FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1714256
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
COUNTY LINE INDUSTRIAL PARK
SOUTHAMPTON, PENNSYLVANIA 18966
(Address of principal executive offices)
(Zip Code)
(215) 355-9100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for at least the past 90 days.
Yes x No
The number of shares outstanding of the registrant's common
stock as of December 31, 1998 is: 3,076,331
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Environmental Tectonics Corporation Three months ended: Nine Months ended:
Consolidated Income Statements November 27, November 28, November 27, November 28,
(unaudited) 1998 1997 1998 1997
(thousands, except share and per share information)
<S> <C> <C> <C> <C>
Net Sales $7,475 $7,639 $20,931 $21,464
Cost of goods sold 4,827 5,172 13,251 14,679
Gross profit 2,648 2,467 7,680 6,785
Operating expenses:
Selling and administrative 1,573 1,246 4,554 3,620
Research and development 72 78 295 137
1,645 1,324 4,849 3,757
Operating income 1,003 1,143 2,831 3,028
Other expenses:
Interest expense 368 346 966 947
Other, net 38 42 115 149
406 388 1,081 1,096
Income before income taxes 597 755 1,750 1,932
Provision for income taxes 208 264 604 675
Income before minority interest 389 491 1,146 1,257
Income attributable to minority interest (10) - 51 -
Net income $ 399 $ 491 $ 1,095 $ 1,257
========= ========= ========= =========
Per share information:
Income available to common shareholders $ 321 $ 413 $ 857 $ 1,044
Income per share: basic $ 0.10 $ 0.14 $ 0.28 $ 0.35
Income per share: diluted $ 0.10 $ 0.13 $ 0.26 $ 0.33
Number of shares: basic 3,076,000 3,002,000 3,073,000 2,986,000
Number of shares: diluted 3,306,000 3,225,000 3,297,000 3,188,000
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 1
<PAGE>
<TABLE>
<CAPTION>
Environmental Tectonics Corporation
Consolidated Balance Sheets November 27, February 27,
(unaudited) 1998 1998
Assets (amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 470 $ 225
Cash equivalents restricted for letters of credit 25 15
Accounts receivable, net 9,066 8,448
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 11,340 5,651
Inventories 3,233 3,058
Deferred tax asset 770 770
Prepaid expenses and other current assets 877 283
25,781 18,450
Property, plant and equipment, at cost, net of accumulated
depreciation of $7,086 at Nov 27, 1998 and $6,729 at Feb 27, 1998 2,975 2,837
Software development costs, net of accumulated amortization
of $4,409 at Nov 27, 1998 and $3,914 at February 27, 1998 917 1,155
Goodwill 645 -
Other assets 403 513
Total assets $30,721 $22,955
======= =======
Liabilities and Stockholders' Equity
Liabilities
Current liabilities:
Current portion of long-term debt $ 186 $ 148
Convertible notes payable - related parties 300 800
Accounts payable - trade 1,950 1,424
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts 1,253 1,145
Customer deposits 764 1,373
Accrued income taxes 424 984
Accrued liabilities 1,622 1,114
Total current liabilities 6,489 6,988
Long-term debt, less current portion:
Credit facility payable to banks 6,633 467
Subordinated debt 3,763 3,730
Other 413 159
10,809 4,356
Deferred income taxes 702 702
Total liabilities 18,010 12,046
Redeemable cumulative preferred stock, $100 par and redemption
value; 25,000 shares authorized, issued and outstanding 2,361 2,330
Minority interest 351 -
Stockholders' Equity
Common stock; $.10 par value; 10,000,000 shares authorized;
3,076,331 and 3,006,596 issued and outstanding at November
27, 1998 and February 27, 1998, respectively 308 300
Capital contributed in excess of par value of common stock 3,219 2,671
Foreign Currency Exchange Adjustment 7 -
Retained earnings 6,465 5,608
Total stockholders' equity 9,999 8,579
Total liabilities and stockholders' equity $30,721 $22,955
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 2
<PAGE>
<TABLE>
<CAPTION>
Environmental Tectonics Corporation
Consolidated Statements of Cash Flows Nine months ended
(unaudited) November 27, November 28,
1998 1997
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,095 $ 1,257
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation and amortization 1,067 1,055
Provision for losses on accounts receivable and inventories (189) 319
Changes in operating assets and liabilities:
Accounts receivable (563) (1,344)
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts (5,689) (3,500)
Inventories 263 (272)
Prepaid expenses and other assets (1,251) (102)
Accounts payable 462 (511)
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 108 (176)
Customer deposits (609) 182
Accrued income taxes (559) 322
Other accrued liabilities 650 (107)
Payments under settlement agreements (90) (90)
Net cash used by operating activities (5,305) (2,967)
Cash flows from investing activities:
Acquisition of equipment (350) (443)
Capitalized software development costs (257) (261)
Purchase of subsidiary, net (498) -
Net cash used in investing activities (1,105) (704)
Cash flows from financing activities:
Net borrowings (payments) under credit facility 6,166 (1,930)
Proceeds from subordinated debt, net 0 3,730
Proceeds from preferred stock, net 0 2,292
Payment of dividends on preferred stock (207) (163)
Decrease in cash equivalents restricted for letters of credit (10) 640
Decrease in notes payable - related party (500) (500)
Deferred financing costs 0 (876)
Debt issued for acquisition 350 -
Stock issued for acquisition 495 -
Minority interest 351 -
Proceeds from issuance of common stock/warrants 68 632
Capital leases/other (58) 3
Net cash provided by financing activities 6,655 3,828
Net increase in cash and cash equivalents 245 157
Cash and cash equivalents at beginning of period 225 189
Cash and cash equivalents at end of period $ 470 $ 346
======= ======
Supplemental schedule of cash flow information:
Interest paid $ 592 $ 848
Income taxes paid $ 1,096 $ 285
</table.
Supplemental information on noncash operating and investing
activities:
During the nine month period ended November 27, 1998, the Company
transferred $36 of other assets to property, plant and equipment.
Also, in connection with an acquisition, the Company issued
<PAGE 3> 55,000 shares of its common stock and a three-year
interest-only note for $350.
During the nine month period ended November 28, 1997, the Company
transferred $158,000 of inventory to property, plant and
equipment and $637 of customer deposits to billings in excess of
cost and estimated earnings on uncompleted long-term contracts.
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 4
<PAGE>
Environmental Tectonics Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include
the accounts of Environmental Tectonics Corporation ("ETC" or the
"Company"), its wholly-owned subsidiary ETC International
Corporation and its majority-owned subsidiary ETC-PZL Aerospace
Industries, Ltd. ("ETC-PZL").
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 27, 1998.
Certain reclassifications have been made to the 1997
financial statements to conform with the 1998 presentation.
2. Earnings per Share
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. The following table demonstrates the components
of basic and diluted earning per share for the three and nine
month periods ended November 27, 1998 and November 28, 1997.
PAGE 5
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Three months ended: Nine months ended:
November 27, November 28, November 27, November 28,
1998 1997 1998 1997
(amounts in thousands, except share and per share information)
<S> <C> <C> <C> <C>
Net income $399 $491 $1,095 $1,257
Less preferred stock dividends (68) (68) (207) (186)
Less accretion of preferred stock (10) (10) (31) (27)
Income available to common stockholders $321 $413 $857 $1,044
========== ========== ========== ==========
Basic earnings per share:
Weighted average shares 3,076,331 3,002,268 3,072,589 2,985,540
Per share amount $0.10 $0.14 $0.14 $0.35
========== ========== ========== ==========
Diluted earnings per share:
Weighted average shares 3,076,331 3,002,268 3,072,589 2,985,540
Effect of dilutive
securities:
Stock options 22,116 26,578 27,943 34,226
Stock warrants 267,852 196,242 196,554 167,912
Weighted average shares 3,306,299 3,225,008 3,297,086 3,187,678
Per share amount $0.10 $0.13 $0.26 $0.33
========== ========== ========== ==========
</TABLE>
Common stock issuable pursuant to conversion provisions of
convertible subordinated debt and preferred stock totaling
357,523 shares of common stock were not included in the
computation of diluted earnings per share because the effect of
the assumed conversion was anti-dilutive.
3. Accounts Receivable
The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
November 27, February 27,
1998 1998
(amounts in thousands)
<S> <C> <C>
U.S. Government receivables billed and unbilled
contract costs subject to negotiation $5,397 $4,563
U.S. commercial receivables billed 649 1,071
International receivables billed 3,380 3,193
9,426 8,827
Less allowance for doubtful accounts (360) (379)
$9,066 $8,448
====== ======
</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
<PAGE 6> claims, amounting to $2.75 million, to the extent of
contract costs incurred, and accounts receivable of $1.7 million,
representing the balance due under the contract. Claim 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 1999. In
accordance with generally accepted accounting principles, revenue
recorded by the Company from a claim does not exceed the incurred
contract costs related to the claim. The Company currently has
approximately $10.3 million in claims filed with the U.S.
Government (including the aforementioned recorded claim and
accounts receivable balances), which are subject to negotiation
and audit by the U.S. Government. The U.S. Government has
responded to the claims with either denials or deemed denials
that the Company has appealed. As of November 1998, the Company
was involved in discovery document review and preparing for
depositions of key government personnel. Also, additional amounts
are under review for the period November 1995 through
October 1996 to determine what, if any, additional amounts can be
filed as supplemental claims.
International receivables billed:
International receivables billed includes $0.9 million
(November 27, 1998) and $1.8 million (February 27, 1998) related
to a certain contract with the Royal Thai Air Force.
In October 1993, the Company was notified by the Royal Thai
Air Force ("RTAF") that the RTAF was terminating a certain $4.6
million simulator contract with the Company. Although the
Company had performed in excess of 90% of the contract, the RTAF
alleged a failure to completely perform. In connection with this
termination, the RTAF made a call on a $229,000 performance bond,
as well as a draw on an approximately $1.1 million 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.
Except as noted in the award, the rights and obligations of the
parties remain as per the original contract including the
potential invoking of penalties or termination of the contract
for delay. On December 22, 1997, the Company successfully
performed acceptance testing and the unit passed with no
discrepancy reports. Although the contract was not completed in
the time allotted, the Company has requested an extension on the
completion time due to various extenuating circumstances,
including allowable "force majeure" events. Of the open balance
at November 27, 1998, approximately $229,000 representing the
performance bond is expected to be paid by August 1999. The
balance due on the contract is still under review. However, 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 the receipt of final payment. <PAGE 7>
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(net of reserves):
November 27, February 27,
1998 1998
(amounts in thousands)
Raw materials $ 418 $ 404
Work in Process 2,815 2,654
$3,233 $3,058
5. Subordinated Debt and Preferred Stock
The components of the subordinated debt and preferred stock
at November 27, 1998 and February 27,1998, were as follows:
<TABLE>
<CAPTION>
November 27, 1998 February 27, 1998
Subordinated Preferred Subordinated Preferred
Debt Stock Debt Stock
(amounts in thousands) (amounts in thousands)
<S> <C> <C> <C> <C>
Face value $4,000 $2,500 $4,000 $2,500
Deferred financing costs (311) (208) (311) (208)
Amortization of finance costs 74 - 41 -
Accretion of preferred stock - 69 - 38
Total $3,763 $2,361 $3,730 $2,330
====== ====== ====== ======
</TABLE>
6. Stockholders' Equity
The components of stockholders' equity at November 27, 1998
and February 27, 1998 were as follows:
<TABLE>
<CAPTION>
Common stock Additional Foreign Retained
Shares Amount Capital Currency Earnings Total
(amounts in thousands, except share information)
<S> <C> <C> <C> <C> <C> <C>
Balance, February 27, 1998 3,006,596 $300 $2,671 $0 $5,608 $8,579
Net income for nine month period ended
November 27, 1998 - - - - 1,095 1,095
Stock issued in connection with acquisition 55,000 5 490 - - 495
Dividend on Preferred stock - - - - (207) (207)
Accretion of preferred stock - - - - (31) (31)
Shares issued in connection with employee stock
purchase and stock option plans 14,735 3 58 - - 61
Foreign Currency Exchange Adjustments - - - 7 - 7
Balance at November 27, 1998 3,076,331 $308 $3,219 $7 $6,465 $9,999
========= ========= ========= ========= ======== =======
</TABLE> <PAGE 8>
7. Acquisition of ETC-PZL Aerospace Industries, Ltd.
On April 21, 1998, ETC acquired 65% ownership of MP-PZL
Aerospace Industries, Ltd. ("MP-PZL"), 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. MP-PZL was
subsequently renamed ETC-PZL Aerospace Industries, Ltd.
("ETC-PZL"). ETC's cost for this acquisition was $1,220,000 and
has been recorded in the accompanying balance sheet under the
purchase method of accounting for business combinations. In
connection with the acquisition, the Company has recorded
goodwill of approximately $662,000 and a minority interest of
approximately $300,000.
ETC-PZL's fiscal period ends December 31, 1998. The results
of ETC-PZL for the period July 1, 1998 through September 30, 1998
have been included in ETC's results of operations for the three
months ended November 27, 1998, and ETC-PZL's results for the
period May 1, 1998 through September 30, 1998 have been included
in the results of operations for the nine months ended
November 27, 1998. On a pro forma basis had the Company
consolidated the results of ETC-PZL in the prior fiscal periods,
the following comparisons would result:
<TABLE>
<CAPTION>
Three months ended:
November 27, November 28, November 28,
1998 1997 1997
(as reported) (pro forma)
------------ ------------- ------------
(amounts in thousands except share and per share data)
<S> <C> <C> <C>
Net Sales 7,475 7,639 8,393
Gross Profit 2,648 2,467 2,633
Operating Income 1,003 1,143 1,162
Net Income 399 491 497
Per share information:
Income available to common shareholders $321 $413 $419
Income per share: basic $0.10 $0.14 $0.14
Income per share: diluted $0.10 $0.13 $0.13
Number of shares: basic 3,076,000 3,002,000 3,002,000
Number of shares: diluted 3,306,000 3,225,000 3,225,000
PAGE 9
<PAGE>
<CAPTION>
Nine months ended:
November 27, November 28, November 28,
1998 1997 1997
(as reported) (pro forma)
------------ ------------- ------------
(amounts in thousands except share and per share data)
<S> <C> <C> <C>
Net Sales 20,931 21,464 22,332
Gross Profit 7,680 6,785 7,154
Operating Income 2,831 3,028 3,159
Net Income 1,095 1,257 1,320
Per share information:
Income available to common shareholders $857 $1,044 $1,107
Income per share: basic $0.28 $0.35 $0.37
Income per share: diluted $0.26 $0.33 $0.35
Number of shares: basic 3,073,000 2,986,000 2,986,000
Number of shares: diluted 3,297,000 3,188,000 3,188,000
</TABLE>
8. Computer Software Costs
The American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP was issued to provide authoritative
guidance on the subject of accounting for the costs associated
with the purchase or development of computer software for
internal use. The statement is effective for fiscal years
beginning after December 15, 1998. This statement is not
expected to have a material impact on the Company's financial
position or results of operation.
9. Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("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. Effective February 28, 1998, the
Company adopted SFAS No. 130 which had no material impact on the
Company's consolidated financial position or results of
operation.
10. 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
financial information about operating segments in the 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
<PAGE 10> 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. Effective February 28, 1998, the Company
adopted SFAS No. 131 which had no impact on the Company's
consolidated financial position or results of operation.
11. Year 2000 Issue
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 is currently utilizing internal
resources to identify, convert or replace its systems for Year
2000 compliance. The Company estimates that costs associated
with the Year 2000 issue, which are currently being expensed as
incurred, will not have a material impact on its financial
position or results of operations.
12. Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, " Accounting and
Derivative Instruments and Hedging Activity." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in
other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments as fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative (gains
and losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted only as of the beginning of any fiscal
quarter. The Company is currently reviewing the provisions of
SFAS No. 133.
PAGE 11
<PAGE>
Item 2. - Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Three months ended November 27, 1998 compared to
November 28, 1997.
The Company had a net income of $399,000, or $.10 per share
(diluted), for the third quarter of fiscal 1998, down from
$491,000, or $0.13 per share (diluted), for the corresponding
prior period. Sales were $7,475,000 for the three months ended
November 27, 1998, a decrease of 2% from the corresponding prior
period. The decrease primarily reflected lower sterilizer
products sales partially offset by increased Aeromedical Training
Systems (ATS) sales. Additionally, a partial offset came from
consolidating the operations of the Company's Polish subsidiary
acquired in April 1998.
Gross profit increased $181,000 for the third quarter of
fiscal 1998, or 7%, despite the lower sales volume, as the gross
profit rate as a percentage of revenues increased to 35% for the
three months ended November 27, 1998 compared to 32% for the
corresponding prior period. This increase reflected an increased
sales volume of higher margin ATS coupled with gross profit from
the Company's Polish subsidiary.
Selling and administrative expenses increased $327,000, or
26%, for the three months ended November 27, 1998, reflecting an
increase in commission expense of $224,000 and the addition of
in-country expenses of $194,000 for the Company's Polish
subsidiary, partially offset by reductions in other categories.
Research and development expenses approximated the prior period.
Interest expense and other fees were up from the prior
period, reflecting higher average loan balances.
The Company's tax rate is 35%, which approximates the
statutory rate.
Nine months ended November 27, 1998 compared to November 28,
1997.
For the nine month period ended November 27, 1998 the
Company had net income of $1,095,000, or $.26 per share
(diluted), compared to $1,257,000, or $.33 per share (diluted),
in the nine month period ended November 28, 1997. Sales were
$20,931,000 for the nine months ended November 27, 1998, a
decrease from $21,464,000 for the corresponding prior period.
ATS sales for the nine months ended November 27, 1998
approximated 82% of total sales. Revenue recognized under
contracts with the United Kingdom Royal Air Force accounted for
$5.9 million, or 28%, of total sales for the nine months ended
November 27, 1998. Sales to international customers (including
sales of the Company's Polish subsidiary), principally government
<PAGE 12> agencies, accounted for $15.6 million, or 75%, of total
sales for the nine months ended November 27, 1998, an increase
from $13.0 million, or 61%, of total sales for the same period a
year ago.
Gross profit increased $895,000, or 13%, for the nine months
ended November 27, 1998, despite the reduced sales level,
reflecting an increased sales volume of higher margin ATS coupled
with gross profit from the Company's Polish subsidiary. As a
percentage of revenue, gross profit was 37% compared to 32% in
the corresponding prior period.
Selling and administrative expenses increased $934,000, or
26%, for the nine months ended November 27, 1998, compared to the
corresponding prior period. Increases were evidenced for the
current period in commission expense, legal and accounting fees
associated with claims activity and the acquisition of the
Company's Polish subsidiary, and the addition of in-country
expense for the Company's Polish subsidiary. As a percentage of
revenues, selling and administrative expenses were 22% for the
nine months ended November 27, 1998, compared to 17% for the
corresponding prior period. However, when adjusted for the
aforementioned items, the current period percentage was 18%.
Interest expense and other expenses for the nine months
ended November 27, 1998 were down slightly from the corresponding
prior period because the prior period included additional fees
associated with the Company's March 1997 refinancing.
The Company's tax rate for the nine months ended
November 27, 1998 was 35%, which approximates the statutory rate.
Liquidity and Capital Resources
During the nine month period ended November 27, 1998, the
Company used $5,305,000 for operating activities. This was
primarily a result of a net increase in costs and estimated
earnings in excess of billings for large contracts, goodwill
associated with the purchase of the Polish subsidiary, increased
receivables, and a reduction in current liability accounts,
including customer deposits and accrued income taxes. Partial
offset came from net income, non-cash changes of depreciation and
amortization, and an increase in accounts payable and other
current liabilities, mostly accrued commission payments.
Generally, the use of cash reflected increased production on
certain large contracts combined with customer related billing
delays. The Company expects an increase in payments for
long-term contracts in the next four months.
Investment activities included capital expenditures of
$350,000 and capitalized software costs of $257,000. On
April 21, 1998, the Company acquired 65% ownership of MP-PZL
Aerospace Industries, Ltd. ("MP-PZL), a simulation and advanced
training device manufacturer located in Warsaw, Poland, for
$375,000 in cash, a $350,000 three-year promissory note bearing
interest at 10% per annum and payable as to principal at maturity
<PAGE 13> and 55,000 shares of ETC's common stock. MP-PZL was
subsequently renamed ETC-PZL Aerospace Industries, Ltd.
Funds to support the Company's operating and investing
activities primarily came from the Company's credit facility. To
help offset the aforementioned customer billing delays, the
Company has requested a short-term increase of $1,000,000 in its
credit facility. The Company believes that cash generated from
operating activities as well as available borrowing under its
credit facility, including the requested increase which has been
tentatively approved by the lender will be sufficient to meet the
Company's obligations. On January 4, 1999, the Company had
approximately $200,000 available under its credit facility, not
including the short-term increase of $1,000,000 tentatively
approved by the Company's lender.
The Company's sales backlog at December 31, 1998 and
February 27, 1998 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $25.0 million and $30.4 million, respectively, of
which contracts with the United Kingdom Royal Air Force
represented $12.2 and $18.1 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 delays and cancellations,
political unrest in customer countries, general economic
conditions and the risk factors detailed from time to time in
ETC's periodic reports and registration statements filed with the
Securities and Exchange Commission, including, without
limitation, ETC's Annual Report on Form 10-KSB for the fiscal
year ended February 27, 1998.
Year 2000 Compliance
The majority of the Company's information technology and
non-information technology systems are Y2K compliant. The
remainder of the Company's systems will be Y2K compliant by June
1999. The Company is in the process of investigating its supply-
chain.
The Company has expended $4,000 in the three-month period
ended November 27, 1998 with respect to Y2K compliance, and
expects to incur approximately $36,000 of additional expenses to
complete the compliance process.
The Company's most likely worst case Y2K scenario would be
to lose the Company's accounting and network applications and
PC's in the Company's main facility located in Southampton,
Pennsylvania. If this event occurs, the Company will be able to
continue its manufacturing activities and would manually proceed
<PAGE 14> to perform other tasks and activities. The Company has
a written contingency plan to address potential Y2K problems.
PAGE 15
<PAGE>
Part II - Other Information
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 27, 1998.
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 30, 1998, the following proposals were adopted by the
vote specified below. No other matters were submitted to a vote
of security holders at the Annual Meeting.
Proposal One: To elect five directors to serve until successors
have been elected and qualified.
(by holders of Common Stock)
<TABLE>
<CAPTION>
Abstentions
Nominee For Withheld and Broker Nonvotes
<S> <C> <C> <C>
Richard E. McAdams 1,810,630 67,201 0
William F. Mitchell 1,810,630 67,201 0
Pete L. Stephens 1,810,630 67,201 0
Phillip L. Wagner 1,810,630 67,201 0
(by holders of Convertible Series A Preferred Stock)
<CAPTION>
Nominee For Withheld and Broker Nonvotes
<S> <C> <C> <C>
Craig Macnab 25,000 - 0
</TABLE>
Proposal Two: To approve the Environmental Tectonics
Corporation 1998 Stock Option Plan.
For Against Abstain Broker Nonvotes
1,800,791 74,900 2,140 0
<PAGE 16>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3.1 - Articles of Incorporation
Exhibit 3.2 - Bylaws
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
PAGE 17
<PAGE>
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 11, 1999 By: /s/ Duane Deaner
Duane Deaner
Chief Financial Officer
(authorized officer and
principal financial officer)
PAGE 18
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation (Incorporated herein by reference
to Exhibit 3.1 to the Registrants' 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 Schedule Data
<PAGE 19>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-26-1999
<PERIOD-END> NOV-27-1998
<CASH> 470
<SECURITIES> 0
<RECEIVABLES> 9,426
<ALLOWANCES> 360
<INVENTORY> 3,233
<CURRENT-ASSETS> 25,781
<PP&E> 10,061
<DEPRECIATION> 7,086
<TOTAL-ASSETS> 30,721
<CURRENT-LIABILITIES> 6,489
<BONDS> 0
0
2,361
<COMMON> 3,527
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,721
<SALES> 20,931
<TOTAL-REVENUES> 20,931
<CGS> 13,251
<TOTAL-COSTS> 4,849
<OTHER-EXPENSES> 115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 966
<INCOME-PRETAX> 1,750
<INCOME-TAX> 604
<INCOME-CONTINUING> 1,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,095
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.26
</TABLE>
