excess of costs and estimated earnings on uncompleted
long-term contracts (1,543) (1,304)
Customer deposits 264 1,642
Accrued income taxes 713 83
Net arbitration awards - 241
Other accrued liabilities (414) 410
Payments under settlement agreements (120) (530)
Decrease in deferred income taxes (157) (281)
Net cash provided by (used in) operating activities 1,647 (4)
Cash flows from investing activities:
Acquisition of equipment (670) (231)
Software development costs capitalized (395) (494)
Net cash used in investing activities (1,065) (725)
Cash flows from financing activities:
Net payments under credit facility (6,247) (775)
Net proceeds from subordinated debt 3,730 -
Net proceeds from preferred stock 2,292 -
Payment of dividends on preferred stock (254) -
Deferred financing costs (876) -
Decrease in cash equivalents restricted for letters of credit 650 194
(Decrease) increase in notes payable - related party (500) 1,300
Increase in other long-term obligations - 68
Net principal payments of other long-term debt (9) (16)
Proceeds from issuance of common stock/warrants 668 116
Net cash (used in) provided by financing activities (546) 887
Net increase in cash and cash equivalents 36 158
Cash and cash equivalents at beginning of year 189 31
Cash and cash equivalents at end of year $ 225 $ 189
Supplemental schedule of cash flow information:
Interest paid $ 1,123 $ 940
Income taxes paid 434 100
Supplemental information on noncash operating and investing activities:
The Company reclassed $158 and $286 of inventory to property, plant,
and equipment during the years ended February 27, 1998 and
February 28, 1997, respectively.
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
1. Summary of Significant Accounting Policies:
Nature of Business
Environmental Tectonics Corporation (ETC or the Company) is
primarily engaged in the development, marketing and
manufacturing of Aircrew Training Systems (ATS) and Process
Simulation equipment. The Company utilizes its internally
developed software systems in virtually all of its products.
ETC focuses on software enhancements, product extensions,
new product development and new marketplace applications.
Sales of ATS products are made principally to U.S. and
foreign government agencies and to the entertainment market.
Sales of Process Simulation equipment, which includes
sterilizers and environmental systems, are made for
commercial and governmental agencies worldwide.
Principles of Consolidation:
The consolidated financial statements include the accounts
of ETC and its wholly-owned subsidiary, ETC International
Corporation. All material intercompany accounts and
transactions have been eliminated. The Company's fiscal
year is the 52- or 53-week annual accounting period ending
the last Friday in February.
Use of Estimates:
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from
those estimates. Significant estimates are made for revenue
recognition under the percentage of completion method (see
Note 1, Revenue Recognition), claims receivable, inventory,
and computer software costs.
The Company has recorded receivables in the amount of $4.6
million for claims made to or against the United States
government for contract costs incurred through February 27,
1998. The total net claims amount made is approximately
$10.3 million based on costs incurred through February 28,
1997 and is subject to negotiation, arbitration and audit by
the United States government.
Many existing computer programs use only two digits to
identify a year in the date field. These programs were
designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results
by or at the year 2000. The Year 2000 issue affects
virtually all companies and organizations. The Company
estimates that costs associated with the Year 2000 issue
will not have a material impact on its financial position or
results of operations.
Revenue Recognition:
Revenue is recognized on long-term contracts utilizing the
percentage of completion method based on costs incurred as a
percentage of estimated total costs. Revenue recognized on
uncompleted long-term contracts in excess of amounts billed
to customers is reflected as an asset. Amounts billed to
customers in excess of revenue recognized on uncompleted
long-term contracts is reflected as a liability. When it is
estimated that a contract will result in a loss, the entire
amount of the loss is accrued. The effect of revisions in
cost and profit estimates for long-term contracts is
reflected in the accounting period in which the facts
requiring the revisions become known. Contract progress
billings are based upon contract provisions for customer
advance payments, contract costs incurred, and completion of
specified contract objectives. Contracts may provide for
customer retainage of a portion of amounts billed until
contract completion. Retainage is generally due within one
year of completion of the contract. Revenue for contracts
under $100 or to be competed in less than one year and
revenue on parts and services are recognized as shipped.
Revenue for service contracts is recognized ratably over the
life of the contract. Related material costs are expensed
as incurred.
Cash and Cash Equivalents:
Cash and cash equivalents include short-term deposits at
market interest rates with original maturities of three
months or less. The Company maintains cash balances at
several financial institutions located in the Northeast.
Accounts in each institution are insured by the Federal
Deposit Insurance Corporation up to $100. Uninsured
balances aggregate $515 at February 27, 1998.
Inventories:
Inventories are valued at the lower of cost or market. Cost
is determined principally by the first-in, first-out method.
The costs of finished goods and work-in-process inventories
include material, direct engineering, manufacturing labor,
and overhead components. The Company periodically reviews
the net realizable value of the inventory and, if necessary,
writes down the recorded costs.
Depreciation of Property, Plant, and Equipment:
Property, plant, and equipment are depreciated over their
estimated useful lives by the straight-line method for
financial reporting purposes. Accelerated depreciation
methods are used for tax purposes. Upon sale or retirement
of property, plant, and equipment, the costs and related
accumulated depreciation are eliminated from the accounts.
Any resulting gains or losses are included in the
determination of net income.
Amortization of Capitalized Software Development Costs:
The Company capitalizes the qualifying costs of developing
software contained in certain products. Capitalization of
costs requires that technological feasibility has been
established. When the software is fully documented and
tested, capitalization of development costs cease and
amortization commences over a period ranging from 36 to 60
months (dependent upon the life of the product) on a
straight-line basis which, at a minimum, approximates
estimated sales. Realization of capitalized software costs
is subject to the Company's ability to market the related
product in the future and generate cash flows to support
future operation. Capitalized software costs and related
amortization totalled $395 and $670, respectively, for the
year ended February 27, 1998. Capitalized software costs
and related amortization totalled $494 and $681,
respectively, for the year ended February 28, 1997.
Amortization of Deferred Financing Costs:
Capitalized costs relating to the recapitalization of the
Company are amortized over the term of the credit facility.
Amortization expense relating to deferred financing costs
was $241 and $202 in 1998 and 1997, respectively (see
Note 6).
Income Taxes:
The Company accounts for income taxes using the liability
method, which reflects the impact of temporary differences
between values recorded for assets and liabilities for
financial reporting purposes and values utilized for
measurement in accordance with tax laws.
Long-Lived Assets:
In the first quarter of 1997, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which provides guidance on when to
recognize and how to measure impairment losses of long-lived
assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS
No. 121 had no material effect on the Company's consolidated
financial position or results of operations.
Stock Options:
In the first quarter of 1997, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," which
contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures
compensation cost at the grant date based on the fair value
of the award. Compensation is then recognized over the
service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue
accounting for employee stock options and similar
instruments under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro forma
disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined in SFAS
No. 123 had been applied. The Company's Incentive Stock
Option Plan is accounted for under APB Opinion No. 25.
Advertising Costs:
The Company expenses advertising costs as incurred.
Advertising expense was $210 and $189 for the years ended
February 27, 1998 and February 28, 1997, respectively.
Earnings (Loss) Per Common Share:
The Company has adopted 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. Due to the antidilutive
effect resulting from the loss, the adoption of this
standard did not effect earnings per share for the year
ended February 28, 1997.
The following table illustrates the reconciliation of the
numerators and denominators of the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
Year ended February 27, 1998
Weighted
average Per share
Income shares amount
(numerator) (denominator)
<S> <C> <C> <C>
Net income $ 1,794
Less preferred stock dividends (254)
Less accretion of preferred stock (38)
Basic earnings per share
Income available to common
stockholders $ 1,502 2,990,344 $ .50
Effective of dilutive securities
Stock options 31,655
Stock warrants 173,802
Diluted earnings per share
Income available to common stock-
holders plus effect of dilutive
securities $ 1,502 3,195,801 $ .47
</TABLE>
There were conversion provisions of convertible subordinated
debt and preferred stock totalling 400,000 shares of common
stock, which were not included in the computation of diluted
earnings per share because the effect of assumed conversions
was antidilutive. These conversion provisions were still
outstanding at February 27, 1998.
<TABLE>
<CAPTION>
Year ended February 28, 1997
Weighted
average Per share
Income shares amount
(numerator) (denominator)
<S> <C> <C> <C>
Basic loss per share
Loss available to common
stockholders $ (20) 2,965,000 $ (.01)
Diluted loss per share
Loss available to common
stockholders plus effect
of dilutive securities $ (20) 2,965,000 $ (.01)
</TABLE>
There were options to purchase 98,810 shares of common stock
at a range of $2.25 to $4.50 per share and conversion
features of convertible notes payable totalling 108,333
shares of common stock, which were not included in the
computation of diluted earnings per share because of the net
loss for the year making an increase in common stock
antidilutive. These stock options and conversion features
were both outstanding at February 28, 1997.
Reporting Comprehensive Income:
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards
to provide prominent disclosure of comprehensive income
items. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and
other events and circumstances from nonowner sources. SFAS
No. 130 is effective for all periods beginning after
December 15, 1997. Subsequent to the effective date, all
prior-period amounts are required to be restated to conform
to the provisions of SFAS No. 130. The adoption of SFAS No.
130 is not expected to have a material impact on the
Company's consolidated financial position or results of
operations.
Business Segment Presentation:
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
SFAS No. 131 requires that public business enterprises
report certain information about operating segments in
complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued
to shareholders. It also requires that public business
enterprises report certain information about their products
and services, the geographic areas in which they operate,
and their major customers. SFAS No. 131 is effective for
all periods beginning after December 15, 1997. The adoption
of SFAS No. 131 will have no impact on the Company's
consolidated financial position or results of operations.
Reclassifications:
Certain reclassifications have been made to the 1997
financial statements to conform with the 1998 presentation.
2. Accounts Receivable:
The components of accounts receivable at February 27, 1998
and February 28, 1997 are as follows:
1998 1997
U.S. Government receivables billed
and unbilled contract costs
subject to negotiation $ 4,563 $ 5,284
U.S. commercial receivables billed 1,071 2,477
International receivables billed 3,193 3,828
8,827 11,589
Less allowance for doubtful accounts (379) (237)
$ 8,448 $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, 1995 and 1998. The Company has
recorded claims, amounting to $2.75 million, including $150
recorded in the first quarter of fiscal 1998, 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,
revenues 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. During the first
quarter of fiscal 1998, 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 in
fiscal 1999. Additional amounts are under review for the
period November 1995 through October 1996 to determine what,
if any, additional amounts above the $150 recorded in fiscal
1998 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
a contract with the U.S. Government. At February 27, 1998,
approximately $1.7 million was in U.S. Government
receivables. Collectibility of these amounts may be
dependent upon the resolution of the above claims.
International receivables billed:
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 the termination, the RTAF made a call on a
$229 performance bond, as well as a draw on an approximately
$1.1 million 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 receivable
balance ($1.8 million), consisting of the performance bond,
the advance payment, and 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 allotted, or should the RTAF not agree
to any extension of the time allotted, the RTAF could invoke
penalties against the Company, including termination of the
contract and delay penalties. The contract was not
completed in the time allotted; however, the Company has
requested an extension on the completion time due to various
extenuating circumstances, including certain allowable
"force majeure" events.
On December 22, 1997, the Company successfully performed
acceptance testing and the unit passed with no discrepancy
reports. The process towards payment of the open balance is
currently in progress. At this point, the Company is not
able to determine what, if any, impact the extended
completion period and the current economic condition in
Thailand will have upon final payment.
<PAGE>
3. Costs and Estimated Earnings on Uncompleted Contracts:
The following is a summary of long-term contracts in
progress at February 27, 1998 and February 28, 1997:
1998 1997
Costs incurred on uncompleted long-
term contracts $23,420 $12,539
Estimated earnings 10,027 7,507
33,447 20,046
Less billings to date (28,941) (18,752)
$ 4,506 $ 1,294
1998 1997
Included in accompanying balance
sheets under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted long-
term contracts $ 5,651 $ 3,345
Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts (1,145) (2,051)
$ 4,506 $ 1,294
Included in billings in excess of costs and estimated
earnings on uncompleted long-term contracts is a provision
for anticipated losses on contracts of $198 and $163 in 1998
and 1997, respectively.
4. Inventories:
Inventories consist of the following:
Raw Work in
material process Total
February 27, 1998 $ 404 $2,654 $3,058
February 28, 1997 417 2,302 2,719
Inventory is presented net of an allowance for obsolescence
of $1,040 and $756 in 1998 and 1997, respectively.
<PAGE>
5. Property, Plant, and Equipment:
The following is a summary of property, plant, and
equipment, at cost, and estimated useful lives at
February 27, 1998 and February 28, 1997:
<TABLE>
<CAPTION>
Estimated
useful
1998 1997 lives
<S> <C> <C> <C>
Land $ 100 $ 100
Building and building additions 1,811 1,811 40 years
Machinery and equipment 6,084 5,288 3-5 years
Office furniture and equipment 759 727 10 years
Building improvements 812 812 5-10 years
9,566 8,738
Less accumulated depreciation (6,729) (6,258)
Property, plant, and equipment,
net $ 2,837 $ 2,480
</TABLE>
Depreciation expense for the years ended February 27, 1998
and February 28, 1997 was $482 and $536, respectively.
6. Long-Term Obligation and Credit Arrangements:
Long-term obligations at February 27, 1998 and February 28,
1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Credit facility payable to banks $ 467 $ 6,714
Subordinated debt, net 3,730 -
Products liability settlement (net of unamortized
discount of $105 and $139, respectively, based
on imputed rate of 11%) 220 306
Term loans payable accruing interest at between
9% and 9.9% collateralized by priority liens
on certain equipment 87 96
4,504 7,116
Less current portion (148) (119)
$ 4,356 $ 6,997
</TABLE>
The amounts of future long-term obligations maturing in each
of the next five fiscal years are as follows:
1999 $ 148
2000 617
2001 106
2002 7
2003 and thereafter 4,000
Total future obligations 4,878
Unamortized discounts or financing costs
associated with obligations (374)
$ 4,504
The approximate average loan balance, maximum aggregate
borrowings outstanding at any month-end payable to banks
during the fiscal years, and weighted average interest rate
computed by the days outstanding method as of February 27,
1998 and February 28, 1997 are as follows:
1998 1997
Approximate average loan balance $ 3,024 $ 7,131
Maximum aggregate $ 5,134 $ 7,489
Weighted average interest rate 8.37% 10.60%
Interest is charged on direct borrowings at the bank's prime
rate in 1998 and at the bank's prime rate plus 2% in 1997.
The interest rates were 8.25% and 10.25% at February 27,
1998 and February 28, 1997, respectively.
The Company's letter of credit limit is $5,000, provided
that the cumulative of all outstanding trade letters of
credit does not exceed $2,500. The balances outstanding
under these provisions at February 27, 1998 were $3,644 and
$1,255, respectively. Fees on letters of credit outstanding
were 1.5% and 2.0% at February 27, 1998 and February 28,
1997, respectively.
Recapitalization:
On March 27, 1997, the Company entered into a revolving
credit agreement (the Credit Agreement) with a new financial
institution, establishing a credit facility of $10 million
through May 31, 1998, at which time the facility is reduced
to $9 million. The Credit Agreement is collateralized by
substantially all of the Company's assets. The Company is
prohibited from declaring any cash dividends under the terms
of the Credit Agreement. This facility bears interest at
the bank's prime lending rate or adjusted LIBOR and expires
on May 31, 1999. A commitment fee of 0.2% is charged for
unused available funds. The credit facility includes
certain covenants related to, among other things,
prohibitions on incurring additional debt, change in
ownership of certain officers, payment of dividends and
maintenance, on a quarterly basis, a current ratio of not
less than 1.50 to 1, a leverage ratio of 1.25 to 1, and a
funds flow coverage ratio of 1.10 to 1. Substantially all
of the Company's short-term financing is provided by this
bank. The Company incurred $357 of financing fees related to
origination of the Credit Agreement. This amount is
included in prepaid expenses and other assets and will be
charged to interest expense over the term of the Credit
Agreement, which is two years. The Company had $5,870
available under the Credit Agreement at February 27, 1998.
Additionally, the Company issued $4 million of subordinated
debentures, bearing interest at 12% per annum, due March 27,
2004 to a financial institution, a director of which has
been subsequently appointed and elected to the Company's
Board of Directors. 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 credited to
capital contributed in excess of par value of common stock.
This amount, along with financing fees of $311, which were
netted against the proceeds, will be amortized to interest
expense over the term of the debentures, which is seven
years.
The Company also issued 25,000 shares of 11% redeemable
convertible preferred stock for $2.5 million. Each share of
convertible 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. Financing fees for the
preferred stock were approximately $208, which were netted
against the proceeds and will be accreted to retained
earnings over five years. The preferred stock is
mandatorily redeemable by the Company beginning in 2002 at a
rate of one-third per year.
Total financing fees associated with the recapitalization
were approximately $876. The proceeds from these
transactions were used to repay, in full, amounts
outstanding with a prior lender.
The components of the subordinated debt and preferred stock
at February 27, 1998 are as follows:
Subordinated Preferred
debt stock
Face value $ 4,300 $ 2,500
Deferred financing costs (311) (208)
Accretion of preferred stock - 38
Amortization of financing costs 41 -
Balance at February 27, 1998 $ 3,730 $ 2,330
As a condition to the issuance of the prior credit facility,
warrants to purchase 100,000 shares of the Company's common
stock at $5.00 per share were issued on November 20, 1990.
These warrants expired on November 20, 1995. As a condition
to the extension of the credit facility through March 31,
1997, warrants were issued to purchase 100,000 shares of the
Company's common stock at a price equal of $5.18. The
warrants will be exercisable through 2001. If the holder
desires to sell or transfer any of its warrants, the Company
has the right of first refusal. A deferred charge of $202
was assigned to the warrants and amortized to profit and
loss during the year ended February 28, 1997. Warrants
issued provide for adjustments of the exercise price and the
number of shares issuable thereunder in the event that the
Company issues additional shares of common stock or rights
to purchase common stock at a price less than the current
warrant price or current market price, whichever is greater.
Product Liability Settlement:
During June 1995, the Company entered into a settlement with
the employee of a customer who brought a products liability
claim against the Company. The settlement of $1,195 will be
satisfied with (i) funds of $547 (including accrued
interest) previously deposited by the Company's products
liability insurance carrier with the U.S. District Court,
and (ii) a settlement payable to the plaintiff for the
remaining amount of $648. The Company paid $53 by July 20,
1995 and $100 on April 20, 1996. In September 1996, the
Company renegotiated the payment schedule. For the period
from October 1996 to September 1997, the Company will pay
$10 per month. Beginning October 1997, the Company will pay
$5 per month until the obligation is satisfied. The
claimant did reserve the right to pursue additional payment
amounts as per the original settlement agreement of July 29,
1995. The Company has recorded a discount of $207 on this
settlement based on an imputed interest rate of 11%, which
is amortized over the term of the settlement.
The carrying value of the aforementioned financial
instruments approximates its fair value at February 27,
1998.
7. Related Parties:
Convertible Notes Payable:
Notes payable represent amounts due from directors,
executive officers and their affiliates. Notes payable, due
on demand, bear interest at 10% and are subordinated to the
Company's credit facility. The payees have the right to
convert the notes into shares of the Company's common stock.
The notes can be converted at a price which is the greater
of $5 or 75% of the average closing price of the Company's
common stock, as defined, at conversion. In March and
April 1998, the Company repaid $500 of these obligations.
ETC Europe:
The Company transacts its business in Europe through ETC
Europe, an affiliated entity which is 99% owned by the
president of the Company. Sales through ETC Europe were
$4,932 and $3,481 in 1998 and 1997, respectively. Amounts
due from ETC Europe as of February 27, 1998 and February 28,
1997 were $-0- and $587, respectively.
Subordinated Debt and Preferred Stock:
A director of ETC is also a director of one of its creditors
(see Note 6).
8. Leases:
Operating Leases:
The Company leases certain premises and office equipment
under operating leases which expire over the next five
years. Future minimum rental payments required under
noncancellable operating leases having a remaining term
expiring after one fiscal year as of February 27, 1998 are
$60 in 1999; $21 in 2000; $18 in 2001; $16 in 2002; and $5
in 2003.
Total rental expense for all operating leases for the years
ended February 27, 1998 and February 28, 1997 was
approximately $106 and $197, respectively.
9. Income Taxes:
The components of the provision (benefit) for income taxes
are as follows:
Year Ended Year Ended
February 27, February 28,
1998 1997
Currently payable:
Federal $ 1,099 $ 190
State 24 3
1,123 193
Deferred:
Federal (142) (333)
State (15) (48)
(157) (281)
$ 966 $ (88)
A reconciliation of the statutory federal income tax
(benefit) to the effective tax is as follows:
Year Ended Year Ended
February 27, February 28,
1998 1997
Statutory income tax 34.0% (34.0)%
State income tax, net of
federal tax benefit (0.6) (1.7)
Foreign sales corporation (4.9) (63.9)
Other 6.5 18.1
35.0% (81.5)%
The tax effects of the primary temporary differences are as
follows:
1998 1997
Deferred tax assets:
Net arbitration award against Company $ - $ 127
Net products liability settlement 70 116
Vacation reserve 43 48
Inventory reserve 389 285
Receivable reserve 142 89
Warranty reserve 44 44
Other, net 82 77
Total current deferred tax asset $ 770 $ 786
Deferred tax liabilities:
Amortization of capitalized software $ 432 $ 539
Depreciation 270 336
Total noncurrent deferred tax
liability $ 702 $ 875
10. Business Segment Information:
The Company primarily manufactures, under contract, various
types of high-technology equipment which it has designed and
developed. The Company considers its business activities to
be two segments: ATS and Process Simulation. The ATS
business produces devices which create and monitor the
physiological effects of motion, including spatial
disorientation and centrifugal forces for medical, training,
research and entertainment markets. The Process Simulation
business produces chambers that create environmental
situations that are used for sterilization, research and
medical applications.
<TABLE>
<CAPTION>
Process
ATS Simulation Corporate Total
<S> <C> <C> <C> <C>
1998
Net sales $22,055 $ 7,229 $ - $29,284
Operating income (loss) 4,231 691 (714) 4,208
Identifiable assets 16,609 2,744 2,832 22,185
1997
Net sales $13,247 $ 8,637 $ - $21,884
Operating income (loss) 2,153 (304) (653) 1,196
Identifiable assets 14,071 4,912 3,326 22,309
</TABLE>
Operating income (loss) consists of net sales less
applicable costs and expenses relating to these revenues.
General corporate expenses, letter of credit fees, interest
expense, other expenses, and income taxes have been excluded
from the determination of segment operating income (loss).
General corporate expenses are primarily central
administrative office expenses. Property, plant, and
equipment and, accordingly, depreciation and capital
expenditures are not identifiable with specific business
segments because most of these assets are used in each of
the segments.
Approximately 19%, 11% and 10% of sales in 1998 were made to
two international customers and one domestic commercial
account, totalling sales of $5,492, $3,266 and $3,013,
respectively, in the ATS segment. Approximately 17% and 11%
of sales in 1997 were made to two international customers,
totalling sales of $3,826 and $2,527, respectively, in the
ATS segment.
Included in the segment information for the year ended
February 27, 1998 are export sales of $17,490. Of these
amounts, there are sales to or relating to governments in
Europe ($6,197), the Middle East ($2,547) and Asia ($3,546)
for the sales of ATS equipment. Sales to the U.S.
Government and its agencies aggregate $2,936 for the year
ended February 27, 1998.
Included in the segment information for the year ended
February 28, 1997 are export sales of $15,422. Of these
amounts, there are sales to or relating to governments or
commercial customers of Europe ($3,826), the Middle East
($1,167) and Asia ($4,496) for the sales of ATS and
Sterilizer equipment. Sales to the U.S. Government and its
agencies aggregated $2,082 for the year ended February 28,
1997.
11. Stock Options:
The Company has a fixed Incentive Stock Option Plan (the
Plan) accounted for under APB Opinion No. 25 and related
Interpretations. The Plan allows the Company to grant
options to employees for up to 500,000 shares of common
stock and will terminate on August 24, 1998. At
February 27, 1998, there were 316,000 shares available to be
granted under the Plan. The options, which have a term of
10 years when issued, vest over a four-year period. The
exercise price of each option shall not be less than 100% of
the current market price of the Company's stock on the date
of grant. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plan
been determined based on the fair value of the options at
the grant dates consistent with the method of SFAS No. 123,
the Company's net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts
indicated below.
1998 1997
Net income (loss):
As reported $ 1,794 $ (20)
Pro forma $ 1,765 $ (37)
Basic earnings (loss) per share:
As reported $ .50 $ (.01)
Pro forma $ .49 $ (.01)
Diluted earnings (loss) per share:
As reported $ .47 $ (.01)
Pro forma $ .46 $ (.01)
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes options-pricing model with
the following weighted average assumptions used for grants
in 1997: dividend yield of 0%; expected volatility of 60%;
risk-free interest rate of 6.2%; and expected life of four
years.
A summary of the status of the Plan as of February 27, 1998
and February 28, 1997, and changes during the years ending
on those dates is presented below.
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 98,810 $3.75 79,550 $3.19
Granted - - 54,900 4.33
Exercised (39,835) 3.16 (32,040) 3.30
Forfeited (12,800) 4.50 (3,600) 4.25
Outstanding at end of year 46,175 3.97 98,810 3.75
Options exercisable at year end 11,144 48,635
Weighted average fair value of
options granted during the year $ - $4.41
</TABLE>
The following information applies to options outstanding at
February 27, 1998 and February 28, 1997:
1998 1997
Number outstanding 46,175 98,810
Range of exercise prices $2.25 to $4.50 $2.25 to $4.50
Weighted average exercise
price $3.97 $3.75
Weighted average remaining
contractual life years 6.4 years 6.6 years
12. Claims and Litigation:
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
deductible. The outcome of this litigation is not currently
predictable.
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.
13. Employee Benefit Plan:
The Company maintains a retirement savings 401(k) plan for
eligible employees. The Company's contributions to the plan
are based on a percentage of the employees' qualifying
contributions. The Company's contributions totalled $91 and
$83 in 1998 and 1997, respectively.
From time to time, the Company had not made employee
contribution payments to the trustee of its employee benefit
plan concurrent with payroll payments to such employees.
The Company is now making these payments concurrent with its
payroll. By reason of such past late payments, the Company
may be subject to certain additional interest and taxes as
well as potential penalties, although the Company denies
liability therefor and does not believe that such additional
costs will be material.
14. Subsequent Event:
In April 1998, the Company acquired 65% ownership of a
simulation and advanced training device manufacturing
company located in Warsaw, Poland for $375,000 in cash, a
10% interest-only three-year note payable for $350,000, and
55,000 shares of ETC's common stock.
<PAGE>
15. Quarterly Consolidated Financial Information (Unaudited):
Financial data for the interim periods of 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
Quarter Ended
Fiscal Year 1998 May August November February
30 29 28 27
<S> <C> <C> <C> <C>
Net sales $ 6,644 $ 7,181 $ 7,639 $ 7,820
Gross profit 1,960 2,358 2,467 2,513
Operating income 790 1,095 1,143 1,180
Income before income taxes 546 631 755 828
Net income 360 406 491 537
Earnings per common share:
Basic .10 .11 .14 .15
Diluted .10 .10 .13 .14
<CAPTION>
Quarter Ended
Fiscal Year 1997 May August November February
31 30 29 28
<S> <C> <C> <C> <C>
Net sales $ 4,509 $ 4,807 $ 5,568 $ 6,910
Gross profit 1,395 1,582 1,774 991
Operating income (loss) 439 581 703 (527)
Income (loss) before income taxes 175 255 421 (959)
Net income (loss) 120 172 287 (599)
Earnings (loss) per common share:
Basic .04 .06 .09 (.20)
Diluted .04 .06 .09 (.20)
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Environmental Tectonics Corporation
We have audited the accompanying consolidated balance sheets
of Environmental Tectonics Corporation and Subsidiary as of
February 27, 1998 and February 28, 1997, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company has recorded receivables in the amount of
$4.6 million related to claims made to or against the United
States government for contract costs incurred through
February 27, 1998. The total net claims amount made is
approximately $10.3 million based on costs incurred through
February 28, 1997 and is subject to negotiation, arbitration and
audit by the United States government.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Environmental Tectonics
Corporation and Subsidiary as of February 27, 1998 and
February 28, 1997, and the consolidated results of their
operations and cash flows for the years then ended in conformity
with generally accepted accounting principles.
Philadelphia, Pennsylvania
May 1, 1998
EXHIBIT 21
List of Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction in Percent of Company's
Name of Entity Which Organized Equity Interest
<S> <C> <C>
ETC International Corp. U.S. Virgin Islands 100%
</TABLE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated May 1, 1998, accompanying
the consolidated financial statements incorporated by reference
or included in the Annual Report of Environmental Tectonics
Corporation and Subsidiary on Form 10-KSB for the year ended
February 27, 1998. We hereby consent to the incorporation by
reference of said report in the Registration Statement of
Environmental Tectonics Corporation and Subsidiary on Form S-8
(File No. 2-92407, effective August 14, 1984) and on Form S-3
(File No. 33-42219, effective September 4, 1991).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> FEB-27-1998 FEB-27-1998 FEB-27-1998 FEB-27-1998
<PERIOD-END> FEB-27-1998 NOV-28-1997 AUG-29-1997 MAY-30-1997
<CASH> 240 371 351 388
<SECURITIES> 0 0 0 0
<RECEIVABLES> 8,537 12,710 11,499 10,566
<ALLOWANCES> 89 89 89 262
<INVENTORY> 3,058 2,588 2,340 2,576
<CURRENT-ASSETS> 18,450 22,790 20,015 18,786
<PP&E> 9,311 9,215 9,115 8,814
<DEPRECIATION> 6,474 6,474 6,474 6,354
<TOTAL-ASSETS> 22,955 26,796 24,124 22,813
<CURRENT-LIABILITIES> 6,988 8,053 7,109 7,451
<BONDS> 0 0 0 0
0 0 0 0
2,330 2,319 2,309 2,292
<COMMON> 2,971 2,935 2,924 2,861
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 22,955 26,796 24,124 22,813
<SALES> 29,284 21,464 13,825 6,644
<TOTAL-REVENUES> 29,284 21,464 13,825 6,644
<CGS> 19,986 14,679 9,507 4,684
<TOTAL-COSTS> 5,090 3,757 2,433 1,170
<OTHER-EXPENSES> 204 149 107 27
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 1,244 947 601 217
<INCOME-PRETAX> 2,760 1,932 1,177 546
<INCOME-TAX> 966 675 411 186
<INCOME-CONTINUING> 1,794 1,257 766 360
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,794 1,257 766 360
<EPS-PRIMARY> 0.50 0.35 0.21 0.10
<EPS-DILUTED> 0.47 0.33 0.20 0.10
</TABLE>
