<PAGE>
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 June 30, 1998 Commission File Number 000-17577
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- --------------------------------------------------------------------------------
(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
--------------
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 _____
Number of shares outstanding as of July 31, 1998
Common Stock 8,887,326
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
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Item 1 - Financial Statements:
Consolidated Balance Sheets -
June 30, 1998 (unaudited) and December 31, 1997................ 3
Consolidated Statements of Operations -
Three and six Months Ended June 30, 1998 and 1997 (unaudited).. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 (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............ 10
PART II - OTHER INFORMATION
Item 6 -
Exhibits................................................................. 10
Signatures............................................................... 11
2
<PAGE>
PART I
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
Assets (Unaudited)
<S> <C>
Current assets
Cash $ 101,000 $ 133,200
Receivables, less allowances ($7,900 --1998; $18,000 --1997) 770,900 921,000
Inventories 475,500 527,500
Notes receivable 280,300 280,300
Other current assets 86,500 110,600
------------ -------------
Total current assets 1,714,200 1,972,600
Net assets of discontinued operation 5,000 455,800
Plant and equipment
Leasehold improvements 37,900 37,900
Machinery and equipment 100,200 86,000
------------ -------------
138,100 123,900
Less accumulated depreciation and amortization (107,300) (94,500)
------------ -------------
Net plant and equipment 30,800 29,400
Other assets
Goodwill, net 463,800 487,800
Notes receivable 1,094,000 1,234,200
------------ -------------
Total other assets 1,557,800 1,722,000
------------ -------------
$ 3,307,800 $ 4,179,800
============ =============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 737,600 $ 865,700
Accrued expenses 154,900 287,800
------------ -------------
Total current liabilities 892,500 1,153,500
Long-term debt 5,242,600 5,983,100
Long-term debt - related party 887,000 887,000
Other liabilities 981,200 981,200
Redeemable convertible preferred stock issued to related party 1,860,000 1,815,000
Stockholders' deficit
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - (9,217,326 shares--1998 and1997) 92,200 92,200
Additional paid-in capital 7,623,900 7,668,900
Accumulated deficit (13,851,100) (13,980,600)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
------------ -------------
Total stockholders' deficit (6,555,500) (6,640,000)
------------ -------------
$ 3,307,800 $ 4,179,800
============ =============
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 1,127,400 $ 1,084,500 $ 2,015,900 $ 2,367,400
Cost of goods sold 929,300 830,500 1,674,000 1,821,000
------------ ------------ ------------ ------------
Gross profit 198,100 254,000 341,900 546,400
Operating expenses:
Sales and marketing 154,200 170,800 323,800 340,600
General and administrative 142,100 218,200 265,200 393,800
------------ ------------ ------------ ------------
Total operating expenses 296,300 389,000 589,000 734,400
------------ ------------ ------------ ------------
Loss from continuing operations (98,200) (135,000) (247,100) (188,000)
Other income (expense):
Interest - income 30,900 38,100 60,400 76,300
Interest - expense (76,700) (21,300) (148,000) (31,200)
------------ ------------ ------------ ------------
Loss from continuing operations before provision for income taxes (144,000) (118,200) (334,700) (142,900)
Provision for (benefit of ) income taxes -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations (144,000) (118,200) (334,700) (142,900)
Loss from discontinued security systems operation (150,200) (433,800)
Gain on disposition of discontinued security systems operation 464,200 464,200
------------ ------------ ------------ ------------
Net earnings (loss) $ 320,200 $ (268,400) $ 129,500 $ (576,700)
============ ============ ============ ============
Net earnings (loss) per share: - Basic
Continuing operations $ (.01) $ (.01) $ (.04) $ (.01)
Discontinued operations $ (.02) $ (.05)
Gain on disposition of discontinued security systems operation $ .05 $ .05
------------ ------------ ------------ ------------
$ .04 $ (.03) $ .01 $ (.06)
============ ============ ============ ============
Net earnings (loss) per share: - Diluted
Continuing operations $ (.01) $ (.01) $ (.04) $ (.01)
Discontinued operations $ (.02) $ (.05)
Gain on disposition of discontinued security systems operation $ .04 $ .05
------------ ------------ ------------ ------------
$ .03 $ (.03) $ .01 $ (.06)
============ ============ ============ ============
Weighted average common and common equivalent shares outstanding:
Basic 8,887,000 8,887,000 8,887,000 8,887,000
Diluted 10,735,750 8,887,000 10,724,500 8,887,000
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Operations
Net earnings (loss) $ 129,500 $ (576,700)
Adjustments to reconcile net loss to cash from operations
Loss from discontinued security systems operation 433,800
Gain on disposition of discontinued security systems operation (464,200)
Depreciation and amortization 36,800 36,400
Cash provided by (used in) changes in working capital items
Receivables 150,100 524,500
Inventories 52,000 (280,900)
Other current assets 24,100 (347,700)
Accounts payable (128,100) 159,500
Accrued expenses (132,900) (258,800)
----------- -----------
Cash provided by continuing operations (332,700) (309,900)
Cash provided (used) by discontinued operations
Cash provided by discontinued furnishings operation 140,200 376,600
Cash used by discontinued security systems operation (1,118,000) (13,100)
----------- -----------
Cash provided (used) by discontinued operations (977,800) 363,500
Financing activities
Net borrowings (repayments) of debt (740,500) 60,100
----------- -----------
Cash provided (used) by financing activities (740,500) 60,100
Investing activities
Expenditures for plant and equipment (14,100) (3,100)
Proceeds from sale of discontinued security systems operation 2,032,900
----------- -----------
Cash provided (used) by investing activities 2,018,800 (3,100)
----------- -----------
Increase (decrease) in cash (32,200) 110,600
Cash beginning of period 133,200 16,000
----------- -----------
Cash end of period $ 101,000 $ 126,600
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA) , INC.
Notes to Consolidated Financial Statements
June 30, 1998
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 1997 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. Certain amounts for 1997 have been reclassified to conform to the current
year presentation.
3. In late 1997, the Company and its Board of Directors adopted a formal plan
to sell the assets of Maris, its security and control system integration
and installation business, and classify Maris as a discontinued operation.
On June 8, 1998, effective June 1, 1998, substantially all of the assets of
Maris were sold to Security Technologies Group, Inc., a privately held New
Jersey corporation (STG). The decision to sell Maris was based on the
Company's lack of adequate capital to support Maris' operations. The
transaction is more fully described in note 2 to the Consolidated Financial
Statements included in the Company's 1997 Annual Report on Form 10-K. The
Company will now focus on the indoor air quality and hospital/healthcare
environmental control business of its only operating subsidiary Airo Clean,
Inc. Continuing operations reflect the results of the on-going business of
Airo Clean only.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in connection with information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Report. The following discussion includes forward-looking
statements that involve risk and uncertainties and are subject to change at any
time. The Company derives its forward-looking statements from its operating
budgets, estimates and forecasts, which are based upon detailed assumptions
regarding business and operational variables. While the Company believes that
its assumptions are reasonable, it cautions that there are inherent difficulties
in predicting the impact of certain factors, including competition, client
demand, and a dependence on a variety of industries which require particle-free,
ultra-clean working environments. The same comments, as to reasonableness of
assumptions, would apply to the demand from the hospital and healthcare market
where HMO's as well as other revenue factors have had a demonstrable impact on
hospital spending.
Overview
In late 1997, the Company and its Board of Directors adopted a formal
plan to sell the assets of Maris, its security and control system integration
and installation business, and classify Maris as a discontinued operation. On
June 8, 1998, effective June 1, 1998, substantially all of the assets of Maris
were sold to Security Technologies Group, Inc., a privately held New Jersey
corporation (STG). The decision to sell Maris was based on the Company's lack of
adequate capital to support Maris' operations. The transaction is more fully
described in note 2 to the Consolidated Financial Statements included in the
Company's 1997 Annual Report on Form 10-K. The Company will now focus on the
indoor air quality and hospital/healthcare environmental control business of its
only operating subsidiary Airo Clean, Inc.
Continuing operations reflect the results of the on-going business of
Airo Clean only.
Review of continuing operations
Net sales for the quarter ended June 30, 1998 were $1.1 million
compared to $1.1 million for the comparable period in 1997. The Company reported
a net loss from continuing operations of $144,000, compared to a net loss of
$118,200 in the same period in 1997. Gross margin, as a percentage of sales, was
17.6% in 1998 and 23.4% for the same period in 1997. The reduction in gross
margin in 1998 reflects the increased pricing pressures in the filter-fan
business throughout the worldwide market and an increase in fixed manufacturing
costs.
For six months ended June 30, 1998, net sales were $2.0 million
compared to $2.4 million for the comparable period in 1997. The Company reported
a net loss from continuing operations of $334,700, compared to a net loss of
$142,900 in the same period of 1997. Gross margin, as a percentage of sales, was
17.0% in 1998 and 23.1% for the same period in 1997. The significant change in
net earnings from continuing operations can be attributed to a decrease in Airo
Clean sales and the decrease in gross margin described above which was partially
offset by a decrease in operating expenses.
Sales and marketing expenses were $154,200 in the second quarter of
1998, compared to $170,800
7
<PAGE>
in 1997. These costs, as a percentage of sales, were 13.7% in the second quarter
of 1998, compared to 15.7% in the same period in 1997. For the six-month period
ending June 30, 1998, sales and marketing expenses were $323,800, compared to
$340,600 in the same period of 1997. The decrease in these expenses can be
attributed to reduced sales commissions, primarily due to a change in the sale
mix. 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 the micro
electronic and specialty manufacturing markets. They also provide needed
particle control in the health care and hospital industry.
General and administrative expenses decreased in the second quarter of
1998 by $76,100 compared to 1997, reflects staff reductions and salary freezes.
These costs, as a percentage of sales, were 12.6% in the second quarter of 1998,
compared to 20.1% in 1997. For the six-month period ending June 30, 1998,
general and administrative expenses decreased by $128,600 when compared to the
same period in 1997. For the six month period ending June 30, 1998, these costs,
as a percentage of sales, were 13.2%, compared to 16.6% in the same period of
1997. The decrease in these expenses in 1998 reflects staff reductions and
salary freezes. The Company continues to closely monitor and control costs and
believes that additional sales can be achieved without a proportional increase
in business infrastructure.
Interest expense in the second quarter of 1998 was $76,700, compared to
$21,300 in 1997. For the six-month period ending June 30, 1998, interest expense
was $148,000 compared to $31,200 in 1997. The increase in 1998 reflects the
higher average debt level due to operating losses incurred in 1997 and 1998, and
starting in June of 1998, continuing operations began to incur all interest
expense due to the sale of the security systems segment. Interest expense for
the continuing operations is projected to be approximately $440,000 for the year
ended December 31, 1998.
Review of discontinued operations
In 1997 the Company and its Board of Directors adopted a formal plan to
sell the assets of Maris and therefore Maris is classified as a discontinued
operation. The following summarizes the Maris operations for the three-month and
the six-month periods ending June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $ 2,307,400 $ 2,926,600 $ 5,050,200 $ 5,046,700
Cost of goods sold 1,757,200 2,280,100 3,936,200 3,930,300
----------- ----------- ----------- -----------
Gross profit 550,200 646,500 1,114,000 1,116,400
Expenses
Sales and marketing 248,300 300,400 534,800 588,900
General and administrative 221,500 338,900 549,300 675,100
Interest 102,200 157,400 254,000 286,200
----------- ----------- ----------- -----------
572,000 796,700 1,338,100 1,550,200
=========== =========== =========== ===========
Loss from discontinued operation $ (21,800) $ (150,200) $ (224,100) $ (433,800)
=========== =========== =========== ===========
</TABLE>
The Company reported a loss from discontinued operations from its
security systems segment for the quarter ended June 30, 1997 of $150,200 and a
loss of $433,800 for the six month period ending June 30, 1997. The loss of
$21,800 for the second quarter of 1998 and the loss of $224,100 for the
six-month period ending June 30, 1998 were fully reserved at December 31, 1997.
The Company reported a gain of $464,200 on the disposition of the discontinued
security systems operation in the second quarter ended June 30, 1998.
8
<PAGE>
Liquidity and Capital Resources
The Company has a $6.0 million credit facility due on March 14, 2000. This
credit facility is secured by guarantees of $4.5 million in the form of a letter
of credit from. Safeguard through September 30, 2000 and substantially all of
the assets of the Company. Safeguard is not contractually obligated to satisfy
any of the Company's obligations with the exception of the $4.5 million letter
of credit used as collateral for the Company's credit facility. Borrowings bear
interest at prime plus 1%. The Company believes that the combination of
Safeguard's letter of credit and the working capital assets of the on going
business will be sufficient to satisfy or support the debt. As of July 31, 1998,
outstanding borrowings under the credit facility were $5.4 million with less
than $100,000 of availability. On December 29, 1997 the credit facility was
amended to increase the availability up to an additional $395,000 through
February 27, 1998 and for the period beginning February 28, 1998 through August
27, 1998, by $195,000. The Company was in default of its debt service ratio loan
covenant as of December 31, 1997, but received a waiver from its lender on July
20, 1998 and the financial covenants were revised to reflect the Company's
continuing operations.
In connection with the 1995 sale of its furniture business, the Company
received a $2.0 million Subordinate Note which bears interest at a rate of 8%
per annum. The principal amount of the Subordinate Note is being amortized on a
seven-year level schedule with semi-annual principal and interest payments and a
balloon payment due on August 25, 2000. Interest and principal payments received
on the Subordinate Note were $208,600 in March 1998 and the Company is due the
second semi-annual payment in August 1998 of approximately $195,000.
In June 1998, the Company sold substantially all the assets of Maris to
STG for approximately $2.9 million, of which approximately $2.2 million was
received at closing and the remaining $.7 million will be received as certain
accounts receivable are collected. In addition, the purchase price included a
contingent payment of up to $500,000 which is based on the performance of Maris'
business for the calendar year ending December 31, 1998. The contingent payment
is based upon Maris achieving a minimum gross margin of 22% and the following
three conditions: (1) $200,000, if gross revenues exceed $13.5 million or a
proportional amount from zero to $200,000 when revenues range between $11.5 and
$13.5 million; (2) $200,000, if gross margins exceed 24% or a proportionate
amount from zero to $200,000 when the gross margin is between 22% and 24%; (3)
$100,000, if the bookings exceed $13.5 million or a proportional amount from
zero to $100,000 when the bookings range between $12.5 and $13.5 million. The
contingent payment will be calculated in January 1999, and if any, will be paid
in April 1999.
As a result of discontinuing the furnishings and security systems
segments, the Company has emerged as a significantly downsized and restructured
company. Credit financing is available for limited working capital requirements.
If these sources of funds prove to be inadequate or in the case of credit
financing, unavailable, then the Company will have to seek additional funds from
other sources to continue operations. There can be no assurance that new sources
of funds, if required, will be available. However, based on the Company's
projections of operations and borrowing availability under the credit facility,
the Company believes it will be able to continue to operate in this restructured
mode and continues to focus on management of working capital and controlling
expenses to minimize the need to utilize availability under the credit facility.
9
<PAGE>
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) Reports on Form 8-K
One Form 8-K dated June 8, 1998 was filed on June 30, 1998 to
report, pursuant to Item 2, the sale of the assets of Maris
Equipment Company, Inc. to Security Technologies Group, Inc.,
effective June 1, 1998
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
(Registrant)
Date: August 7, 1998 /S/ George E. Mitchell
----------------------------------------------
George E. Mitchell,
President and Chief Executive Officer
Date: August 7, 1998 /S/ Frederick B. Franks, III
----------------------------------------------
Frederick B. Franks, III
Vice President Finance and Treasurer
(Principal Financial and
Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 101,000
<SECURITIES> 0
<RECEIVABLES> 778,800
<ALLOWANCES> 7,900
<INVENTORY> 475,500
<CURRENT-ASSETS> 1,714,200
<PP&E> 138,100
<DEPRECIATION> 107,300
<TOTAL-ASSETS> 3,307,800
<CURRENT-LIABILITIES> 892,500
<BONDS> 0
1,860,000
0
<COMMON> 92,200
<OTHER-SE> (6,555,500)
<TOTAL-LIABILITY-AND-EQUITY> 3,307,808
<SALES> 2,015,900
<TOTAL-REVENUES> 2,015,900
<CGS> 1,674,000
<TOTAL-COSTS> 1,674,000
<OTHER-EXPENSES> 528,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (148,000)
<INCOME-PRETAX> (334,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (334,700)
<DISCONTINUED> 464,200
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,500
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
