FORM 10-Q
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 24,2000
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
January 02, 2001 is: 7,109,546
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Environmental Tectonics Corporation
Consolidated Income Statements
(unaudited)
Three months ended: Nine months ended:
--------------------------- ---------------------------
November 24, November 26, November 24, November 26
2000 1999 2000 1999
------------ ------------ ------------ ------------
(thousands, except share and per share information)
Net Sales $ 8,622 $ 9,107 $22,773 $25,681
Cost of goods sold 5,813 5,726 13,931 16,203
------- ------- ------- -------
Gross profit 2,809 3,381 8,842 9,478
------- ------- ------- ------
Operating expenses:
Selling and administrative 2,030 1,819 5,575 5,277
Research and development 162 161 646 658
------- ------- ------- -------
2,192 1,980 6,221 5,935
------- ------- ------- -------
Operating income 617 1,401 2,621 3,543
------- ------- ------- -------
Other expenses:
Interest expense 237 191 640 534
Other, net 45 23 49 69
------- ------- ------- -------
282 214 689 603
------- ------- ------- -------
Income before income taxes 335 1,187 1,932 2,940
Provision for income taxes 108 415 681 1,029
------- ------- ------- -------
Income before minority interest 227 772 1,251 1,911
Income (loss) attributable to
minority interest 0 8 24 (58)
------ -------- -------- --------
Net income $ 227 $ 764 $ 1,227 $ 1,969
======= ======= ======= =======
Per share information:
Income available to common
shareholders $ 227 $ 764 $ 1,227 $ 1,803
Income per share: basic $ 0.03 $ 0.11 $ 0.17 $ 0.27
Income per share: diluted $ 0.03 $ 0.10 $ 0.16 $ 0.24
Number of shares: basic 7,107,000 6,855,000 7,089,000 6,728,000
Number of shares: diluted 7,488,000 7,489,000 7,511,000 7,370,000
The accompanying notes are an integral part of the consolidated financial
statements.
2
Environmental Tectonics Corporation
Consolidated Balance Sheets
November 24, February 25,
2000 2000
------- -------
unaudited
---------
(amounts in thousands,
except share information
Assets
Current assets:
Cash and cash equivalents $ 774 $ 1,725
Cash equivalents restricted 783 32
Accounts receivable, net 16,546 10,771
Costs and estimated earnings in excess of billings on
uncompleted long-term contracts 11,377 8,878
Inventories 4,501 3,904
Deferred tax asset 689 689
Prepaid expenses and other current assets 628 482
------- -------
35,298 26,481
Property, plant and equipment, at cost, net of accumulated
depreciation of $8,408 at November 24, 2000 and $8,004 at
Feb 25, 2000 4,803 3,300
Software development costs, net of accumulated amortization of
$5,673 at November 24, 2000 and $5,215 at February 25, 2000 968 1,096
Other assets 781 1,020
------- -------
Total assets $41,850 $31,897
======= =======
Liabilities and Stockholders' Equity
Liabilities
Current liabilities:
Current portion of long-term debt $ 299 $ 78
Accounts payable - trade 1,430 1,830
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts 4,944 3,282
Customer deposits 3,219 2,935
Accrued income taxes 472 455
Accrued liabilities 1,369 1,595
------- -------
Total current liabilities 11,733 10,175
------- -------
Long-term debt, less current portion:
Credit facility payable to banks 6,053 4,093
Long-Term Bonds, net 5,077 -
Subordinated debt 350 350
Other - 12
------- -------
11,480 4,455
------- -------
Deferred income taxes 652 652
------- -------
Total liabilities 23,865 15,282
------- -------
Minority interest 68 370
------- -------
Stockholders' Equity
Common stock; $.05 par value; 20,000,000 shares authorized;
7,107,246 and 6,864,280 issued and outstanding at
November 24, 2000 and February 25, 2000, respectively 355 343
Capital contributed in excess of par value of common stock 6,498 5,832
Accumulated other comprehensive income (295) (62)
Retained earnings 11,359 10,132
------- -------
Total stockholders' equity 17,917 16,245
------- -------
Total liabilities and stockholders' equity $41,850 $31,897
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
3
Environmental Tectonics Corporation
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
November 24, November 26,
2000 1999
------- -------
(amounts in thousands)
Cash flows from operating activities:
Net income $ 1,227 $ 1,969
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 1,012 1,208
Provision for losses on accounts receivable and inventories 83 70
Minority interest (302) (59)
Changes in operating assets and liabilities:
Accounts receivable (5,783) (2,035)
Costs and estimated earnings in excess of billings on
uncompleted long-term contracts (2,499) 2,421
Inventories (672) (2,344)
Prepaid expenses and other assets (182) (50)
Other assets 162 (208)
Accounts payable (400) (69)
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts 1,662 (3,372)
Customer deposits 284 (929)
Accrued income taxes 17 (95)
Other accrued liabilities (300) (10)
Payments under settlement agreements (48) (90)
------- -------
Net cash used in operating activities (5,739) (3,593)
------- -------
Cash flows from investing activities:
Acquisition of equipment (1,907) (257)
Capitalized software development costs (330) (237)
Purchase of subsidiary, net 142 --
------- -------
Net cash used in investing activities (2,095) (494)
Cash flows from financing activities:
Net borrowings under credit facility 1,960 --
Proceeds from long-term bonds 5,470 --
Deferred financing costs (175) --
Payment of dividends on preferred stock -- (38)
Increase in cash equivalents restricted for letters of credit (751) (18)
Proceeds from issuance of common stock/warrants 678 90
Capital leases/other (66) (95)
------- -------
Net cash provided (used) by financing activities 7,116 (61)
------- -------
Effect of exchange rate changes on cash (233) (22)
Net decrease in cash and cash equivalents (951) (4,170)
Cash and cash equivalents at beginning of period 1,725 5,344
------- -------
Cash and cash equivalents at end of period $ 774 $ 1,174
======= =======
Supplemental schedule of cash flow information:
Interest paid 429 240
Income taxes paid 661 636
Supplemental information on noncash operating and investing activities:
During the nine month period ended November 26,1999, the Company
transferred a net of $216 from inventory to property, plant and equipment.
The accompanying notes are an integral part of the consolidated financial
statements.
4
Environmental Tectonics Corporation
Notes to Consolidated Financial Statements
(amounts in dollars, except where noted and share and per share information)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Environmental Tectonics Corporation ("ETC" or the "Company"), its wholly-owned
subsidiaries ETC International Corporation, Entertainment Technology
Corporation, and ETC Europe, 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 and the
financial results for the period presented may not be indicative of the full
year's results, 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-K for the year ended February
25, 2000. Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 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 earnings per share for the
three and nine-month periods ended November 24, 2000 and November 26, 1999. All
earnings per share and share amounts have been restated to reflect a 2 for 1
stock split effective May 28, 1999.
5
(amounts in thousands, except
share and per share information)
Three months ended: Nine months ended:
---------------------------------------------------------
November 24, November 26, November 24, November 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income $227 $764 $1,227 $1,969
Less preferred stock dividends - - - (38)
Less accretion of preferred stock - - - (128)
--------- --------- ---------- ----------
Income available to common
stockholders $227 $764 $1,227 $1,803
========= ========= ========= =========
Basic earnings per share:
Weighted average shares 7,107,000 6,855,000 7,089,000 6,728,000
Per share amount $0.03 $0.11 $0.17 $0.27
========= ========= ========= =========
Diluted earnings per share:
Weighted average shares 7,107,000 6,855,000 7,089,000 6,728,000
Effect of dilutive securities:
Stock options 69,000 159,000 124,000 166,000
Stock warrants 312,000 475,000 298,000 476,000
--------- --------- --------- ---------
7,488,000 7,489,000 7,511,000 7,370,000
Per share amount $0.03 $0.10 $0.16 $0.24
========= ========= ========= =========
3. Accounts Receivable
The components of accounts receivable are as follows:
November 24, February 25,
2000 2000
------------ ------------
(amounts in thousands)
U.S. Government receivables billed and unbilled contract costs
subject to negotiation $ 5,717 $ 5,145
U.S. commercial receivables billed 4,779 1,395
International receivables billed and unbilled contract costs
subject to negotiation 6,425 4,598
------- -------
16,921 11,138
Less allowance for doubtful accounts (375) (367)
------- -------
$16,546 $10,771
======= =======
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 beginning in fiscal year 1994, including $1,148,000 recorded
during the three months ended May 26, 2000. The Company has recorded claims,
amounting to $3,898,000 to the extent of contract costs incurred, and accounts
receivable of $1,649,000 representing the balance due under the contract. Claim
6
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 2001. 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 $12,000,000 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. In May, 2000, the Company and the U.S. Government
had reached an agreement in principle which would have included resolution of
all U.S. Navy claims on a global basis and contracted additional work on the
centrifuge. In July,2000, the Company received notice that the Navy, citing an
inability to obtain the prerequisite approvals and thus the necessary funding to
effect the settlement, was rescinding the agreement.
International receivables and unbilled contract costs subject to negotiation:
International receivables billed includes $900,000 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 $4,600,000 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 $1,100,000 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 remained 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, one of which was a delay in obtaining an
7
export license to ship parts required to complete the trainers. The balance due
on the contract is still under review and at this point the Company is not able
to determine what, if any, impact the extended completion period will have upon
the receipt of final payment. However, the Company continues to pursue
collection.
Unbilled contract costs subject to negotiation represent claims made or to
be made against an international customer for three contracts covering 1994 to
the present. Claims receivables and corresponding revenue aggregating $4,377,000
have been recorded, including $1,674,000 in the current quarter. Claim costs
have been incurred in connection with customer caused delays, errors in
specifications and designs, other out-of-scope items and exchange losses and may
not be received in full during fiscal 2001. 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 is
currently updating and finalizing these claims and also has begun legal
proceedings in the United Kingdom against the customer. As a related item,
during the third quarter of fiscal 2000, the aforementioned international
customer, citing failure to deliver product within contract terms, assessed
liquidated damages totalling approximately $1,600,000 on two contracts currently
in progress. The Company disputes the basis for these liquidated damages and
plans to contest them vigorously. However, following generally accepted
accounting principles, the Company has reduced contract values and corresponding
revenue recognition by approximately $1,600,000.
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 24, February 25,
2000 2000
------------ ------------
(amounts in thousands)
Raw materials $ 356 $ 343
Work in Process 4,145 3,561
------ ------
$4,501 $3,904
8
5. Stockholders' Equity
The components of stockholders' equity at November 24, 2000 and February
25, 2000 were as follows:
(amounts in thousands, except share information)
Common Stock Accumulated
------------------ Additional other comp. Retained
Shares Amount Capital income Earnings Total
--------- ------ ---------- -------- -------- --------
Balance, February 25,
2000 6,864,280 $343 $5,832 $ (62) $10,132 $16,245
Net income for nine
month period ended
November 24, 2000 - - - - 1,227 1,227
Other comprehensive loss - - - (233) - (233)
--------- ---- ------ ----- ------- -------
Total comprehensive income - - - - - 994
Shares issued in con-
nection with conver-
sion of
warrants 212,866 10 508 - - 518
Shares issued in con-
nection with employee
stock option plans 30,100 2 158 - - 160
--------- ---- ------ ----- ------- -------
Balance at November 24,
2000 7,107,246 $355 $6,498 $(295) $11,359 $17,917
========= ==== ======= ===== ======= =======
6. Business Segment Presentation:
The Company primarily manufactures under contract various types of
high-technology equipment which it has designed and developed. The Company
considers its business activities to be divided into two segments: Aircrew
Training Systems (ATS) and Industrial Simulation. The ATS business segment
produces devices which create and monitor the physiological effects of motion,
including spatial disorientation and centrifugal forces for the medical,
training, research and entertainment markets. The Industrial Group produces
chambers that create environments that are used for sterilization, research, and
medical applications. The following segment information reflects the accrual
basis of accounting:
Industrial
ATS Group Total
---------- ---------- ----------
(amounts in thousands)
Three months ended
November 24, 2000
-------------------
Net Sales $ 5,758 $2,864 $ 8,622
Interest Expense 209 28 237
Deprec. And Amort. 176 158 334
Operating Income 1,467 (560) 907
Income Tax Prov. 441 (207) 234
Identifiable Assets 28,981 4,411 33,392
Expend. For Seg. Assets 1,391 151 1,542
9
Three months ended
November 26, 1999
-------------------
Net Sales $5,914 $3,193 $ 9,107
Interest Expense 162 29 191
Deprec. And Amort. 280 151 431
Operating Income 1,242 817 2,059
Income Tax Prov. 378 276 654
Identifiable Assets 21,700 3,914 25,614
Expend. For Seg. Assets 104 19 123
Reconciliation to 2000 1999
consolidated amounts ----- -----
Segment operating income $ 907 $2,059
Less interest expense (237) (191)
Less income taxes (234) (654)
----- -----
Total profit for segments $ 436 $1,214
Corporate home off. exps. (290) (658)
Interest and other exps. (45) ( 23)
Income tax benefit 126 (239)
Minority interest 0 (8)
----- -----
Net income $ 227 $ 764
===== =====
Industrial
ATS Group Total
---------- ----------- ----------
(amounts in thousands
Nine months ended
November 24, 2000
-------------------
Net Sales $16,461 $6,312 $22,773
Interest Expense 553 87 640
Deprec. And Amort. 638 374 1,012
Operating Income 4,153 (813) 3,340
Income Tax Prov. 1,288 (316) 972
Identifiable Assets 28,981 4,411 33,392
Expend. For Seg. Assets 1,664 243 1,907
10
Nine months ended
November 26, 1999
-------------------
Net Sales $ 19,030 $6,651 $25,681
Interest Expense 382 71 453
Deprec. And Amort. 887 321 1,208
Operating Income 3,992 931 4,923
Income Tax Prov. 1,264 302 1,566
Identifiable Assets 21,700 3,914 25,614
Expend. For Seg. Assets 185 72 257
Reconciliation to consol. amts: 2000 1999
----- -----
Segment operating income $ 3,340 $4,923
Less interest expense (640) (453)
Less income taxes (972) (1,566)
----- -----
Total profit for segments $ 1,728 $2,904
Corporate home off. exps. (719) (1,380)
Interest and other exps. (49) (150)
Income tax benefit 291 537
Minority interest (24) 58
----- -----
Net income $ 1,227 $1,969
===== =====
Segment operating income (loss) consists of net sales less applicable costs and
expenses related to those revenues. Unallocated general corporate expenses and
other miscellaneous fees have been excluded from total profit for segments.
General corporate expenses are primarily central administrative office expenses
including executive salaries, stockholders expenses and legal and accounting
fees. Other miscellaneous expenses include banking and letter of credit fees.
Property, plant and equipment are not identified with specific business segments
as these are common resources shared by all segments.
Approximately 39.9% of sales totaling $3,442,000 in the third quarter of fiscal
2001 were made to one international and one domestic customer in the ATS
segment. Approximately 47.6% of sales totaling $4,336,000 in the third quarter
of fiscal 2000 were made to two international customers primarily in the ATS
segment.
Approximately 47.2% of sales totaling $10,760,000 in the nine months ended
November 24, 2000, were made to two international customers and one domestic
customer primarily in the ATS area. Approximately 56.9% of sales totaling
$14,604,000 in the nine months ended November 26, 1999, were made to two
international customers and one domestic customer primarily in the ATS segment.
11
Included in the segment information for the third quarter of fiscal 2001 are
export sales of $ 4,108,000. Of this amount, there are sales to commercial or
government accounts in Great Britain of $1,425,000 and Africa of $786,000. Sales
to the US government and its agencies aggregate $315,000 for the period.
Included in the segment information for the third quarter of fiscal 2000 are
export sales of $6,861,000. Of this amount, there are sales to government
accounts in Great Britain of $2,309,000 and Africa of $2,027,000. Sales to the
US government and its agencies aggregate $320,000 for the period.
Included in the segment information for the nine months ended November 24, 2000,
are export sales of $10,490,000. Of this amount, there are sales to commercial
or government accounts in Great Britain of $3,394,000 and Africa of $2,313,000.
Sales to the US government and its agencies aggregate $1,888,000 for the period.
Included in the segment information for the nine months ended November 26, 1999,
are export sales of $17,899,000. Of this amount, there are sales to commercial
or government accounts in Great Britain of $5,398,000 and Africa of $6,586,000.
Sales to the US government and its agencies aggregate $843,000 for the period.
7. Acquisitions
On September 9, 2000, the company purchased the assets of the "Pro-Pilot"
flight simulation game for $400,000 cash. The Company plans to develop a next
generation "Pro-Pilot 2000"tm game which will be marketed through the internet.
Also, this software can be integrated into the Company's General Aviation
Trainer product for commercial application.
On September 27, 2000, the Company purchased an additional 30% ownership
interest in ETC-PZL for $300,000 cash. With this purchase, the Company's
ownership interest increases to 95%.
12
8. Derivative Instruments and Hedging Activity
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
at 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. The Company does not feel that the
implementation of this pronouncement will have a material impact on the
financial results of the Company.
13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
(amounts in dollars, except where noted and share and per share amounts)
Results of Operations
Three months ended November 24, 2000 compared to November 26, 1999.
The Company had net income of $227,000, or $.03 per share (diluted), versus
net income of $764,000 or $.10 per share (diluted), for the corresponding third
quarter of fiscal 2000. Sales for the quarter were $8,622,000, a decrease of
$485,000 or 5.3%, over the corresponding prior period. The primary contributors
to the sales decrease were international contracts for the Company's
Hypo/hyperbaric Systems. Partial offsets were an increase in domestic Sterilizer
work, worldwide Environmental Systems projects, and a 135.8% increase in the
Entertainment group. Overall, domestic sales were up $2,273,000, or 118.0% from
the prior period, and represented 48.7% of the Company's total sales, up from
21.1% a year ago. International sales were down $2,753,000 or 40.1%, and
represented 47.6% of total sales, down from 75.3% in the prior period.
Gross profit dollars were down $572,000 from the prior period, reflecting
the lower sales level and a reduced rate as a percentage of revenue. The rate as
a percentage of sales was down 4.5 percentage points to 32.6%. The primary
contributor to the rate decrease was the Hypo/hyperbaric Group as the prior
period benefited from higher international sales at a higher rate as a
percentage of sales.
Selling and administrative expenses increased $211,000 or 11.6%. This
primarily reflected additional legal expenses for both domestic and
international claims and local expenses for the Company's ETC Europe subsidiary
acquired in March, 2000.
Research and development expenses were within $1,000 of the prior period
reflecting continued product development primarily in the Company's Turkish
Branch.
Interest and other fees were up $68,000 or 31.8% reflecting increased
borrowings albeit at a lower average rate.
The Company's tax rate approximated the statutory rate for both periods.
14
Results of Operations
Nine months ended November 24,2000 compared to November 26, 1999.
The Company had net income of $1,227,000, or $.16 per share (diluted),
versus net income of $1,969,000, or $.24 per share (diluted), for the
corresponding period of fiscal 2000. Sales for the nine months were $22,773,000,
a decrease of $2,908,000 or 11.3% over the corresponding prior period. The
primary contributor to the sales decrease was international contracts for both
Hypo/hyperbaric and Aircrew Training Systems. A partial offset was increased
domestic sales for Sterilizers and Entertainment products and worldwide sales of
Environmental Systems. Overall, domestic sales were up $3,457,000 or 49.8% over
the prior period, and represented 45.6% of the Company's total sales, up from
27.0% a year ago. Government sales were up $1,045,000 or 123.9% over the prior
period, and represented 8.3% of total sales, up from 3.3% in the prior period.
Gross profit decreased $636,000, or 6.7% reflecting reduced sales partially
offset by a 1.9 percentage point increase in the rate as a percentage of sales
to 38.8%. The primary contributor to this increase in rate was a higher rate as
a percentage of sales for the Company's Entertainment products and additional
claims gross margin booked for the Company's U.S. Government claims.
Selling and administrative expenses increased $298,000, or 5.6%, primarily
reflecting additional legal expenses for both domestic and international claims
and the addition of local expenses for the Company's ETC Europe subsidiary
acquired in March, 2000.
Research and development expenses were down slightly between the periods
($12,000,1.8%).
Interest and other fees were up $86,000 or 14.3% from the prior period
reflecting increased interest charges on higher borrowings albeit at a lower
average rate.
The Company's tax rate approximated the statutory rate in both periods.
15
Liquidity and Capital Resources
During the nine month period ended November 24,2000, the Company used
$5,739,000 for operating activities. This was primarily a result of an increase
in accounts receivable and inventories, an increase in costs and estimated
earnings in excess of billings on uncompleted long-term contracts, and a
decrease in accounts payable. Positive cash was generated by net income,
non-cash expenses, and an increase in billings in excess of costs and estimated
earnings on uncompleted long-term contracts. Versus last year's corresponding
period, net cash used in operating activities reflected an increase of
$2,146,000 as the current period included higher billing activity and
corresponding higher accounts receivable.
Investment activities consisted of purchases for capital equipment,
capitalized software, and the net cash impact of buying ETC Europe.
Financing activities consisted of bank borrowings, cash from the issuance
of long-term bonds and cash from the issuance of stock partially offset by an
increase in restricted cash. On February 25,2000, the Company signed an
amendment to its revolving credit agreement originally entered into on March
27,1997, which increased its credit facility to $15,000,000 and extended its
expiration date to August 31, 2001. On November 21, 2000, the Company signed an
additional amendment which extended the expiration date to August 31, 2002 and
increased the British Pound Sterling denominated portion from $1 million
equivalent to $2 million equivalent. Terms and conditions of both amendments
remained essentially the same as the original agreement. Substantially all of
the Company's short term financing is provided by this bank. On March 15, 2000,
the Company issued approximately $5,500,000 of unregistered taxable variable
rate demand/fixed rate revenue bonds (Series of 2000). Net proceeds from these
bonds were used to repay a $4,100,000 advance taken on the Company's revolving
credit facility and to finance construction of an addition to the Company's main
plant in Southampton, Pa. The bonds are secured by a $5,600,000 irrevocable
direct pay letter of credit issued by the Company's main lender which expires on
March 15, 2005 and which is secured by all assets of the Company. The bonds
carry a maturity date of April 1,2020, bear a variable interest rate which
adjusts each week to a rate required to remarket the bonds at full principal
value (currently at 7.0% on December 28,2000) with a cap of 17%, and are subject
to mandatory redemption of $275,000 per year for 19 years and $245,000 for the
20th year.
16
The Company's sales backlog at November 24, 2000, and February 25, 2000,
for work to be performed and revenue to be recognized under written agreements
after such dates was approximately $40,648,000 and $44,146,000 respectively. In
addition, the Company's training and maintenance contracts backlog at November
24, 2000, and February 25,2000, for work to be performed and revenue to be
recognized after that date under written agreements was approximately $1,156,000
and $1,288,000 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-K for the fiscal year ended February 25, 2000.
17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
none
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 August 31, the
following proposal was 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.
Abstentions and
Nominee For Withheld Broker Nonvotes
------- --- -------- ---------------
David Lazar 6,791,876 1,457 0
Richard E. McAdams 6,791,876 1,457 0
William F. Mitchell 6,791,876 1,457 0
Pete L. Stephens 6,791,876 1,457 0
Phillip L. Wagner 6,791,876 1,457 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
18
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.
Date: January 8, 2001 ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)
By: /s/Duane Deaner
--------------------------------
Duane Deaner,
Chief Financial Officer
(authorized officer and
principal financial officer)
EXHIBIT INDEX
3.1 Articles of Incorporation (Incorporated herein by reference to Exhibit 3.1
to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
3.2 Bylaws (Incorporated herein by reference to Exhibit 3(ii) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
February 25, 1994).
27 Financial Data Schedule