ENVIRONMENTAL TECTONICS CORPORATION
2000
ANNUAL SHAREHOLDERS' REPORT
FINANCIAL REVIEW
($ in thousands, except share and per share data)
Fiscal Year End 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 34,920 $ 29,225 $ 29,284 $ 21,884 $ 15,580
Gross profit 12,798 11,672 9,298 5,742 5,206
Operating income 5,327 4,759 4,208 1,196 1,492
Net income (loss) 2,837 2,170 1,794 (20) 299
Earnings (loss) per common share:
Basic .40 .32 .25 (.01) .05
Diluted .36 .29 .23 (.01) .05
Working capital 16,306 13,755 11,462 10,334 7,860
Long-term obligations 4,455 4,219 4,356 6,997 5,514
Total assets 31,897 35,448 22,955 23,095 20,926
Total stockholders' equity 16,245 11,030 8,579 6,409 6,111
Weighted average common shares:
Basic 6,604,000 5,861,000 5,981,000 5,930,000 5,870,000
Diluted 7,319,000 6,312,000 6,496,000 5,930,000 5,870,000
All earnings per share and share amounts have been restated to reflect a 2 for 1
stock split effective May 28, 1999. No cash dividends have ever been paid on the
Company's common stock, and the Company is currently prohibited from declaring
any cash dividends on common stock under the terms of its credit facility.
1
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Fiscal 2000 Versus Fiscal 1999
Certain statements under Item 1 and Item 7 contained herein or as may
otherwise be incorporated by reference herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include but are not limited to: statements
regarding future product development, technological advances and market
acceptance of products. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Environmental Tectonics Corporation (the
"Company"), or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, general
economic and business conditions, competition, technological advances, political
unrest in customer countries, contract cancellations and other risk factors that
are detailed in this document and in other periodic reports and registration
statements filed by Environmental Tectonics Corporation with the Securities and
Exchange Commission. All forward-looking statements included in this document
are based on information available to the company on the date hereof, and the
Company assumes no responsibility to update any such forward-looking statements.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends.
The company had a net income of $2,837,000 or $.36 per share (diluted),
versus a net income of $2,170,000 or $.29 per share (diluted) in 1999. Operating
income was $5,327,000, an increase of $568,000 or 11.9% over 1999. These
increases were primarily the result of a higher gross margin reflecting the
increased sales level.
Total sales increased $5,695,000 or 19.5% from 1999 as sales increases
were evidenced in all areas, most significantly in the domestic market which was
up $4,209,000 or 80.7%. Domestic sales represented 27.0% of the Company's total
sales, up from 17.9% in the prior period. Increases were evidenced across all
product areas except hyperbaric, with the most significant increases in
entertainment products and the Company's disaster management simulator product.
Sales to the U.S. Government increased $430,000, 37.1%, and represented 4.5% of
total sales, up slightly from 4.0% in the prior period. The increase reflected
sales to the U.S. Navy for large submarine decompression chambers. International
sales, including sales of the Company's Polish subsidiary, increased $1,056,000,
and represented 68.5% of the Company's total sales, down from 78.1% in the prior
period. The increase reflected additional sales in the Company's Polish
subsidiary which benefited from an additional 4 months activity in the current
period. Customers in 2000 representing 10% or more of sales were Mends
International $8,107,000, the United Kingdom Ministry of Defense $4,821,000, and
the Walt Disney companies $3,681,000. Additionally, open orders for the Walt
Disney companies constituted 56.7% of the Company's backlog at February 25,
2000.
On a segment basis, sales of the Company's Aircrew Training Systems
(ATS) products, which create and monitor the physiological effects of motion
(including spatial disorientation and centrifugal forces) on humans and
equipment for medical, training, research and entertainment markets, were
$26,361,000 an increase of $1,896,000, or 7.7% over 1999. Sales of these
products accounted for 75.5% of the Company's sales compared to 83.7% in 1999.
Sales in the Company's other segment, the Industrial Group, which designs and
produces chambers that create environments that are used for sterilization,
research and medical applications, increased $3,799,000 or 79.8% and accounted
for 24.5% of the Company's total sales compared to 16.3% in 1999.
Gross profit increased $1,126,000 or 9.6%. As a percentage of sales,
gross profit was 36.6%, down from 39.9% in 1999. This decrease was attributable
to a product mix shift to lower margin Industrial Group products.
Operating profit increased $568,000, or 11.9% compared to 1999. On a
segment basis, ATS had an operating profit of $5,039,000, a decrease of $658,000
from the prior period, while the Industrial Group had an operating profit of
$1,355,000 compared to an operating loss of $89,000 in 1999. These segment
operating profits were offset, in part, by unallocated corporate expenses of
$936,000, an increase of $87,000 over 1999.
2
Selling and administrative expenses increased $35,000, or 0.5%, due
principally to higher staffing and related expenses in support of the expanded
sales activity and additional selling and administrative expenses for the
Company's Polish subsidiary which had an additional four months activity in the
current period. As a percentage of sales, selling and administrative expenses
were 18.8% compared to 22.3% in 1999.
Research and development expenses increased $523,000, or 131.7% from
1999, primarily for ATS and entertainment product applications. Most of the
Company's research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific
contracts, as well as research for feasibility and technology updates.
Capitalized software development costs for 2000 were $555,000 compared to
$581,000 in 1999. Amortization of software costs, which was charged to cost of
sales, was $596,000 and $651,000 for 2000 and 1999, respectively.
Interest expense was down $386,000, 34.3% from 1999 reflecting lower
borrowings. Letter of credit and other expenses decreased $79,000 principally
due to decreased bank charges.
The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.
Fiscal 1999 Versus Fiscal 1998
The Company had a net income of $2,170,000 or $.29 per share (diluted),
versus a net income of $1,794,000, or $.23 per share (diluted) in 1998.
Operating income was $4,759,000, an increase of $551,000, or 13.1% over 1998.
These increases were primarily the result of higher gross margins reflecting
increased sales of ATS products.
Total sales decreased slightly $59,000, .2% from 1998 as decreases
domestically and to the U.S. Government were only partially offset by an
increase internationally and the addition of sales from the Company's Polish
subsidiary purchased in April, 1998. Domestic sales decreased $3,640,000, 41.1%,
and represented 17.9% of the Company's total sales, down from 30.2% in the prior
year. The decrease domestically primarily reflected reduced industrial
sterilizer sales coupled with decreased sales of the Company's entertainment
products. Sales to the U.S. Government decreased $1,779,000, 60.6% and
represented 4.0% of the Company's total sales, down from 10.0% for the prior
year. The decrease in U.S. Government sales primarily reflected the completion
in the prior year of a large chamber project. International sales, including
sales of the Company's Polish subsidiary, increased $5,360,000, 30.6% and
represented 78.1% of the Company's total sales. The increase internationally
primarily resulted from additional progress on two large centrifuge projects
including a Centrifuge project for the United Kingdom Ministry of Defense (UK
MOD). Sales in 1999 to the UK MOD were approximately $7.0 million or 24.0% of
the Company's total sales. Open orders for the UK MOD constituted $11.1 million
of the Company's sales backlog at February 26, 1999.
On a segment basis, sales of the Company's Aircrew Training Systems
(ATS) products, which create and monitor the physiological effects of motion
(including spatial disorientation and centrifugal forces) on humans and
equipment for medical, training, research and entertainment markets were
$24,465,000 an increase of $2,410,000, or 10.9% over 1998. Sales of these
products accounted for 83.7% of the Company's sales compared to 75% in 1998.
Sales in the Company's other segment, the Industrial Group, which designs and
produces chambers that create environments that are used for sterilization,
research and medical applications, decreased $2,469,000 or 34.2%, and accounted
for 16.3% of the Company's total sales compared to 25% in 1998. Although the
primary reduction was in sterilizer sales, decreases were evidenced across all
product lines for this Group.
Gross profit increased $2,374,000 or 25.5%. As a percentage of sales,
gross profit was 39.9% up from 31.8% in 1998. These increases were attributable
to a product mix shift to higher margin ATS products.
Operating profit increased $551,000, or 13.1% compared to 1998. On a
segment basis, ATS has an operating profit of $5,697,000, an increase of
$1,466,000 while the Industrial Group had an operating loss of $89,000 compared
to an operating profit of $691,000 in 1998. These segment operating profits were
offset, in part, by unallocated corporate expenses of $849,000, an increase of
$135,000 over 1998.
3
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Selling and administrative expenses increased $1,574,000, or 31.8%, due
principally to higher commissions expense on higher commissionable sales,
increased government claim expenses, and the addition of selling and
administrative expenses for the Company's Polish subsidiary. As a percentage of
sales, selling and administrative expenses were 22.3% compared to 16.9% in 1998.
Research and development expenses increased $249,000, or 168.2% from
1998. Most of the Company's research efforts, which were and continue to be a
significant cost of its business, are included in cost of sales for applied
research for specific contracts, as well as research for feasibility and
technology updates. Capitalized software development costs for 1999 were
$581,000 compared to $395,000 in 1998. Amortization of software costs, which was
charged to cost of sales, was $651,000 and $670,000 for 1999 and 1998,
respectively.
Interest expense was down $120,000, 9.6% from 1998 reflecting a lower
average interest rate. Letter of credit and other expenses decreased $16,000
principally due to decreased bank charges.
The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.
Fiscal 1998 Versus Fiscal 1997
The Company had net income of $1,794,000 or $.23 per share (diluted)
compared to a net loss of $20,000 or $.01 per share in 1997. Operating income
was $4,208,000, an increase of $3,012,000 or 252% over 1997. These increases
were primarily the result of increased sales which were $29,284,000, up $7.4
million or 34% over 1997.
Domestic sales increased $4,477,000 or 102% over 1997, and accounted
for 30% of the Company's total sales, up from 20% in 1997. This increase was due
to the introduction of the Company's proprietary motion-based technology into
the entertainment marketplace, as well as a $1,308,000 increase in sales of
industrial sterilizers. Sales to the U.S. Government, principally for work on
two large altitude chambers and a continuation of our contracted operator
maintenance contracts on selected aircrew training devices, increased $854,000,
or 41%, and accounted for 10% of the Company's total sales, the same percentage
as 1997. Sales to international customers, principally government agencies,
increased $2,068,000, or 13% over 1997, and accounted for 60% of the Company's
total sales, down from 70% in 1997. The increase in international sales was due
principally to continued work on a centrifuge for Japan and a multipurpose
aircraft trainer for the United Kingdom Ministry of Defense (UKMOD). Sales in
1998 to the UKMOD were approximately $9,226,000, or 32% of the Company's total
sales. Open orders for the UKMOD accounted for 59% of the Company's sales
backlog at February 27, 1998.
On a segment basis, sales of the Company's Aircrew Training Systems
(ATS) products, which create and monitor the physiological effects of motion
(including spatial disorientation and centrifugal forces) on humans and
equipment for medical, training, research and entertainment markets were
$22,055,000, an increase of $8,808,000, or 66% over 1997. Sales of these
products accounted for 75% of the Company's sales compared to 61% in 1997. Sales
in the Company's other segment, the Industrial Group, which designs and produces
chambers that create environments that are used for sterilization, research and
medical applications, decreased $1,408,000, or 16%, and accounted for 25% of
ETC's total sales compared to 39% in 1997. This reduction was due principally to
international sales of the Company's sterilizers and environmental chambers,
which were $2,533,000 lower in 1998 compared to 1997.
Gross profit increased $3,556,000 or 62%. As a percentage of sales,
gross profit was 32%, up from 26% in 1997. These increases were attributable, in
part, to the higher sales volume which improved plant capacity utilization, as
well as an increase in sales of higher-margined ATS products.
Operating profit increased $3,012,000, or 252% compared to 1997. On a
segment basis, ATS had an operating profit of $4,321,000, an increase of 97%,
while the Industrial Group had an operating profit of $691,000 compared to an
operating loss of $304,000 in 1997. These segment operating profits were offset,
in part, by unallocated corporate expenses of $714,000, an increase of $61,000,
or 9% over 1997.
4
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Selling and administrative expenses increased $563,000, or 13%, due
principally to higher variable costs related to the higher sales volume, such as
commissions and travel expenses. As a percentage of sales, selling and
administrative expenses were 17% compared to 20% in 1997. This improvement was
due, in part, to the fixed administrative costs being spread over the higher
sales total, as well as a reduction in accounting and legal fees.
Research and development expenses decreased $19,000, or 11% from 1997.
The Company's research efforts, which were and continue to be a significant cost
of its business, are included in cost of sales for applied research for specific
contracts, as well as research and development for basic research for
feasibility and technology updates. Capitalized software development costs for
1998, were $395,000 compared to $494,000 in 1997. Amortization of software
costs, which were charged to cost of sales, were $670,000 and $681,000 for 1998
and 1997, respectively.
Interest expense was virtually unchanged from 1998. Other expense
increased during 1998, principally due to foreign exchange charges.
The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.
Liquidity and Capital Resources
At February 25, 2000, the Company had a Credit Agreement with a bank
which provided a credit facility of $15 million. This agreement expires on
August 31, 2001. Substantially all of the company's short-term financing is
provided by this bank. At February 25, 2000, the Company had $ 9.3 million
available under the credit agreement.
During fiscal 2000, the company used $2,383,000 of cash for operating
activities. This was primarily the result of an increase in accounts receivable
and inventories, and a reduction in billings in excess of costs and estimated
earnings on uncompleted long-term contracts and customer deposits. Partial
offsets were net income, non- cash charges, and a decrease in costs and
estimated earnings in excess of billings on uncompleted long-term contracts. In
general, the net use of cash for operations reflected the use of cash , received
in advance in February, 1999, to build purchased contract equipment.
Investing activities used $1,569,000 and consisted of purchases for
capital equipment and capitalized software.
Financing activities generated $416,000 of cash. This included the net
effect of borrowing under the Company's credit facility to pay off $4.0 million
of the Company's subordinated debt, payment of dividends on preferred stock and
additional paid-in-capital from the issuance of common stock.
The company believes that cash generated from operating activities as
well as available borrowing under the Credit Agreement will be sufficient to
meet its future obligations.
In reference to the Company's outstanding claims with both the U.S.
government and an international customer, to the extent the Company is
unsuccessful in further recovery of contract costs, such an event could have a
material adverse effect on the Company's liquidity and results of operations.
Historically, the Company has had good experience in that recoveries have
exceeded claims (see Note 3 of Notes to Consolidated Financial Statements).
5
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Year 2000 Disclosure
As of January 1, 2000, the Company experienced no major issues during
the transition from 1999 to 2000.
Market for the Registrant's Common Stock and Related Security Holder Matters
The Company's Common Stock (the Common Stock) is traded on the American
Stock Exchange under the symbol ETC. As of May 8, 2000, the Company had 308
shareholders of record.
The following table sets forth the quarterly ranges of high and low
sale prices, and the closing sale price, for shares of the Common Stock for the
periods indicated, as adjusted for a 2 for 1 stock split effective May 28, 1999.
Such prices represent quotations between dealers and do not include mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
Sale Prices
-------------------------- Closing
High Low Sale Price
---- --- ----------
2000
First Quarter $14-1/2 $7-15/16 $11-7/8
Second Quart 12-1/8 9 10-11/16
Third Quarter 10-5/8 8-5/8 9-5/8
Fourth Quarter 21 9-3/8 12-7/8
1999
First Quarter $11-1/4 $8-1/4 $10-1/2
Second Quarter 12-7/8 9-1/8 9-3/4
Third Quarter 11-3/4 6-5/8 11
Fourth Quarter 17 9-1/16 16-1/8
The Company has never paid any cash dividends on the Common Stock in
the past and does not anticipate that any cash dividends will be declared or
paid in the foreseeable future. The Company's current line of credit facility
prohibits the payment of any dividends by the Company without the lender's prior
written consent.
Backlog
The Company's sales backlog at February 25, 2000 and February 26, 1999,
for work to be performed and revenue to be recognized under written agreements
after such dates, was approximately $44,146,000 and $32,141,000, respectively.
In addition, the Company's training and maintenance contracts backlog at
February 25, 2000 and February 26, 1999, for work to be performed and revenue to
be recognized after that date under written agreements, was approximately
$1,288,000 and $1,311,000, respectively. Of the February 25, 2000 backlog,
approximately $38,725,000 was under contracts for ATS and maintenance support
including $25,755,000 for the Walt Disney companies. Approximately 64% of the
February 25, 2000 backlog is expected to be completed prior to February 23,
2001.
6
Report of Independent Certified Public Accountants
Board of Directors
Environmental Tectonics Corporation
We have audited the accompanying consolidated balance sheets of
Environmental Tectonics Corporation and Subsidiary as of February 25, 2000 and
February 26, 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three fiscal
years in the period ended February 25, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Environmental Tectonics Corporation and Subsidiary as of February 25, 2000 and
February 26, 1999, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended February 25, 2000,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
the Company has recorded receivables in the amount of $5.85 million related to
claims made to or against the United States government and an international
customer for contract costs incurred through February 25, 2000. The total net
claims amount made is approximately $12 million based on costs incurred through
February 25,2000, and is subject to negotiation, arbitration and audit by the
U.S. government and the international customer.
/s/ Grant Thornton LLP
- ----------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
April 30, 2000
7
Consolidated Balance Sheets
($ in thousands, except share data)
February 25, February 26,
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents $ 1,725 $ 5,344
Cash equivalents restricted for letters of credit 32 47
Accounts receivable, net 10,771 9,656
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 8,878 10,416
Inventories 3,904 3,118
Deferred tax asset 689 1,136
Prepaid expenses and other current assets 482 787
------- -------
Total current assets 26,481 30,504
Property, plant and equipment, net 3,300 2,842
Software development costs, net of accumulated
amortization of $ 5,215 and $ 4,619
in 2000 and 1999, respectively 1,096 1,137
Other assets 1,020 965
------- -------
Total assets $31,897 $35,448
======= =======
LIABILITIES
Current portion of long-term obligations $ 78 $ 121
Accounts payable - trade 1,830 1,554
Billings in excess of costs and estimated earnings
on uncompleted long-term contracts 3,282 6,775
Customer deposits 2,935 5,696
Accrued income taxes 455 920
Other accrued liabilities 1,595 1,683
------- -------
Total current liabilities 10,175 16,749
------- -------
Long-term obligations, less current portion:
Credit facility payable to banks 4,093 -
Subordinated debt 350 4,124
Other 12 95
------- -------
4,455 4,219
------- -------
Deferred tax liability 652 702
------- -------
Total liabilities 15,282 21,670
------- -------
Redeemable cumulative convertible preferred stock, $100 par and
redemption value: 25,000 shares authorized; 25,000
shares issued and outstanding at February 26, 1999 0 2,372
------- -------
Minority Interest 370 376
STOCKHOLDERS' EQUITY
Common stock - authorized 20,000,000 shares, $.05 par value; 6,864,280 and
6,166,412 shares issued and
outstanding in 2000 and 1999, respectively 343 308
Capital contributed in excess of par value of common stock 5,832 3,240
Accumulated other comprehensive income (loss) (62) 21
Retained earnings 10,132 7,461
------- -------
Total stockholders' equity 16,245 11,030
------- -------
Total liabilities and stockholders' equity $31,897 $35,448
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
8
Consolidated Statements of Operations
($ in thousands, except share and per share data)
Year Ended Year Ended Year Ended
February 25 February 26, February 27,
2000 1999 1998
----------- ------------ -----------
Net sales $ 34,920 $ 29,225 $ 29,284
Cost of goods sold 22,122 17,553 19,986
--------- --------- ---------
Gross profit 12,798 11,672 9,298
--------- --------- ---------
Operating expenses:
Selling and administrative 6,551 6,516 4,942
Research and development 920 397 148
--------- --------- ---------
7,471 6,913 5,090
--------- --------- ---------
Operating income 5,327 4,759 4,208
--------- --------- ---------
Other expenses:
Interest expense 738 1,124 1,244
Letter of credit fees 53 26 58
Other, net 56 162 146
--------- --------- ---------
847 1,312 1,448
--------- --------- ---------
Income before provision for income taxes 4,480 3,447 2,760
and minority interest
Provision for income taxes 1,573 1,201 966
--------- --------- ---------
Income before minority interest $ 2,907 $ 2,246 $ 1,794
========= ========= =========
Income attributable to minority interest 70 76 -
Net income $ 2,837 $ 2,170 $ 1,794
Per share information
Earnings per common share:
Basic $ .40 $ .32 $ .25
Diluted $ .36 $ .29 $ .23
Income available to common stockholders $ 2,671 $ 1,853 $ 1,502
Weighted average common shares:
Basic 6,604,000 5,861,000 5,981,000
Diluted 7,319,000 6,312,000 6,496,000
The accompanying notes are an integral part of the consolidated financial
statements.
9
Consolidated Statements of Changes in Stockholders' Equity
($ in thousands, except share data)
For the years ended February 25, 2000, February 26, 1999, and
February 27, 1998
Capital
contributed
in excess of Accumulated
Common stock par value of other Total
----------------------- common comprehensive Retained stockholders'
Shares Amount stock income earnings equity
-------- -------- ------------ ------------- --------- -------------
Balance, February 28, 1997 2,963,083 $ 296 $ 2,007 $ - $ 4,106 $ 6,409
Net income for the year - - - - 1,794 1,794
Value of warrants issued in
connection with issuance of
subordinated debt - - 499 - - 499
Accretion of preferred stock - - - - (38) (38)
Dividends on preferred stock - - - - (254) (254)
Shares issued in connection
with employee stock purchase
and stock option plans 41, 550 3 146 - - 149
Shares issued in connection with
employee stock award 1,963 1 19 - - 20
---------- ----- ------- ----- -------- --------
Balance, February 27, 1998 3,006,596 $ 300 $ 2,671 $ - $ 5,608 $ 8,579
Net income for the year - - - - 2,170 2,170
Other comprehensive income - - - 21 - 21
---------- ----- ------- ----- -------- --------
Total comprehensive income - - - 21 2,170 2,191
Stock issued in connection with
with acquisition 55,000 6 489 - - 495
Accretion of preferred stock - - - - (42) (42)
Dividends on preferred stock - - - - (275) (275)
Shares issued in connection with
employee stock purchase and
stock option plans 21,610 2 80 - - 82
---------- ----- ------- ----- -------- --------
Balance, February 26, 1999 3,083,206 $ 308 $ 3,240 $ 21 $ 7,461 $ 11,030
Net income for the year - - - - 2,837 2,837
Other comprehensive loss - - - (83) - (83)
---------- ----- ------- ----- -------- --------
Total comprehensive income - - - (83) 2,837 2,754
Stock split effective
May 28, 1999 3,083,206 - - - - -
Dividend on preferred stock - - - - (38) (38)
Accretion of preferred stock - - - - (128) (128)
Shares issued in connection
with conversion of preferred
stock 666,666 33 2,467 - - 2,500
Shares issued in connection
with employee stock purchase
and stock option plans 31,202 2 125 - - 127
---------- ----- ------- ----- -------- --------
Balance, February 25, 2000 6,864,280 $ 343 $ 5,832 $ (62) $ 10,132 $ 16,245
========== ===== ======= ===== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
10
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended Year Ended Year Ended
February 25 February 26, February 27,
2000 1999 1998
----------- ------------ -----------
Cash flows from operating activities:
Net income $ 2,837 $ 2,170 $ 1,794
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 1,395 1,642 1,463
Increase (decrease)in allowance for accounts
receivable and inventory 77 (409) 527
Minority interest (6) 76 -
Changes in operating assets and liabilities:
(Increase) decrease in assets
Accounts receivable (1,097) (1,202) 2,762
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 1,538 (4,765) (2,306)
Inventories (888) 623 (882)
Prepaid expenses and other current assets 145 (530) (44)
Other assets (125) 12 (35)
Increase (decrease) in liabilities:
Accounts payable 276 112 (375)
Billings in excess of costs and estimated earnings
on uncompleted long-term contracts (3,493) 5,630 (1,543)
Customer deposits (2,761) 4,323 264
Accrued income taxes (465) (64) 713
Other accrued liabilities (93) 616 (414)
Payments under settlement agreements (120) (120) (120)
Decrease (increase) in deferred income taxes, net 397 (366) (157)
------- ------- -------
Net cash (used in) provided by operating activities (2,383) 7,748 1,647
------- ------- -------
Cash flows from investing activities:
Acquisition of equipment (1,014) (567) (670)
Software development costs capitalized (555) (581) (395)
Purchase of subsidiary, net of cash acquired - 60 -
------- ------- -------
Net cash used in investing activities (1,569) (1,088) (1,065)
------- ------- -------
Cash flows from financing activities:
Net (payments) borrowings under credit facility 4,093 (467) (6,247)
Net proceeds from (payments on) subordinated debt (3,774) - 3,730
Net proceeds from preferred stock - - 2,292
Payment of dividends on preferred stock (38) (275) (254)
Deferred financing costs - - (876)
Decrease (increase) in cash equivalents restricted for
letters of credit 15 (32) 650
Decrease in notes payable - related party - (800) (500)
Net decrease in other long-term obligations (40) (70) (9)
Proceeds from issuance of common stock/warrants 160 82 668
------- ------- -------
Net cash provided by (used in) financing activities 416 (1,562) (546)
------- ------- -------
Effect of exchange rates on cash (83) 21 -
Net (decrease) increase in cash and cash equivalents (3,619) 5,119 36
Cash and cash equivalents at beginning of year 5,344 225 189
------- ------- -------
Cash and cash equivalents at end of year $ 1,725 $ 5,344 $ 225
======= ======= =======
Supplemental schedule of cash flow information:
Interest paid $ 421 $ 925 $ 1,123
Income taxes paid $ 1,533 $ 1,357 $ 434
Supplemental information on non-cash operating and investing
activities:
During the year ended February 25, 2000, the Company
reclassed $216 from inventory to property, plant and
equipment. The Company reclassed $ 0 and $158 of
inventory to property, plant and equipment during
the years ended February 26, 1999 and February 27,
1998, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
11
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies:
Nature of Business
Environmental Tectonics Corporation ("ETC" or the "Company") is primarily
engaged in the development, marketing and manufacturing of Aircrew
Training Systems (ATS) and industrial simulation equipment. The Company
utilizes its internally developed software systems in virtually all of
its products. ETC focuses on software enhancements, product extensions,
new product development and new marketplace applications. Sales of ATS
products are made principally to U.S. and foreign government agencies and
to the entertainment market. Sales of industrial simulation equipment,
which includes sterilizers, environmental systems, and hypo/hyperbaric
equipment, are made to both commercial customers and governmental
agencies worldwide.
Stock Split: On February 25, 1999, the Company's Board of Directors
declared a 2-for-1 stock split for stockholders of record on May 17,
1999. All earnings per share and share amounts in the financial
statements for all years presented have been restated to reflect the
2-for-1 split.
Principles of Consolidation:
The consolidated financial statements include the accounts of
Environmental Tectonics Corporation, its wholly owned subsidiary, ETC
International Corporation and its 65% owned subsidiary, ETC-PZL Aerospace
Industries SP. Z O.O. All material inter-company accounts and
transactions have been eliminated. The Company's fiscal year is the 52-
or 53-week annual accounting period ending the last Friday in February.
Use of Estimates:
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates are made for revenue recognition under the percentage of
completion method (see Note 1, Revenue Recognition), claims receivable,
inventory, and computer software costs.
The Company has recorded receivables in the amount of $5.85 million for
claims made or to be made against the United States government and an
international customer for contract costs incurred through February 25,
2000. The total net claims amount filed with the U.S. government is
approximately $12.0 million based on costs incurred through February 25,
2000, and additional claims are in preparation for filing in fiscal 2001
against an international customer. These claims are subject to
negotiation, arbitration and audit by the United States government and
the international customer.
Revenue Recognition:
Revenue is recognized on long-term contracts utilizing the percentage of
completion method based on costs incurred as a percentage of estimated
total costs. Revenue recognized on uncompleted long-term contracts in
excess of amounts billed to customers is reflected as an asset. Amounts
billed to customers in excess of revenue recognized on uncompleted
long-term contracts are reflected as a liability. When it is estimated
that a contract will result in a loss, the entire amount of the loss is
accrued. The effect of revisions in cost and profit estimates for
long-term contracts is reflected in the accounting period in which the
facts requiring the revisions become known. Contract progress billings
are based upon contract provisions for customer advance payments,
contract costs incurred, and completion of specified contract milestones.
Contracts may provide for customer retainage of a portion of amounts
billed until contract completion. Retainage is generally due within one
year of completion of the contract. Revenue for contracts under $100 or
to be completed in less than one year, and revenue on parts and services,
is recognized as shipped. Revenue for service contracts is recognized
ratably over the life of the contract, with related material costs
expensed as incurred.
12
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies (Continued):
Cash and Cash Equivalents:
Cash and cash equivalents include short-term deposits at market interest
rates with original maturities of three months or less. The Company
maintains cash balances at several financial institutions located in the
Northeast United States and at some locations internationally. Accounts
in each domestic institution are insured by the Federal Deposit Insurance
Corporation up to $100. During the year the Company had cash and cash
equivalents in excess of insured amounts. However, most of the Company's
funds are with one financial institution which has never experienced any
customer losses.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
principally by the first-in, first-out method. The costs of finished
goods and work-in-process inventories include material, direct
engineering, manufacturing labor, and overhead components. The Company
periodically reviews the net realizable value of the inventory and, if
necessary, writes down the recorded costs.
Depreciation of Property, Plant and Equipment:
Property, plant and equipment are depreciated over their estimated useful
lives by the straight-line method for financial reporting purposes.
Accelerated depreciation methods are used for tax purposes. Upon sale or
retirement of property, plant and equipment, the costs and related
accumulated depreciation are eliminated from the accounts. Any resulting
gains or losses are included in the determination of net income.
Amortization of Goodwill:
The Company amortizes costs in excess of fair values of net assets of the
businesses acquired using the straight - line method over a period not to
exceed 20 years. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred.
Goodwill of $662 was recorded in fiscal 1999 for the Company's purchase
of ETC-PZL Aerospace Industries, SP. Z O.O. Amortization expense was $36
in fiscal 2000 and accumulated amortization as of February 25, 2000 was
$61.
Amortization of Capitalized Software Development Costs:
The Company capitalizes the qualifying costs of developing software
contained in certain products. Capitalization of costs requires that
technological feasibility has been established. When the software is
fully documented and tested, capitalization of development costs cease
and amortization commences over a period ranging from 36 to 60 months
(dependent upon the life of the product) on a straight-line basis which,
at a minimum, approximates estimated sales. Realization of capitalized
software costs is subject to the Company's ability to market the related
product in the future and generate cash flows to support future
operations. Capitalized software costs and related amortization totaled
$555 and $596, respectively, for the year ended February 25, 2000.
Capitalized software costs and related amortization totaled $581 and
$651, respectively, for the year ended February 26, 1999.
Amortization of Deferred Financing Costs:
Capitalized costs relating to the March, 1997 financing of the Company
are being amortized over the respective terms of each agreement.
Amortization expense relating to deferred financing costs was $331, $181
and $241 in 2000, 1999, and 1998, respectively (see note 7).
13
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies (Continued):
Income Taxes:
The Company accounts for income taxes using the liability method, which
reflects the impact of temporary differences between values recorded for
assets and liabilities for financial reporting purposes and values
utilized for measurement in accordance with tax laws.
Long-Lived Assets:
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which provides
guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles, and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
material effect on the Company's consolidated financial position or
results of operations.
Stock Options:
The Company accounts for stock options in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period which is usually the vesting period. Alternatively, the standard
permits entities to continue accounting for employee stock options and
similar instruments under Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been
applied (see note 12). The Company's Incentive Stock Option Plan is
accounted for under APB Opinion No. 25.
Advertising Costs:
The Company expenses advertising costs as incurred. Advertising expense
was $270, $294 and $210 in 2000, 1999, and 1998, respectively.
Earnings Per Common Share:
The Company has adopted SFAS No. 128, "Earnings Per Share," which is
effective for financial statements issued after December 15, 1997. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
14
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies (Continued):
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
All earnings per share and share amounts have been restated to reflect a
2 for 1 stock split effective May 28, 1999.
Year ended February 25, 2000
----------------------------------------------------
Weighted
average Per share
Income shares amount
----------- ------------- ---------
(numerator) (denominator)
Net income $2,837
Less preferred stock dividends (38)
Less accretion of preferred stock (128)
------
Basic earnings per share
Income available to common stockholders $2,671 6,604,184 $ .40
====== =====
Effective of dilutive securities
Stock options 224,151
Stock warrant 490,358
---------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $2,671 7,318,693 $ .36
====== ========= =====
Year ended February 26, 1999
----------------------------------------------------
Weighted
average Per share
Income shares amount
----------- ------------- ---------
(numerator) (denominator)
Net income $2,170
Less preferred stock dividends (275)
Less accretion of preferred stock (42)
------
Basic earnings per share
Income available to common stockholders $1,853 5,861,377 $ .32
====== =====
Effective of dilutive securities
Stock options 38,641
Stock warrants 412,007
----------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $1,853 6,312,025 $ .29
====== ========= =====
There were conversion provisions of preferred stock totaling 666,666 shares of
common stock which were not included in the computation of diluted earnings per
share because the effect of assumed conversions was anti-dilutive. These
conversion provisions were not outstanding at February 25, 2000 (see also
note 7).
15
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies (Continued):
Year ended February 27, 1998
----------------------------------------------------
Weighted
average Per share
Income shares amount
----------- ------------- ---------
(numerator) (denominator)
Net income $1,794
Less preferred stock dividends (254)
Less accretion of preferred stock (38)
------
Basic earnings per share
Income available to common stockholders $1,502 5,980,688 $ .25
------ -----
Effective of dilutive securities
Stock options 70,634
Stock warrants 444,289
---------
Diluted earnings per share
Income available to common stockholders
plus effect of dilutive securities $1,502 6,495,611 $ .23
====== ========= =====
There were conversion provisions of convertible notes payable and preferred
stock totaling 800,000 shares of common stock which were not included in the
computation of diluted earnings per share because the effect of assumed
conversions was anti-dilutive. These conversion provisions were not outstanding
at February 25, 2000.
16
Notes to Consolidated Financial Statements
($ in thousands, except share data)
1. Summary of Significant Accounting Policies (Continued):
Reporting Comprehensive Income:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards to provide prominent disclosure of comprehensive income items.
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. SFAS No. 130 is effective for all periods beginning
after December 15, 1997. Other comprehensive income consists of foreign
currency translation adjustments. The adoption of SFAS No. 130 did not
have a material impact on the Company's consolidated financial position
or results of operations.
Business Segment Presentation:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate, and their major customers. SFAS No. 131 is
effective for all periods beginning after December 15, 1997. The adoption
of SFAS No. 131 had no impact on the Company's consolidated financial
position or results of operations.
Reclassifications:
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform with the 2000 presentation.
2. Acquisition of ETC-PZL Aerospace Industries SP. Z O.O.
On April 21, 1998, the Company acquired a 65% ownership in MP-PZL
Aerospace Industries, Ltd. ("MP-PZL"), a simulation and advanced
training device manufacturing company located in Warsaw, Poland, for
$375 in cash, an 8% interest-only three-year note payable for $350 and
55,000 shares of the Company's common stock amounting to $495. MP-PZL
was subsequently renamed ETC-PZL Aerospace Industries SP. Z O.O.
("ETC-PZL"). The Company's cost for this acquisition was $1,220 and has
been recorded in the accompanying balance sheet under the purchase
method of accounting for business combinations. In connection with the
acquisition, the Company recorded goodwill of $662 and a minority
interest of $300.
17
Notes to Consolidated Financial Statements
($ in thousands, except share data)
2. Acquisition of ETC-PZL Aerospace Industries SP. Z O.O. (Continued):
ETC-PZL's fiscal period ends December 31. The results of ETC-PZL for the
period May 1, 1998 through December 31, 1998 have been included in the
Company's results of operations for the twelve months ended February 26,
1999. On a pro forma basis, had the Company consolidated the results of
ETC-PZL in 1998 or for a full 12 months in 1999, the following
comparisons would result:
Twelve months ended:
February 25, February 26, February 26,
2000 1999 1999
------------ ------------- ------------
(as reported) (pro forma)
Net sales $ 34,920 $ 29,225 $ 29,841
Gross profit 12,798 11,672 11,906
Operating income 5,327 4,759 4,723
Net income 2,837 2,170 2,155
Per share information
Income available to common shareholders 2,671 1,853 1,838
Income per share: basic 0.40 0.32 0.31
Income per share: diluted 0.36 0.29 0.29
Number of shares: basic 6,604,000 5,861,000 5,861,000
Number of shares: diluted 7,319,000 6,312,000 6,312,000
Twelve months ended:
February 26, February 27, February 27,
1999 1998 1998
------------ ------------- ------------
(as reported) (pro forma)
Net sales $ 29,225 $ 29,284 $ 31,391
Gross profit 11,672 9,298 9,944
Operating income 4,759 4,208 4,521
Net income 2,170 1,794 1,922
Per share information
Income available to common shareholders 1,853 1,502 1,603
Income per share: basic 0.32 0.25 0.27
Income per share: diluted 0.29 0.23 0.26
Number of shares: basic 5,861,000 5,981,000 5,981,000
Number of shares: diluted 6,312,000 6,496,000 6,496,000
Subsequent to fiscal year end, on March 6, 2000, the Company signed an
agreement to purchase for approximately $300 an additional 30% ownership
in ETZ-PZL. The sale is contingent upon approval by the Polish Ministry
of Treasury.
18
Notes to Consolidated Financial Statements
($ in thousands, except share data)
3. Accounts Receivable:
The components of accounts receivable at February 25, 2000 and February
26, 1999, are as follows:
2000 1999
---- ----
U.S. government receivables billed
and unbilled contract costs
subject to negotiation $ 5,145 $ 4,529
U.S. commercial receivables billed 1,395 598
International receivables billed and unbilled
contract costs subject to negotiation 4,598 4,914
------- --------
11,138 10,041
Less allowance for doubtful accounts (367) (385)
------- --------
$10,771 $ 9,656
======= ========
19
Notes to Consolidated Financial Statements
($ in thousands, except share data)
3. Accounts Receivable (Continued):
U.S. government receivables billed and unbilled contract costs subject
to negotiation:
Unbilled contract costs subject to negotiation represent claims made or
to be made against the U.S. government under a contract for a
centrifuge. These costs were recorded during fiscal years 1994, 1995 and
1998. The Company has recorded claims, amounting to $2.75 million,
including $150 recorded in the first quarter of fiscal 1998, to the
extent of contract costs incurred. These 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 $12.0 million in claims filed with the U.S.
government. The U.S. government has responded to the claims with either
denials or deemed denials that the Company has appealed. The U.S.
government has made offers for settlement which the Company deems
inadequate. Such claims are subject to negotiation and audit by the U.S.
government.
In November, 1996, the Company invoiced the balance due under a contract
with the U.S. government. At February 25, 2000, approximately $1.6
million was included in U.S. government receivables. Collectibility of
these amounts may be dependent upon the resolution of the above claims.
International receivables billed:
International receivables billed included $ 0.9 million at February 25,
2000 and February 26, 1999 related to a certain contract with the Royal
Thai Air Force.
In October 1993, the Company was notified by the Royal Thai Air Force
(RTAF) that the RTAF was terminating a certain $4.6 million simulator
contract with the Company. Although the Company had performed in excess
of 90% of the contract, the RTAF alleged a failure to completely
perform. In connection with the termination, the RTAF made a call on a
$229 performance bond, as well as a draw on an approximately $1.1
million advance payment letter of credit. Work under this contract had
stopped while under arbitration, but on October 1, 1996, the Thai Trade
Arbitration Counsel rendered its decision under which the contract was
reinstated in full and the Company was given a period of nine months to
complete the remainder of the work. Except as noted in the award, the
rights and obligations of the parties remain as per the original
contract including the potential invoking of penalties or termination of
the contract for delay. On December 22, 1997, the Company successfully
performed acceptance testing and the unit passed with no discrepancy
reports. Although the contract was not completed in the time allotted,
the Company has requested an extension on the completion time due to
various extenuating circumstances, including allowable "force majeure"
events. The balance due on the contract is still under review. However,
the Company is not able to determine what, if any, impact the extended
completion period will have upon the receipt of final payment.
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 aggregating $1.5 million were
recorded in fiscal 2000. Claim costs have been incurred in connection
with customer caused delays, errors in specifications and designs, and
other out-of-scope items 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 has begun legal proceedings
against the customer. As a related item, during fiscal 2000 the
aforementioned international customer, citing failure to deliver product
within contract terms, assessed liquidated damages totaling
approximately $1.6 million 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 reduced contract values and
corresponding revenues by approximately $1.3 million, of which $1.0
million was recorded in fiscal 2000.
20
Notes to Consolidated Financial Statements
($ in thousands, except share data)
4. Costs and Estimated Earnings on Uncompleted Contracts:
The following is a summary of long-term contracts in progress at
February 25, 2000 and February 26, 1999:
2000 1999
---- ----
Costs incurred on uncompleted long-term contracts $ 23,468 $ 24,926
Estimated earnings 14,937 18,529
-------- --------
38,405 43,455
Less billings to date (32,809) (39,814)
-------- --------
$ 5,596 $ 3,641
======== ========
21
Notes to Consolidated Financial Statements
($ in thousands, except share data)
4. Costs and Estimated Earnings on Uncompleted Contracts (Continued):
2000 1999
---- ----
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted long-term contracts $ 8,878 $ 10,416
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts (3,282) (6,775)
--------- ----------
$ 5,596 $ 3,641
======= ==========
Included in billings in excess of costs and estimated earnings on
uncompleted long-term contracts is a provision for anticipated losses on
contracts of $306 and $206 in 2000 and 1999, respectively.
5. Inventories:
Inventories consist of the following:
Raw Work in
material process Total
-------- -------- -------
February 25, 2000 $ 343 $ 3,561 $ 3,904
February 26, 1999 388 2,730 3,118
Inventory is presented net of an allowance for obsolescence of $ 720 and
$ 625 in 2000 and 1999, respectively.
6. Property, Plant and Equipment:
The following is a summary of property, plant and equipment, at cost,
and estimated useful lives at February 25, 2000 and February 26, 1999:
Estimated
useful
2000 1999 lives
---- ---- -----
Land $ 100 $ 100
Building and building additions 1,908 1,811 40 years
Machinery and equipment 6,865 6,652 3-5 years
Office furniture and equipment 1,039 956 10 years
Building improvements 1,392 850 5-10 years
--------- ---------
11,304 10,369
Less accumulated depreciation (8,004) (7,527)
--------- ---------
Property, plant and equipment, net $ 3,300 $ 2,842
========= =========
Depreciation expense for the years ended February 25, 2000, February 26,
1999, and February 27, 1998, was $ 535, $ 707, and $ 482, respectively.
22
Notes to Consolidated Financial Statements
($ in thousands, except share data)
7. Long-Term Obligation and Credit Arrangements:
Long-term obligations at February 25, 2000 and February 26, 1999,
consist of the following:
2000 1999
---- ----
Credit facility payable to banks (subsequently refinanced) $ 4,093 $ -
Subordinated debt, net 350 4,124
Products liability settlement (net of unamortized discount of
$ 37 and $71 in 2000 and 1999, respectively, based
on imputed rate of 11%) 48 134
Term loans payable accruing interest at between 9% and 9.9%
collateralized by priority liens on certain equipment 42 82
-------- ------
4,533 4,340
Less current portion (78) (121)
--------- ------
$ 4,455 $4,219
======== ======
The amounts of future long-term obligations maturing in each of the next
five fiscal years are as follows:
2001 $ 115
2002 4,455
2003 -
2004 -
2005 and thereafter -
--------
Total future obligations 4,570
Unamortized discounts or financing
cost associated with obligations (37)
--------
$ 4,533
========
The approximate average loan balance, maximum aggregate borrowings
outstanding at any month-end payable under the credit facility and
subordinated debt during the fiscal years, and weighted average interest
rate computed by the days outstanding method as of February 25, 2000 and
February 26, 1999, are as follows:
2000 1999
----- ----
Approximate average loan balance $ 575 $ 4,578
Maximum aggregate $ 5,393 $ 7,000
Weighted average interest rate 8.16% 7.87%
Interest is charged on direct borrowings at the bank's prime rate less a
factor ranging from 0% to 0.5% based on the Company's Leverage Ratio, as
defined, or adjusted LIBOR in 2000 and 1999. The interest rates were 8.1%
and 7.5% at February 25, 2000 and February 26, 1999, respectively.
The Company's letter of credit limit is $5.0 million, provided that the
cumulative of all outstanding trade letters of credit does not exceed
$2.5 million. The balances outstanding under these provisions at February
25, 2000, were $1.5 million. Fees on letters of credit outstanding were
0.75% at February 25, 2000 and 1.5% at February 26, 1999, respectively.
23
Notes to Consolidated Financial Statements
($ in thousands, except share data)
7. Long-Term Obligation and Credit Arrangements (Continued):
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 million and extended its expiration
date to August 31, 2001. These funds are available to support working
capital needs and letter of credit. Terms and conditions of the amendment
remained essentially the same as the original agreement. The Credit
Agreement is collateralized by substantially all of the Company's assets.
The Company is prohibited from declaring any cash dividends under the
terms of the Credit Agreement. This facility bears interest at the bank's
prime lending rate less a factor ranging from 0% to 0.5% based on the
Company's Leverage Ratio, as defined, or adjusted LIBOR. A commitment fee
of 0.2% is charged for unused available funds. The credit facility
includes certain covenants related to, among other things, prohibitions
on incurring additional debt, change in ownership of certain officers,
payment of dividends and maintenance, on a quarterly basis, of certain
financial ratios. Substantially all of the Company's short-term financing
is provided by this bank. The Company had $9.3 million available under
the Credit Agreement at February 25, 2000.
On March 27, 1997, the Company issued $4 million of subordinated
debentures, bearing interest at 12% per annum, due March 27, 2004, to a
financial institution, a director of which has been subsequently
appointed and elected to the Company's Board of Directors. On January 11,
2000, the Company utilized $4.1 million of its revolving credit facility
to repay these subordinated debentures. See also commentary concerning
long term bonds. In connection with the subordinated debentures, warrants
were issued to acquire 332,820 shares of the Company's common stock at an
exercise price of $.50 per share; $499 of the proceeds from the sale of
the debentures was allocated to the warrants and credited to capital
contributed in excess of par value of common stock. This amount is being
amortized to interest expense over the term of the warrants, which is
seven years.
On March 27, 1997, the Company also issued 25,000 shares of 11%
redeemable convertible preferred stock for $2.5 million. Each share of
convertible stock was convertible, at the option of the shareholder, into
26.66 shares of the Company's common stock at a price of $3.75 per share.
On February 26, 1999, the Company issued a redemption notice to redeem
the outstanding 25,000 shares of Series A Preferred Stock in their
entirely. On March 25, 1999, the Company received notice that Sirrom
Capital Corporation had exercised its conversion privilege under the
terms of the agreement to convert its 25,000 shares of Series A Preferred
Stock into the Company's common shares. Consequently, on April 19, 1999,
the Series A Preferred was retired and 666,666 shares of common stock
were issued to Sirrom Capital Corporation. Concurrent with this
transaction the Company charged retained earnings for $128 representing
the difference between book and face value of the Preferred Stock and
then reclassed $2,500 of Preferred Stock value to common stock at par and
additional paid in capital.
Total financing fees associated with the March 27, 1997 financing were
approximately $876, all of which had been charged to interest expense or
accreted to retained earnings by February 25, 2000. The proceeds from
these transactions were used to repay, in full, amounts outstanding with
a prior lender.
Subordinated debt at February 25, 2000, consisted of debt issued for the
acquisition of ETC-PZL (see note 2).
24
Notes to Consolidated Financial Statements
($ in thousands, except share data)
7. Long-Term Obligation and Credit Arrangements (Continued):
As a condition to the extension of the prior credit facility through
March 31, 1997, warrants were issued to an affiliate of a Bank to
purchase 200,000 shares of the Company's common stock at a price equal to
$2.59. On March 6, 2000, these warrants were exercised and the Company
received $518 representing the full purchase price. Subsequently, on
March 20, 2000, the Company issued 212,866 shares (representing the
original warrant value as adjusted) of its common shares.
On March 15, 2000, the Company issued approximately $5.5 million of
unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds
(Series of 2000). Net proceeds from these bonds were used to repay a $4.1
million 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 $5.6 million 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 6.59% on May 19,
2000 ) with a cap of 17%, and are subject to mandatory redemption of $275
per year for 19 years and $245 for the 20th year.
Product Liability Settlement:
During June 1995, the Company entered into a settlement with the employee
of a customer who brought a products liability claim against the Company.
The settlement of $1,195 will be satisfied with (i) funds of $547
(including accrued interest) previously deposited by the Company's
products liability insurance carrier with the U.S. District Court, and
(ii) a settlement payable to the plaintiff for the remaining amount of
$648. The Company paid $53 by July 20, 1995 and $100 on April 20, 1996.
In September 1996, the Company renegotiated the payment schedule. For the
period beginning October 1996, the company will pay $10 per month. The
claimant did reserve the right to pursue additional payment amounts as
per the original settlement agreement of July 29, 1995. The Company has
recorded a discount of $37 on this settlement based on an imputed
interest rate of 11%, which is amortized over the term of the settlement.
The carrying value of the aforementioned financial instruments
approximates their fair values at February 25, 2000.
8. Related Parties:
ETC Europe:
The Company transacts its business in Europe through ETC Europe, an
affiliated entity which was 99% owned by the President of the Company.
Sales through ETC Europe were $6,025 and $1,957 in 2000 and 1999,
respectively. Amounts due from ETC Europe as of February 25, 2000 and
February 26, 1999, were $56. Effective March 7, 2000, the Company
completed the purchase for $100 of the 99% ownership held by the
President of the Company.
Subordinated Debt and Preferred Stock:
During 2000 a director of ETC was also a director of one of its creditors
(see note 7).
9. Leases:
Operating Leases:
The Company leases certain premises and office equipment under operating
leases which expire over the next five years. Future minimum rental
payments required under noncancellable operating leases having a
remaining term expiring after one fiscal year as of February 25, 2000,
are $125 in 2001; $63 in 2002; $62 in 2003; $63 in 2004; and $122 in 2005
and thereafter.
Total rental expense for all operating leases for the years ended
February 25, 2000, February 26, 1999, and February 27, 1998, was $39,
$69, and $106 respectively.
25
Notes to Consolidated Financial Statements
($ in thousands, except share data)
10. Income Taxes:
The components of the provision (benefit) for income taxes are as
follows:
Year Ended Year Ended Year Ended
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Currently payable:
Federal $ 889 $ 1,272 $ 1,099
State 179 184 24
Foreign taxes 108 111 -
------- ------- --------
1,176 1,567 1,123
------- ------- --------
Deferred:
Federal 360 (333) (142)
State 37 (33) (15)
------- ------- --------
397 (366) (157)
------- ------- --------
$ 1,573 $ 1,201 $ 966
======= ======= ========
A reconciliation of the statutory federal income tax (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
February 25, February 26, February 27,
2000 1999 1998
------------ ----------- ------------
Statutory income tax 34.0% 34.0% 34.0%
State income tax, net of federal tax benefit and
state net operating loss carryforwards in 1999 2.9 3.9 (0.6)
Foreign sales corporation (5.2) (4.4) (4.9)
Other 3.4 1.5 6.5
----- ----- -----
35.1% 35.0% 35.0%
===== ===== =====
The tax effects of the primary temporary differences are as follows:
2000 1999 1998
------------ ----------- ------------
Deferred tax assets:
Net arbitration award against Company $ 0 $ 446 $ -
Net products liability settlement 115 161 70
Vacation reserve 59 45 43
Inventory reserve 270 236 389
Receivable reserve 138 145 142
Warranty reserve 46 44 44
Other, net 61 59 82
----- ------- ------
Total current deferred tax asset $ 689 $ 1,136 $ 770
Deferred tax liabilities:
Amortization of capitalized software $ 395 $ 407 $ 432
Depreciation 257 295 270
------ ------- ------
Total noncurrent deferred tax liability $ 652 $ 702 $ 702
====== ======= ======
27
Notes to Consolidated Financial Statements
($ in thousands, except share data)
11. Business Segment Information:
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 produces devices which create and monitor the physiological
effects of motion, including spatial disorientation and centrifugal
forces for medical, training, research and entertainment markets. The
Industrial Group business produce 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
---------- ---------- --------
2000
----
Net sales $ 26,361 $ 8,559 $ 34,920
Interest expense 465 125 590
Depreciation and amortization 1,024 371 1,395
Operating income 5,039 1,355 6,394
Income tax provision 1,601 431 2,032
Identifiable assets 20,344 5,538 25,882
Expenditures for segment assets 650 167 817
1999
----
Net sales $ 24,465 $ 4,760 $ 29,225
Interest expense 711 84 795
Depreciation and amortization 1,289 353 1,642
Operating income (loss) 5,697 (89) 5,608
Income tax provision (benefit) 1,745 (61) 1,684
Identifiable assets 22,470 2,644 25,114
Expenditures for segment assets 438 26 464
1998
----
Net sales $ 22,055 $ 7,229 $ 29,284
Interest expense 808 158 966
Depreciation and amortization 1,048 415 1,463
Operating income 4,231 691 4,922
Income tax provision 1,198 187 1,385
Identifiable assets 14,902 2,917 17,819
Expenditures for segment assets 435 85 520
2000 1999 1998
---------- ---------- --------
Reconciliation to consolidated amounts:
Segment operating income $ 6,394 $ 5,608 $ 4,922
Less interest expense (590) (795) (966)
Less income taxes (2,032) (1,684) (1,385)
---------- ---------- --------
Total profit for segments 3,772 3,129 2,571
Corporate home office expense (936) (849) (714)
Interest and other expenses (388) (517) (482)
Income tax benefit 459 483 419
Minority interest (70) (76) -
---------- ---------- --------
Net income $ 2,837 $ 2,170 $ 1,794
======== ========== ========
Segment operating income (loss) consists of net sales less applicable
costs and expenses relating to these revenues. Unallocated general
corporate expenses, letter of credit fees, interest expense, and income
taxes have been excluded from the determination of the total profit for
segments. General corporate expenses are primarily central administrative
office expenses. Property, plant, and equipment are not identified with
specific business segments because most of these assets are used in each
of the segments.
28
Notes to Consolidated Financial Statements
($ in thousands, except share data)
11. Business Segment Information (Continued):
Approximately 63% of sales totaling $16,609 in 2000 were made to two
international and one domestic customer in the ATS segment. Approximately
24% of sales totaling $7,005 in 1999 were made to one international
customer in the ATS segment. Approximately 19%, 11% and 10% of sales in
1998 were made to two international customers and one domestic commercial
account, totaling sales of $5,492, $3,266 and $3,013, respectively, in
the ATS segment.
Included in the segment information for the year ended February 25, 2000,
are export sales of $23,907. Of this amount, there are sales to or
relating to governments or commercial accounts in Great Britain ($4,821),
Poland ($4,201), and Nigeria ($8,107). Sales to the U.S. government and
its agencies aggregate $1,587 for the year ended February 25, 2000.
Included in the segment information for the year ended February 26, 1999
are export sales of $22,876. Of these amounts, there are sales to or
relating to governments or commercial accounts in Great Britain ($7,005),
Poland ($2,530), Japan ($2,130), Nigeria ($1,990), Bangladesh ($1,548),
Turkey ($1,057), the UAE ($1,040), and Egypt ($949) for ATS sales. Sales
to the U.S. government and its agencies aggregate $1,158 for the year
ended February 26, 1999.
Included in the segment information for the year ended February 27, 1998
are export sales of $17,490. Of these amounts, there are sales to or
relating to governments or commercial accounts in Great Britain ($5,721),
Japan ($3,382), Turkey ($1,734), Egypt ($1,288), Oman ($710), Norway
($558), and the UAE ($524) for ATS sales. Sales to the U.S. government
and its agencies aggregated $2,936 for the year ended February 27, 1998.
12. Stock Options:
In August, 1999 the Company adopted an Incentive Stock Option Plan to
replace the 1988 Incentive Stock Option Plan which expired in August,
1999. The plan authorizes a committee of the Board of Directors to grant
options for the purchase of up to 500,000 shares of common stock to
qualifying officers and other key employees. The Plan provides that
option price shall not be less than 100% (or in the case of a ten percent
owner, 110%) of the current market price of the stock on the date of the
grant. Options may be exercised on a cumulative basis at the rate of 25%
per year commencing one year after the date of grant. The Plan will
terminate on August 1, 2008. At February 25, 2000, there were 321,500
shares available to be granted under the Plan.
Since the exercise price of each option is not less than 100% of the
current market price of the Company's stock on the date of grant, no
compensation cost has been recognized for the Plan. Had compensation cost
for the Plan been determined based on the fair value of the options at
the grant dates consistent with the method of SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below. Reported amounts reflect the 2 for 1 stock
split declared by the Company on February 25, 2000 (see note 1).
2000 1999 1998
---- ---- ----
Net income:
As reported $ 2,837 $ 2,170 $ 1,794
Pro forma $ 2,350 $ 2,073 $ 1,765
Basic earnings per share:
As reported $ .40 $ .32 $ .25
Pro forma $ .33 $ .30 $ .24
Diluted earnings per share:
As reported $ .36 $ .29 $ .23
Pro forma $ .30 $ .28 $ .22
29
Notes to Consolidated Financial Statements
($ in thousands, except share data)
12. Stock Options (Continued):
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1999 and 1998: dividend yield of
0% and 0%; expected volatility of 54% and 60%; risk-free interest rate of
5.47% and 6.2%; and expected life of five and four years.
A summary of the status of the Plan as of February 25, 2000, February 26,
1999, and February 27, 1999, and changes during the years ending on those
dates is presented below.
2000 1999
------------------------ -------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -----
Outstanding at beginning of year 543,700 $ 6.57 92,350 $ 1.99
Granted 0 0 490,000 7.05
Exercised (28,950) 3.59 (38,650) 1.78
Forfeited (17,000) 4.86 - -
------- -------
Outstanding at end of year 497,750 543,700 6.57
------- -------
Options exercisable at year end 52,563 26,850
Weighted average fair value of
options granted during the year $ - $ 3.7
1998
--------------------------
Weighted
average
exercise
Shares price
------ -----
Outstanding at beginning of year 197,620 $ 1.88
Granted - -
Exercised (79,670) 1.58
Forfeited (25,600) 2.25
--------- --------
Outstanding at end of year 92,350 1.99
Options exercisable at year end 22,288
Weighted average fair value of
options granted during the year $ -
30
Notes to Consolidated Financial Statements
($ in thousands, except share data)
12. Stock Options (Continued):
The following information applies to options outstanding at February
25, 2000:
Options outstanding Options exercisable
---------------------------- ---------------------------------------
Weighted
Number average Weighted Number Weighted
Outstanding at remaining average exercisable at average
February 25, contractual exercise February 25, exercise
Range of exercise prices 2000 life (years) price 2000 price
------------------------ -------------- ------------ -------- -------------- ---------
$1.75 to $2.25 31,250 6.5 years $ 2.21 23,438 $ 2.21
$5.00 to $7.81 466,500 8.8 years $ 7.11 29,125 $ 5
13. Claims and Litigation:
Certain other claims, suits, and complaints arising in the ordinary
course of business have been filed or are pending against the Company.
In the opinion of management, after consultation with legal counsel, all
such matters are reserved for or adequately covered by insurance or, if
not so covered, are without merit or are of such kind, or involve such
amounts, as would not have a significant effect on the financial
position or results of operations of the Company if disposed of
unfavorably.
14. Employee Benefit Plan
The Company maintains a retirement savings 401(k) plan for eligible
employees. The Company's contributions to the plan are based on a
percentage of the employees' qualifying contributions. The Company's
contributions totaled $121, $103, and $91 in 2000, 1999, and 1998
respectively.
31
Notes to Consolidated Financial Statements
($ in thousands, except share data)
15. Quarterly Consolidated Financial Information (Unaudited):
Financial data for the interim periods of 2000, 1999 and 1998 were as
follows:
Quarter Ended
-----------------------------------------------------------
Fiscal Year 2000 May August November February
28 27 26 25
--------- --------- --------- ---------
Net sales $ 8,295 $ 8,279 $ 9,107 $ 9,239
Gross profit 3,418 2,679 3,381 3,320
Operating income 1,426 716 1,401 1,784
Income before income taxes 1,231 522 1,187 1,540
Minority interest (35) (32) 8 129
Net income 835 372 763 867
Earnings per common share:
Basic .11 .05 .11 .13
Diluted .10 .05 .10 .11
Quarter Ended
-----------------------------------------------------------
Fiscal Year 1999 May August November February
29 28 27 26
--------- --------- --------- ---------
Net sales $ 7,460 $ 5,996 $ 7,475 $ 8,294
Gross profit 2,749 2,283 2,648 3,992
Operating income 999 829 1,003 1,928
Income before income taxes 712 441 597 1,697
Minority interest - 61 (10) 25
Net income 464 234 399 1,073
Earnings per common share:
Basic .07 .03 .05 .17
Diluted .07 .02 .05 .15
Quarter Ended
-----------------------------------------------------------
Fiscal Year 1998 May August November February
30 29 28 27
--------- --------- --------- ---------
Net sales $ 6,644 $ 7,181 $ 7,639 $ 7,820
Gross profit 1,960 2,358 2,467 2,513
Operating income 790 1,095 1,143 1,180
Income before income taxes 546 631 755 828
Net income 360 406 491 537
Earnings per common share:
Basic .05 .05 .07 .08
Diluted .05 .05 .06 .07
Note: All earnings per share amounts have been restated to reflect a 2 for 1
stock split effective May 28, 1999.
32