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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 Commission File Number 000-17577
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-2537194
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(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 Summit Drive, Exton, PA 19341-2838
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 524-7000
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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 and
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 the past 90
days.
Yes X No
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Number of shares outstanding as of November 3, 1997
Common Stock 8,887,326
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
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<TABLE>
<CAPTION>
Page
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Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 1997 (unaudited) and December 31, 1996.............................. 3
Consolidated Statements of Operations -
Three and nine Months Ended September 30, 1997 and 1996 (unaudited)............... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 (unaudited)......................... 5
Note to Consolidated Financial Statements......................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 7
Item 4 - Submission of Matters to a Vote of Security Holders............................... 9
PART II - OTHER INFORMATION
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Item 6 - Exhibits.......................................................................... 9
Signatures................................................................................. 10
</TABLE>
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PART I
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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Assets (Unaudited)
<S> <C> <C>
Current assets
Cash $ 58,000 $ 124,200
Receivables, less allowances ($63,400 --1997; $180,000 --1996) 3,500,500 4,171,500
Costs and estimated earnings in excess of billings on uncompleted contracts 1,051,000 511,000
Inventories 975,500 647,100
Notes receivable 280,300 280,300
Other current assets 437,000 360,900
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Total current assets 6,302,300 6,095,000
Plant and equipment
Leasehold improvements 170,200 167,100
Machinery and equipment 1,132,400 1,076,800
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1,302,600 1,243,900
Less accumulated depreciation and amortization (1,021,900) (839,800)
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Net plant and equipment 280,700 404,100
Other assets
Excess of cost over fair value of net assets of businesses acquired, net 499,800 535,800
Notes receivable 1,234,200 1,682,000
Other 22,700 18,400
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Total other assets 1,756,700 2,236,200
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$ 8,339,700 $ 8,735,300
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Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 3,429,400 $ 3,172,500
Accrued expenses 595,500 1,142,500
Billings in excess of costs and estimated earnings on uncompleted contracts 634,000 469,800
Current debt 120,000 120,000
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Total current liabilities 4,778,900 4,904,800
Long-term debt 5,506,500 5,143,000
Long-term debt - related party 887,000 887,000
Other liabilities 981,200 981,200
Redeemable convertible preferred stock issued to related party 1,500,000 1,500,000
Stockholders' deficit
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - (9,217,326 shares--1997 and1996) 92,200 92,200
Additional paid-in capital 7,983,900 7,983,900
Accumulated deficit (12,969,500) (12,336,300)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
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Total stockholders' deficit (5,313,900) (4,680,700)
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$ 8,339,700 $ 8,735,300
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</TABLE>
See notes to consolidated financial statements
3
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales $4,555,500 $ 4,403,300 $11,969,600 $14,213,000
Cost of goods sold 3,419,800 3,277,400 9,171,100 10,659,300
---------- ----------- ----------- -----------
Gross profit 1,135,700 1,125,900 2,798,500 3,553,700
Operating expenses:
Sales and marketing 506,700 443,100 1,436,300 1,288,000
General and administrative 543,900 597,300 1,612,700 1,687,900
---------- ----------- ----------- -----------
Total operating expenses 1,050,600 1,040,400 3,049,000 2,975,900
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Income (loss) from operations 85,100 85,500 (250,500) 577,800
Other income (expense):
Interest - income 38,300 114,500
Interest - expense (179,900) (146,800) (497,200) (428,600)
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Income (loss) before taxes (56,500) (61,300) (633,200) 149,200
Income taxes 0 0 0 0
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Net earnings (loss) $ (56,500) $ (61,300) $ (633,200) $ 149,200
========== =========== =========== ===========
Net earnings (loss) per share: - Primary $ (.01) $ (.01) $ (.07) $ .02
========== =========== =========== ===========
Net earnings (loss) per share: - Assuming full dilution $ (.01) $ (.01) $ (.07) $ .01
========== =========== =========== ===========
Weighted average common and common equivalent shares outstanding:
Primary 8,887,000 8,887,000 8,887,000 8,887,000
Assuming full dilution 8,887,000 10,387,000 8,887,000 10,387,000
</TABLE>
See notes to consolidated financial statements
4
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
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<S> <C> <C>
Operations
Net earnings (loss) $(633,200) $ 149,200
Adjustments to reconcile net earnings (loss) to cash from operations
Depreciation and amortization 218,100 216,500
Cash provided by discontinued operations 542,500 850,500
Cash provided by (used in) changes in working capital items
Receivables 671,000 (847,500)
Inventories (328,400) (42,500)
Contracts in progress (375,800) (917,700)
Other current assets (102,600) (2,100)
Accounts payable 256,900 889,100
Accrued expenses (560,400) (909,800)
Taxes on income (54,800) 0
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Cash used by operations (366,700) (614,300)
Financing activities
Net borrowings of debt 363,500 771,900
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Cash provided by financing activities 363,500 771,900
Investing activities
Expenditures for plant and equipment (58,700) (117,900)
Other, net (4,300) (2,900)
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Cash used by investing activities (63,000) (120,800)
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Increase (decrease) in cash (66,200) 36,800
Cash beginning of period 124,200 106,500
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Cash end of period $ 58,000 $ 143,300
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</TABLE>
See notes to consolidated financial statements
5
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CORE TECHNOLOGIES (PENNSYLVANIA) , INC.
Notes to Consolidated Financial Statements
September 30, 1997
1. The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The Summary of Accounting
Policies and Notes to Consolidated Financial Statements included in the
Company's 1996 Annual Report should be read in conjunction with the
accompanying statements. These statements include all adjustments
(consisting only of normal recurring adjustments) which the Company
believes are necessary for a fair presentation of the statements. The
interim operating results are not necessarily indicative of the results
for a full year.
2. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(Statement 128). Statement 128 supersedes APB Opinion No. 15, Earnings Per
Share, and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. Statement 128 replaces the
presentation of primary EPS and fully diluted EPS with a presentation of
basic EPS and diluted EPS. Statement 128 is effective for financial
statements for both interim and annual periods ending after December 15,
1997. The adoption of Statement 128 will not have a material impact on the
Company's reported EPS.
3. Certain amounts for 1996 have been reclassified to conform to the current
year presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Review of Operations
Net sales for the quarter ended September 30, 1997 were $4.6 million
compared to $4.4 million for the comparable period in 1996. The Company reported
a net loss of $56,500, or $.01 per share, compared to a net loss of $61,300, or
$.01 per share in the same period in 1996. Gross margin, as a percentage of
sales, was 24.9% in 1997 and 25.6% for the same period in 1996. The decrease in
gross margin in 1997 reflects some pricing pressure at Airo Clean offset by
improved project margins for the past two quarters at Maris.
For the nine months ended September 30, 1997, net sales were $12.0
million compared to $14.2 million for the comparable period in 1996. The Company
reported a net loss of $633,200, or $.07 per share, compared to net earnings of
$149,200, or $.02 per share in the same period in 1996. Gross margin, as a
percentage of sales, was 23.4% in 1997 and 25.0% for the same period in 1996.
The significant change in net earnings can be attributed to one large cleanroom
project included in Airo Clean's sales in 1996.
Third quarter 1997 Maris sales were $3.3 million compared to $2.2
million in 1996. Maris sales for the nine month period ending September 30, 1997
were $8.3 million compared to $8.6 million for the same period in 1996. Maris
gross margins, as a percentage of sales, increased to 23.5% in the third quarter
of 1997 from 14.7% in the same period in 1996. For nine months ending September
30, 1997, Maris' gross margin was 22.6% compared to 18.2% in 1996. Maris'
increased margins can be attributed to improved margins on new projects started
in the Northeast market.
Third quarter 1997 Airo Clean sales were $1.3 million compared to $2.2
million in 1996. Airo Clean sales for the nine month period ending September 30,
1997 were $3.7 million compared to $5.6 million for the same period in 1996.
Airo Clean's gross margin as a percentage of sales decreased to 28.7% in the
third quarter of 1997 from 36.4% in the same period in 1996. For nine months
ending September 30, 1997, Airo Clean's gross margin was 25.1% compared to 35.5%
in 1996. Sales in the third quarter of 1996 and the nine months ending September
30, 1996 were higher because of a very large cleanroom project. Airo Clean's
decreased margins in 1997 can be attributed to increased competitive pricing
pressures and higher customizing costs to meet specific customer needs and lower
sales to spread costs.
Sales and marketing expenses increased in the third quarter 1997 by
$63,600, compared to 1996, due to increased Maris and Airo Clean sales efforts.
For the nine month period ending September 30, 1997, sales and marketing
expenses increased $148,300 when compared to the same period in 1996. These
costs, as a percentage of sales, were 11.1% in the third quarter of 1997,
compared to 10.1% in same period in 1996 and were 12.0% in the nine month period
ending September 30, 1997, compared to 9.1% in the same period in 1996,
primarily as a result of the lower sales levels. Sales efforts at Maris are
being concentrated in expanding the electronic security systems business to take
advantage of the Company's expertise and the higher profit potential. The sales
effort at Airo Clean continues to focus on promoting the BioShield, Ultraguard
and Laminar Air Flow Products. These are air scrubbing devices for controlling
airborne contaminants and are targeted for a variety of industries which require
particle-free, ultra-clean working environments, such as semiconductor chip
manufacturing, as well as patient isolation devices for hospital and health care
applications.
General and administrative expenses decreased in the third quarter of
1997 by $53,400 compared to 1996, due to cost reduction programs implemented at
Maris and Airo Clean. For the nine month period ending September 30, 1997,
general and administrative expenses decreased $75,200 when compared to the same
period in 1996. These costs, as percentage of sales, were 11.9% in the third
quarter of 1997 compared to 13.6% in the same period in 1996 and were 13.5% in
the nine month period ending September 30, 1997 compared to 11.9% in the same
7
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period in 1996. The Company continues to closely monitor and control costs and
believes that additional sales can be achieved without a proportional increase
in the business infrastructure.
Interest income in the third quarter of 1997 was $38,300 and $114,500
for the nine month period ending September 30, 1997.
Interest expense in the second quarter of 1997 was $179,900 compared to
$146,800 in the same period in 1996. For the nine month period ending September
30, 1997, interest expense was $497,200 compared to $428,600 in the same period
in 1996. The increase in 1997 reflects the higher average debt level compared to
the same period in 1996.
The Company plans to utilize its net operating loss carryforwards to
offset any future taxable income. The Company has net operating loss
carryforwards of approximately $7.7 million that may be used in future years to
offset taxable income until the year 2011.
Liquidity and Capital Resources
The results of the Company in 1996 and, to a lesser extent, 1997
continue to reflect the negative impact of Maris contracts obtained prior to
1995 which have been substantially completed in the second quarter of 1997.
Projects obtained in 1995, 1996 and the first nine months of 1997 were secured
at reasonable margins, but for the last two years the Company's resources have
been allocated toward finalizing old Maris contracts with minimal or no margin
contribution. The Company believes that the old Maris contracts will have a
minimal impact on the Company's future operations, and the Company is
successfully building backlog with reasonable margins.
At September 30, 1997, the Company's principle source of liquidity
included cash of $58,000, as compared to $124,200 at December 31, 1996, and
amounts available under the Company's credit facility. Cash used by operations
was $366,700 for the nine months ended September 30, 1997, as compared to cash
used by operations of $614,300 in the comparable prior year period. The change
is primarily the result of a decrease in accounts receivable as a result of
collections and lower net sales, which is partially offset by an increase in
contracts in progress. Borrowings under the Company's credit facility were
utilized to fund its operating cash requirements. Cash used by investing
activities of $63,000 for the nine months ended September 30, 1997, and $120,800
in the comparable prior year period reflects the Company's capital expenditures.
Capital expenditures for 1997 are projected at approximately $100,000 with no
formal commitments as of September 30, 1997.
In March 1997, the Company terminated its credit facility with its
previous lender and successfully negotiated a new three year, $6 million credit
agreement maturing on March 14, 2000. Borrowings under the Company's previous
credit facility were repaid with proceeds from the new facility. This credit
facility is secured by guarantees of $4.5 million in the form of a letter of
credit from Safeguard Scientifics, Inc. through September 30, 2000, as well as
substantially all of the assets of the Company. Borrowings bear interest at
prime plus 1% and the Company pays a monthly commitment fee of 1/2% on the
unused portion of the credit facility. The Company believes that the combination
of Safeguard's letter of credit and the working capital assets of the Company's
ongoing business will be sufficient to satisfy or support the debt. As of
November 3, 1997 outstanding borrowings under the credit facility were $5.5
million.
The Company believes that with its new credit facility, which provides
the Company with more favorable terms than the previous credit facility, and
cash provided by operations and its ability to secure reasonable terms from
vendors, it will be able to continue to operate in a downsized mode. The Company
will continue to focus on management of working capital and controlling expenses
to minimize the need to utilize availability under the new credit facility.
8
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) Exhibits
Number Description
27 Financial Data Schedule
(electronic filing only)
(b) No reports on Form 8-K have been filed by the registrant
during the quarter ended September 30, 1997.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
(Registrant)
Date: November 14, 1997 /S/ George E. Mitchell
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George E. Mitchell,
President and Chief Executive Officer
Date: November 14, 1997 /S/ Frederick B. Franks, III
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Frederick B. Franks, III
Vice President Finance and Treasurer
(Principal Financial and
Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 58,000
<SECURITIES> 0
<RECEIVABLES> 3,563,900
<ALLOWANCES> 63,400
<INVENTORY> 975,500
<CURRENT-ASSETS> 6,302,300
<PP&E> 1,302,600
<DEPRECIATION> 1,021,900
<TOTAL-ASSETS> 8,339,700
<CURRENT-LIABILITIES> 4,778,900
<BONDS> 0
1,500,000
0
<COMMON> 92,200
<OTHER-SE> (5,313,900)
<TOTAL-LIABILITY-AND-EQUITY> 8,339,700
<SALES> 11,969,600
<TOTAL-REVENUES> 11,969,600
<CGS> 9,171,100
<TOTAL-COSTS> 9,171,100
<OTHER-EXPENSES> 2,934,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (497,200)
<INCOME-PRETAX> (633,200)
<INCOME-TAX> 0
<INCOME-CONTINUING> (633,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (633,200)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
