<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 March 31, 1998 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 July 31, 1998
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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Page
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Item 1 - Financial Statements:
Consolidated Balance Sheets -
March 31, 1998 (unaudited) and December 31, 1997.................................... 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997 (unaudited).............................. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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
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Item 6 - Exhibits............................................................................ 10
Signatures................................................................................... 11
2
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PART I
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 150,100 133,200
Receivables, less allowances ($17,900 --1998; $18,000 --1997) 638,400 921,000
Inventories 498,300 527,500
Notes receivable 280,300 280,300
Other current assets 114,800 110,600
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Total current assets 1,681,900 1,972,600
Net assets of discontinued operation 733,100 455,800
Plant and equipment
Leasehold improvements 37,900 37,900
Machinery and equipment 89,300 86,000
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127,200 123,900
Less accumulated depreciation and amortization (100,800) (94,500)
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Net plant and equipment 26,400 29,400
Other assets
Goodwill, net 475,800 487,800
Notes receivable 1,094,000 1,234,200
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Total other assets 1,569,800 1,722,000
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$ 4,011,200 4,179,800
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 837,500 865,700
Accrued expenses 189,600 287,800
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Total current liabilities 1,027,100 1,153,500
Long-term debt 6,131,600 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 1,837,500 1,815,000
Stockholders' deficit
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - (9,217,326 shares--1998 and1997) 92,200 92,200
Additional paid-in capital 7,646,400 7,668,900
Accumulated deficit (14,171,300) (13,980,600)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
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Total stockholders' deficit (6,853,200) (6,640,000)
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$ 4,011,200 4,179,800
============ ============
</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)
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<CAPTION>
Three Months ended March 31,
1998 1997
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Net sales $ 888,500 $ 1,282,900
Cost of goods sold 744,700 990,500
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Gross profit 143,800 292,400
Operating expenses:
Sales and marketing 169,600 169,800
General and administrative 123,100 175,600
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Total operating expenses 292,700 345,400
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Loss from continuing operations (148,900) (53,000)
Other income (expense):
Interest - income 29,500 38,200
Interest - expense (71,300) (9,900)
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Loss from continuing operations before provision for income taxes (190,700) (24,700)
Provision for (benefit of) income taxes
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Loss from continuing operations (190,700) (24,700)
Loss from discontinuing security systems operation (283,600)
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Net loss $ (190,700) $ (308,300)
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Net loss per share: - Basic
Continuing operations $ (.02) $ (.00)
Discontinued operations (.03)
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$ (.02) $ (.03)
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Net loss per share: - Diluted
Continuing operations $ (.02) $ (.00)
Discontinued operations (.03)
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$ (.02) $ (.03)
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Weighted average common and common
equivalent shares outstanding:
Basic 8,887,000 8,887,000
Diluted 8,887,000 8,887,000
</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>
Three Months Ended March 31,
1998 1997
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<S> <C> <C>
Operations
Net loss $(190,700) $(308,300)
Adjustments to reconcile net loss to cash from operations
Loss from discontinued security systems operation 283,600
Gain on disposition of discontinued furnishings operation
Depreciation and amortization 18,400 18,000
Cash provided by (used in) changes in working capital items
Receivables 282,600 367,900
Inventories 29,200 (30,700)
Other current assets (4,200) (190,600)
Accounts payable (28,200) 105,200
Accrued expenses (98,200) (164,700)
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Cash provided by continuing operations 8,900 80,400
Cash provided by (used) by discontinued operations
Cash provided by discontinued furnishings operation 140,200 172,900
Cash used by discontinued security systems operation (277,400) (157,800)
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Cash provided (used) by discontinued operations (137,200) 15,100
Financing activities
Net borrowings (repayments) of debt 148,500 (39,600)
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Cash provided (used) by financing activities 148,500 (39,600)
Investing activities
Expenditures for plant and equipment (3,300) (3,100)
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Cash used by investing activities (3,300) (3,100)
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Increase in cash 16,900 52,800
Cash beginning of period 133,200 16,000
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Cash end of period $ 150,100 $ 68,800
========= =========
</TABLE>
See notes to consolidated financial statements
5
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CORE TECHNOLOGIES (PENNSYLVANIA) , INC.
Notes to Consolidated Financial Statements
March 31, 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
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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
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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
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Net sales for the quarter ended March 31, 1998 were $.9 million
compared to $1.3 million for the comparable period in 1997. The Company
reported a net loss from continuing operations of $190,700, compared to a net
loss of $24,700 in the same period in 1997. Gross margin, as a percentage of
sales, was 16.2% in 1998 and 22.8% for the same period in 1997. The reduction
in gross margin in 1998 is due to the reduced sales in 1998 compared to 1997,
the variable cost margins for both periods were similar and the fixed costs
increased slightly in 1998 from 1997.
7
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Sales and marketing expenses were $169,600 in 1998, compared to
$169,800 in 1997. These costs, as a percentage of sales, were 19.1% in the
first quarter of 1998, compared to 13.2% in the same period in 1997. The
percentage change from quarter to quarter is directly proportional to the
decrease in sales. 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. They also provide needed
particle control in the health care and hospital industry.
General and administrative expenses were $123,100 in 1998, compared
to $175,600 in 1997. These costs, as a percentage of sales, were 13.9% in the
first quarter of 1998, compared to 13.7% in 1997. The absolute dollar decrease
of $52,500 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 first quarter of 1998 was $71,300, compared
to $9,900 in 1997. The increase in 1998 reflects the higher average debt level
due to operating losses incurred in 1997 and 1998. In 1998 continuing
operations will incur all interest expense from the date of sale of the
security systems segment in June 1998. 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
first quarter ended March 31, 1998 and 1997:
1998 1997
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Revenues $ 2,742,800 $ 2,120,100
Cost of goods sold 2,179,000 1,650,200
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Gross profit 563,800 469,900
Expenses
Sales and marketing 286,500 288,500
General and administrative 327,800 336,200
Interest 151,800 128,800
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766,100 753,500
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Loss from discontinued operation $ (202,300) $ (283,600)
============ ===========
The Company reported a loss from discontinued operations from its
security systems segment for the quarter ended March 31, 1997 of $283,600 and
the loss of $202,300 for the first quarter of 1998 was fully reserved at
December 31, 1997.
8
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Liquidity and Capital Resources
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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
August 5, 1998, outstanding borrowings under the credit facility were $5.2
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.
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
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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 March 31, 1998.
10
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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: August 7, 1998 /S/ George E. Mitchell
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George E. Mitchell,
President and Chief Executive Officer
Date: August 7, 1998 /S/ Frederick B. Franks, III
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Frederick B. Franks, III
Vice President Finance and Treasurer
(Principal Financial and
Principal Accounting Officer)
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 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> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 150,100
<SECURITIES> 0
<RECEIVABLES> 656,300
<ALLOWANCES> 17,900
<INVENTORY> 498,300
<CURRENT-ASSETS> 1,681,900
<PP&E> 127,200
<DEPRECIATION> 100,800
<TOTAL-ASSETS> 4,011,200
<CURRENT-LIABILITIES> 1,027,100
<BONDS> 0
1,837,500
0
<COMMON> 92,200
<OTHER-SE> (6,853,200)
<TOTAL-LIABILITY-AND-EQUITY> 4,011,200
<SALES> 888,500
<TOTAL-REVENUES> 888,500
<CGS> 744,700
<TOTAL-COSTS> 744,700
<OTHER-EXPENSES> 263,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71,300)
<INCOME-PRETAX> (190,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (190,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,700)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
