FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 50549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended November 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1714256
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
COUNTY LINE INDUSTRIAL PARK
SOUTHAMPTON, PENNSYLVANIA 18966
(Address of principal executive offices)
(Zip Code)
(215) 355-9100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for at
least the last 90 days.
Yes X No
The number of shares outstanding of the registrant's
common stock as of January 7, 1998 was: 3,002,918
<PAGE>
Environmental Tectonics Corporation
Consolidated Income Statements
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 28, November 29,* November 28, November 29,*
1997 1996 1997 1996
(thousands, except share and per share information)
<S> <C> <C> <C> <C>
Net Sales $7,639 $5,568 $21,464 $14,974
Cost of goods sold 5,172 3,794 14,679 10,223
------ ------ ------- -------
Gross profit 2,467 1,774 6,785 4,751
------ ------ ------- -------
Operating expenses:
Selling and administra-
tive 1,246 1,041 3,620 2,924
Research and development 78 30 137 104
------ ------ ------- -------
1,324 1,071 3,757 3,028
------ ------ ------- -------
Operating income 1,143 703 3,028 1,723
------ ------ ------- -------
Other expenses:
Interest expense 346 253 947 818
Letter of credit fees 32 10 56 21
Other, net 10 19 93 33
------ ------ ------- -------
388 282 1,096 872
------ ------ ------- -------
Income before income taxes 755 421 1,932 851
Provision for income taxes 264 134 675 272
------ ------ ------- -------
Net income $ 491 $ 287 $ 1,257 $ 579
====== ====== ======= =======
Per share information:
Income per share: primary $ 0.13 $ 0.10 $ 0.34 $ 0.20
Income per share: fully
diluted $ 0.12 $ 0.09 $ 0.32 $ 0.19
Number of shares:
primary 3,175,890 2,967,199 3,171,278 2,955,026
Number of shares:
fully diluted 3,542,750 2,983,917 3,450,474 2,975,060
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
* Reclassified to conform with current presentation.
<PAGE>
Environmental Tectonics Corporation
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
November 28, February 28,
1997 1997
Assets (amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 346 $ 189
Cash equivalents restricted for
letters of credit 25 665
Accounts receivable, net 12,621 11,352
Cost and estimated earnings in excess
of billings on uncompleted long-
term contracts 6,845 3,345
Inventories 2,588 2,719
Prepaid expenses and other current
assets 365 92
22,790 18,362
Property, plant and equipment, at cost,
net of accumulated depreciation of
$6,599 at November 28 and $6,258 at
February 28 2,741 2,480
Software development costs, net of
accumulated amortization of $3,823
at November 28 and $3,244 at
February 28 1,112 1,430
Other assets 153 37
Total assets $26,796 $22,309
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Environmental Tectonics Corporation
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
November 28, February 28,
1997 1997
Liabilities and Stockholders' Equity (amounts in thousands)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 148 $ 119
Convertible notes payable - related
parties 800 1,300
Accounts payable - trade 1,288 1,799
Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts 2,512 2,051
Customer deposits 1,291 1,746
Accrued income taxes 593 271
Accrued liabilities 1,421 1,528
Total current liabilities 8,053 8,814
Long-term debt, less current portion:
Credit facility payable to banks 4,784 6,714
Subordinated debt 3,255 -
Other 188 283
8,227 6,997
Deferred income taxes 89 89
Total liabilities 16,369 15,900
Redeemable cumulative preferred stock,
$100 par and redemption value:
25,000 shares authorized; 25,000
shares issued and outstanding 2,319 -
Stockholders' Equity
Common stock; $.10 par value; 10,000,000
authorized; 3,002,918 and 2,963,083
issued and outstanding at November 28,
1997 and February 28, 1997, respectively 300 296
Capital contributed in excess of par value
of common stock 2,635 2,007
Retained earnings 5,173 4,106
Total stockholders' equity 8,108 6,409
Total liabilities and stockholders' equity $26,796 $22,309
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Environmental Tectonics Corporation
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
November 28, November 29,*
1997 1996
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,257 $ 579
Adjustments to reconcile income to net cash (used)
provided by operating activities:
Depreciation and amortization 1,055 953
Provision for losses on accounts receivable and
inventories 319 225
Changes in operating assets and liabilities:
Accounts receivable (1,344) (2,534)
Costs and estimated earnings in excess of billings
on uncompleted long-term contracts (3,500) 1,278
Inventories (272) (611)
Prepaid expenses and other current assets (102) 110
Accounts payable (511) 594
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts (176) (349)
Customer deposits 182 562
Accrued income taxes 322 116
Other accrued liabilities (107) (84)
Payments under settlement agreements (90) (120)
------- -------
Net cash (used) provided by operating activities (2,967) 719
------- -------
Cash flows from investing activities:
Acquisition of equipment (443) (197)
Capitalized software development costs (261) (422)
------- -------
Net cash used in investing activities (704) (619)
------- -------
Cash flows from financing activities:
Borrowings under credit facility 4,784 -
Payments under credit facility (6,714) (475)
Proceeds from subordinated debt, net 3,255 -
Proceeds from preferred stock, net 2,292 -
Payment of dividends on preferred stock (163) -
Decrease in cash equivalents restricted for letters
of credit 640 504
Decrease in notes payable - related party (500) -
Deferred financing costs (406) -
Net increase of other long-term debt 8 38
Proceeds from issuance of common stock/warrants 632 49
------- -------
Net cash provided by financing activities 3,828 116
------- -------
Net increase (decrease) in cash and cash equivalents 157 216
Cash and cash equivalents at beginning of period 189 31
------- -------
Cash and cash equivalents at end of period $ 346 $ 247
======= =======
Supplemental schedule of cash flow information:
Interest paid 848 516
Income taxes paid 285 0
Supplemental information on noncash operating and investing activities:
The Company transferred $158,000 of inventory to property, plant and equipment
and $637,000 of customer deposits to billings in excess of costs and estimated
earnings on uncompleted long-term contracts during the nine month period ended
November 28, 1997.
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
* Reclassified to conform with current presentation.
<PAGE>
Environmental Tectonics Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements have been
prepared by Environmental Tectonics Corporation, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which, in the
opinion of management, are necessary for a fair statement of the
results for the interim periods presented. All such adjustments
are of a normal recurring nature.
Certain information in footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations, although the
Company believes the disclosures are adequate to make the
information presented not misleading. These financial statements
should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended February 28, 1997.
2. Earnings per Share
Net income per share of common stock is computed by dividing
earnings applicable to common stock by the weighted average
number of shares of common stock and common stock equivalents, if
dilutive, outstanding during the three and nine month periods
ended November 28, 1997 and November 29, 1996. Common stock
equivalents include shares issuable under the exercise of
dilutive common stock options, stock warrants and convertible
related parties notes payable. Fully diluted earnings per share
additionally assumes the conversion of preferred stock and
related parties notes payable. Net earnings used in the
computation of primary earnings per share are reduced by
preferred stock dividend payments.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 28, November 29, November 28, November 29,
1997 1996 1997 1996
(amounts in thousands, except share and per share information)
<S> <C> <C> <C> <C>
Primary earnings per share:
Net income for primary earnings per share $491 $287 $1,257 $579
Preferred stock dividends (68) - (163) -
---------- ---------- ---------- ----------
Earnings applicable to common stock $423 $287 $1,094 $579
========== ========== ========== ==========
Weighted average shares outstanding 3,002,268 2,928,944 2,985,540 2,928,944
Common stock equivalents based on
average market price 173,622 38,255 185,738 26,082
---------- ---------- ---------- ----------
Total equivalent shares for primary
computation 3,175,890 2,967,199 3,171,278 2,955,026
========== ========== ========== ==========
Per share amounts:
Primary earnings per common share
and common share equivalents $0.13 $0.10 $0.34 $0.20
========== ========== ========== ==========
Fully-diluted earnings per share:
Net income for fully-diluted earnings
per share $491 $287 $1,257 $579
Preferred stock dividends (68) - (163) -
---------- ---------- ---------- ----------
Earnings applicable to common stock $423 $287 $1,094 $579
========== ========== ========== ==========
Weighted average shares outstanding 3,002,268 2,928,944 2,985,540 2,928,944
Common stock equivalents based on
average market price 540,482 54,973 464,934 46,116
---------- ---------- ---------- ----------
Total equivalent shares for fully-diluted
computation 3,542,750 2,983,917 3,450,474 2,975,060
========== ========== ========== ==========
Per share amounts:
Fully-diluted earnings per common share
and common share equivalents $0.12 $0.09 $0.32 $0.19
========== ========== ========== ==========
</TABLE>
Under the Company's 1988 Incentive Stock Option Plan,
500,000 shares of the Company's common stock are currently
reserved for issuance in connection with the exercise of options,
and options to acquire 46,175 shares were currently outstanding
as of November 28, 1996.
The Financial Accounting Standards Board (the "FASB") has
issued SFAS No. 128, "Earnings Per Share," which is effective for
financial statements issued after December 15, 1997. The new
standard eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were
computed. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by
the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised and converted into common stock or resulted
in the issuance of common stock that then shared in the earnings
of the entity. It is not known at this time what impact this
statement will have on reported earnings per share.
3. Accounts Receivable
The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
November 28, February 28,
1997 1997
(amounts in thousands)
<S> <C> <C>
U.S. Government receivables billed and unbilled
contract costs subject to negotiation $ 5,000 $ 5,284
U.S. commercial receivables billed 2,067 2,477
International receivables billed 5,708 3,828
------- -------
12,775 11,589
Less allowance for doubtful accounts (154) (237)
------- -------
$12,621 $11,352
======= =======
</TABLE>
U.S. Government receivables billed and unbilled contract costs
subject to negotiation:
Unbilled contract costs subject to negotiation represent
claims made or to be made against the U.S. Government 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 $150,000 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
$150,000 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 1998.
Additional amounts are under review for the period November 1995
through October 1996 to determine what, if any, additional
amounts above the $150,000 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 November 28, 1997
approximately $1.7 million was in U.S. Government receivables.
Collectibility of these amounts may be dependent upon the
resolution of the above claims.
In October 1997, the Company settled a long-standing claim
with the U.S. Navy involving a contract for ATS equipment for
Kuwait which was suspended by the Navy because of the Persian
Gulf conflict.
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 $229,000 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 ($1.3 million), consisting of the
performance bond and the advance payment, plus 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.
On December 22, 1997, the Company successfully performed
acceptance testing and the unit passed with no discrepancy
reports. 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.
4. Inventories
Inventories are valued at the lower of cost or market using
the first-in, first out (FIFO) method and consist of the
following:
November 28, November 28,
1997 1997
(amounts in thousands)
Raw materials $ 491 $ 417
Work in Process 2,097 2,302
$2,588 $2,719
5. Recapitalization
On March 27, 1997, the Company entered into a revolving
credit agreement (the "Credit Agreement") with a new bank,
establishing a credit facility of $10 million through May 31,
1998, at which time the facility is reduced to $9 million. This
facility bears interest at the bank's prime lending rate or
adjusted LIBOR and expires on May 31, 1999. Substantially all of
the Company's short-term financing is provided by this bank. The
Company incurred $372,000 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 agreement, which is two years.
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. $499,000
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
$312,000, 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 $208,000, which were netted
against the proceeds and will be accreted to retained earnings
over five years. Total financing fees associated with the
recapitalization were approximately $849,000. 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 November 28, 1997 are as follows:
Subordinated Preferred
Debt Stock
(amounts in thousands)
Face value $4,000 $2,500
Value of warrants issued (499) -
Amortization of warrants 36 -
Deferred financing costs (312) (208)
Amortization of finance costs 30 -
Accretion of preferred stock - 27
Balance at November 28, 1997 $3,255 $2,319
6. Stockholders' Equity
The components of stockholders' equity at February 28, 1997
and November 28, 1997 were as follows:
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Capital Earnings Total
(amounts in thousands, except share information)
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 2,963,083 $296 $2,007 $4,106 $6,409
Net income for nine month period
ended November 28, 1997 1,257 1,257
Value of warrants issued in
connection with issuance of
subordinated debt 499 499
Dividend on preferred stock (163) (163)
Accretion of preferred stock (27) (27)
Shares issued in connection with
employee stock purchase and
stock option plans 39,835 4 129 133
--------- ---- ------ ------ ------
Balance at November 28, 1997 3,002,918 $300 $2,635 $5,173 $8,108
========= ==== ====== ====== ======
</TABLE>
7. Capital Structure
In February 1997, the FASB issued SFAS No. 129, "Disclosure
Information about Capital Structure." SFAS No. 129 summarizes
previously issued disclosure guidance contained within APB
Opinion No. 10 and 15, as well as SFAS No. 47. SFAS No. 129 is
effective for fiscal years ending after December 15, 1997. The
Company's current disclosures will not be affected by the
adoption of SFAS No. 129.
8. 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 non-owner 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 financial position or results of
operations.
9. Segments
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 financial position or results of operation.
10. Contingencies
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 product liability coverage,
subject to a $100,000 deductible. The outcome of this litigation
is not currently predictable.
Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the
Company. In the opinion of management, after consultation with
legal counsel, all such matters are reserved for or adequately
covered by insurance or, if not so covered, are without merit or
are of such kind, or involve such amounts, as would not have a
significant effect on the financial position or results of
operations of the Company if disposed of unfavorably.
<PAGE>
Environmental Tectonics Corporation
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations:
Three months ended November 28, 1997 compared to November 29,
1996
The Company had net income of $491,000 or $.12 per share, an
increase of $204,000 or 71% over the third quarter of fiscal
1997. Operating income increased $440,000 or 63%.
Sales were $7,639,000 for the quarter ended November 28,
1997, an increase of $2,071,000 or 37% compared to the same
period a year ago. This increase primarily reflected higher
sales of the Aeromedical Training Systems ("ATS") and Hyperbaric
product lines (ATS more than doubled compared to the third
quarter of fiscal 1997), which were partially offset by decreases
in chamber sales for environmental process applications.
Additionally, ATS results benefitted from the aforementioned
settlement with the U.S. Navy Kuwait claim. (See Note 3 of Notes
to Consolidated Financial Statements.)
Gross profit increased $693,000 or 39% for the quarter ended
November 28, 1997, due principally to the higher sales volume.
As a percentage of sales, gross profit was 32% for the quarter
ended November 28, 1997, equal to 32% for the prior year.
Selling and administrative expenses increased $205,000 or
20% for the quarter ended November 28, 1997, due principally to
variable costs related to the higher sales volume, principally
commissions. As a percentage of sales, selling and
administrative expenses were 16% for the quarter ended
November 28, 1997, compared to 19% for the same period a year
ago. This improvement was due, in part, to the fixed
administrative costs being spread over the higher sales volume.
Interest expense increased $93,000 or 37% for the quarter
ended November 28, 1997, reflecting both higher borrowings
(albeit at a lower rate) and increased amortization of various
deferred financing fees associated with the new credit facility
of March 1997.
The Company's tax rate approximates the statutory rate.
Nine months ended November 28, 1997 compared to November 29, 1996
The Company had net income of $1,257,000 or $.32 per share
for the nine months ended November 28, 1997, an increase of
$678,000 or 117% over the first nine months of fiscal 1997.
Operating income increased $1,305,000 or 76% for the nine months
ended November 28, 1997. Sales were $21,464,000 for the nine
months ended November 28, 1997, an increase of $6,490,000 or 43%.
This increase was due to higher sales of ATS and simulation
products, partially offset by reduced sales primarily in the
sterilizer division of the Company's process simulation group.
As a percentage of the total, ATS activity for the nine months
ended November 28, 1997 constituted 54% of total sales compared
to 32% in the prior year corresponding period. Revenue
recognized under contracts with the United Kingdom Royal Air
Force accounted for $4.8 million or 23% of total sales and
represented 53% of the Company's open backlog. Sales to
international customers, principally government agencies,
accounted for $13.0 million or 61% of total sales for the nine
months ended November 28, 1997 compared to $10.6 million or 71%
for the same period a year ago. Gross profit increased
$2,034,000 or 43% for the nine months ended November 28, 1997,
due principally to the higher sales volume. As a percentage of
sales, gross profit was 32% for the nine months ended
November 28, 1997, equal to 32% for the same period a year ago.
Selling and administrative expenses increased $696,000 or
24% for the nine months ended November 28, 1997 due principally
to variable costs related to the higher sales volume, primarily
commissions expense which increased $343,000. Adjusted for the
commission increase, selling and administrative expenses
increased $353,000 or 14% for the nine months ended November 28,
1997 on a sales increase of 43%. As a percentage of sales,
selling and administrative expenses were 17% for the nine months
ended November 28, 1997, compared to 20% for the same period a
year ago. This improvement was due, in part, to the fixed
administrative costs being spread over the higher sales volume.
Interest expense increased $129,000 or 16% for the nine
months ended November 28, 1997, reflecting both higher borrowings
(albeit at a lower rate) and increased amortization of various
deferred financing fees associated with the new credit facility
of March 1997.
The Company's tax rate approximates the statutory rate.
Liquidity and Capital Resources
During the nine month period ended November 28, 1997, the
Company used $2,967,000 for operating activities. This was
primarily the result of an increase in costs and estimated
earnings in excess of billings for uncompleted long-term
contracts and an increase in accounts receivable. The Company
expects to increase its billings for these contracts during the
fourth quarter of fiscal 1998. These uses of cash were offset in
part by net income and non-cash charges of depreciation and
amortization, and increases in reserve balances and income tax
accruals. Funds were provided to support these operating and
investing activities from the Company's Credit Agreement.
Investing activities were $704,000 used for capital expenditures
and software development. The Company believes that cash
generated from operating activities as well as available
borrowings under its Credit Agreement will be sufficient to meet
its obligations. At January 2, 1998, the Company had $4.6
million available under its Credit Agreement.
The Company and its bank are currently in the process of
clarifying certain financial covenants and definitions in the
Credit Agreement, which the Company expects will lead to an
amended Credit Agreement. These changes are not expected to
affect the available borrowings, payment terms or interest rate.
At November 28, 1997, the Company was in compliance with all the
covenants per the existing Credit Agreement. Additionally, the
Company on a pro-forma basis would have met any revised financial
covenants currently under consideration.
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 3 of Notes to
Consolidated Financial Statements)
The Company's sales backlog at November 28, 1997 and
February 28,1997 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $35.7 million and $30.9 million, respectively.
This report contains certain 'forward-looking statements'
including, without limitation, statements containing the words
'believes', 'anticipates', 'intends', 'expects' and words of
similar import relating to the Company's operations. There are
important factors that could cause actual results to differ
materially from those indicated by such forward-looking
statements including contract cancellations, political unrest in
customer countries, general economic conditions and the risk
factors detailed from time to time in Environmental Tectonics
Corporation's periodic reports and registration statements filed
with the Securities and Exchange Commission, including, without
limitation, Environmental Tectonics Corporations Annual Report on
Form 10-KSB for the fiscal year ended February 28, 1997.
<PAGE>
Environmental Tectonics Corporation
Form 10-QSB
Part II
Item 1. Legal Proceedings
There were no material developments in the litigation
previously described in the Company's Annual Report on
Form 10-KSB for the fiscal year ended February 28, 1997.
Item 2. Changes in Securities
The constituent instruments defining the rights of the
holders of any class of securities were not modified nor were the
rights evidenced by any class of registered securities materially
limited or qualified during the period covered by this report.
Item 3. Defaults Upon Senior Securities
No defaults occurred during the period covered in this
report.
Item 4. Submission of Matters to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on
September 17, 1997, the following proposal was adopted by the
vote specified below:
Proposal: To elect five directors to serve until successors have
been elected and qualified.
(by holders of Common Stock)
Nominee For Withheld
Richard E. McAdams 2,745,044 260
William F. Mitchell 2,745,304 -
Pete L. Stephens 2,745,304 -
Phillip L. Wagner 2,745,304 -
Craig MacNab 2,745,304 -
(by holders of Convertible Series A Preferred Stock)
Nominee For Withheld
Craig MacNab 25,000 -
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation
3.2 Bylaws
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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Signatures
Pursuant to the requirements of the Securities Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)
Date: January 12, 1998 By:/s/ Duane Deaner
Duane Deaner
Chief Financial Officer
(authorized officer and
principal financial officer)
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EXHIBIT INDEX
3.1 Articles of Incorporation (Incorporated herein by reference
to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended February 28, 1997).
3.2 Bylaws (Incorporated herein by reference to Exhibit 3(ii) to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 25, 1994).
27 Financial Data Schedule.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-27-1998
<PERIOD-END> NOV-28-1997
<CASH> 371
<SECURITIES> 0
<RECEIVABLES> 12,775
<ALLOWANCES> 154
<INVENTORY> 2,588
<CURRENT-ASSETS> 22,790
<PP&E> 9,340
<DEPRECIATION> 6,599
<TOTAL-ASSETS> 26,796
<CURRENT-LIABILITIES> 8,053
<BONDS> 0
0
2,319
<COMMON> 2,935
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,796
<SALES> 21,464
<TOTAL-REVENUES> 21,464
<CGS> 14,679
<TOTAL-COSTS> 3,757
<OTHER-EXPENSES> 149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 947
<INCOME-PRETAX> 1,932
<INCOME-TAX> 675
<INCOME-CONTINUING> 1,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,257
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
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