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 August 23,2002
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
October 2, 2002 is: 7,153,428
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Environmental Tectonics Corporation
Consolidated Income Statements
(unaudited)
Thirteen Weeks Ended Twenty Six Weeks Ended
------------------------------ -----------------------------------
August 23, August 24, August 23, August 24
2002 2001 2002 2001
------------ --------------- -----------------------------------
(in thousands, except share and per share information)
Net Sales $11,041 $ 7,414 $ 22,248 $ 15,754
Cost of goods sold 7,778 5,021 15,402 10,668
------- ------- -------- --------
Gross profit 3,263 2,393 6,846 5,086
------- ------- -------- --------
Operating expenses:
Selling and administrative 2,042 1,691 4,444 3,767
Research and development 113 156 219 324
------- ------- -------- --------
2,155 1,847 4,663 4,091
------- ------- -------- --------
Operating income 1,108 546 2,183 995
------- ------- -------- --------
Other expenses:
Interest expense 125 272 266 530
Other, net 47 (1) 150 32
------- ------- -------- --------
172 271 416 562
------- ------- -------- --------
Income before income taxes 936 275 1,767 433
Provision for/(benefit from)
income taxes 205 (18) 477 (79)
Income before minority interest 731 293 1,290 512
Loss attributable to
minority interest (5) (4) (31) (9)
------- ------- -------- --------
Net income $ 736 $ 297 $ 1,321 521
======= ======= ======== ========
======================================================================================================
Per share information:
Income available to common
stockholders $ 736 $ 297 $ 1,321 $ 521
Income per share: basic $ 0.10 $ 0.04 $ 0.18 $ 0.07
Income per share: diluted $ 0.10 $ 0.04 $ 0.18 $ 0.07
Number of shares: basic 7,153,000 7,143,000 7,153,000 7,143,000
Number of shares: diluted 7,489,000 7,497,000 7,496,000 7,549,000
The accompanying notes are an integral part of the consolidated financial
statements.
2
Environmental Tectonics Corporation
Consolidated Balance Sheets
August 23, February 22,
2002 2002
---------------------------
(unaudited)
(amounts in thousands,
except share information)
Assets
Current assets:
Cash and cash equivalents $ 724 $ 2,261
Cash equivalents restricted for letters of credit 875 569
Accounts receivable, net 12,955 19,856
Costs and estimated earnings in excess of billings on
uncompleted long-term contracts 9,530 9,391
Inventories 9,053 7,161
Deferred tax asset 715 715
Prepaid expenses and other current assets 1,044 921
------- -------
Total current assets 34,896 40,874
Property, plant and equipment, at cost, net of accumulated depreci-
ation of $9,638 at August 23, 2002 and $9,303 at February 22, 2002 5,318 5,318
Software development costs, net of accumulated amortization of
$6,455 at August 23, 2002 and $6,166 at February 22, 2002 1,945 1,684
Other assets 558 606
------- -------
Total assets $42,717 $48,482
======= =======
Liabilities and Stockholders' Equity
Liabilities
Current liabilities:
Current portion of long-term debt $ 278 $ 281
Accounts payable - trade 3,703 3,438
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts 449 499
Customer deposits 4,370 3,684
Accrued income taxes 408 731
Accrued liabilities 1,489 1,558
------- -------
Total current liabilities 10,697 10,191
------- -------
Long-term debt, less current portion:
Credit facility payable to banks 4,490 11,755
Long-Term Bonds, net 4,645 4,920
Other 13 13
------- -------
9,148 16,688
------- -------
Deferred income taxes 735 735
------- -------
Total liabilities 20,580 27,614
------- -------
Minority interest 54 86
------- -------
Stockholders' Equity
Common stock; $.05 par value; 20,000,000 shares authorized;
7,153,428 and 7,142,946 issued and outstanding at
August 23, 2002 and February 22, 2002, respectively 358 357
------- -------
Capital contributed in excess of par value of common stock 6,722 6,703
------- -------
Accumulated other comprehensive loss (212) (172)
Retained earnings 15,215 13,894
------- -------
Total stockholders' equity 22,083 20,782
------- -------
Total liabilities and stockholders' equity $42,717 $48,482
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
3
Environmental Tectonics Corporation
Consolidated Statements of Cash Flows
(unaudited)
Twenty Six Weeks Ended
----------------------------
August 23, August 24,
2002 2001
------------ ------------
(amounts in thousands)
Cash flows from operating activities:
Net income $ 1,321 $ 521
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 632 587
Provision for losses on accounts receivable and inventories 774 54
Minority interest (32) (7)
Changes in operating assets and liabilities:
Accounts receivable 6,181 896
Costs and estimated earnings in excess of billings on uncom-
pleted long-term contracts (139) (3,193)
Inventories (2,687) (1,521)
Prepaid expenses and other assets (123) (107)
Other assets 40 (29)
Accounts payable 265 641
Billings in excess of costs and estimated earnings on uncom-
pleted long-term contracts (50) (1,115)
Customer deposits 686 599
Accrued income taxes (323) 70
Other accrued liabilities (69) (96)
------- --------
Net cash provided by/(used in) operating activities 6,476 (2,700)
------- --------
Cash flows from investing activities:
Acquisition of equipment (109) (596)
Capitalized software development costs (35) (248)
------- --------
Net cash used in investing activities (144) (844)
Cash flows from financing activities:
Borrowings under credit facility 11,803 6,691
Payments under credit facility (19,068) (2,701)
Repayment of long-term bonds (275) (275)
Cash equivalents restricted for letters of credit (306) 69
Proceeds from issuance of common stock/warrants 20 191
Capital leases repayments/other (3) (354)
-------- --------
Net cash (used in)/provided by financing activities (7,829) 3,621
-------- --------
Effect of exchange rate changes on cash (40) (4)
Net (decrease)/increase in cash and cash equivalents (1,537) 73
Cash and cash equivalents at beginning of period 2,261 851
-------- --------
Cash and cash equivalents at end of period $ 724 $ 924
======== ========
Supplemental schedule of cash flow information:
Interest paid 247 467
Income taxes paid 982 243
Supplemental information on noncash operating and investing activities:
During the six months ended August 23, 2002, the Company reclassified $226
from inventory to property, plant and equipment and $515 from inventory to
capitalized software.
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 conformity with accounting principles generally accepted
in the United States of America 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 22, 2002. Certain reclassifications have been made to
the fiscal 2002 financial statements to conform with the fiscal 2003
presentation.
2. Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders 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 earning per share for the
thirteen and twenty six week periods ended August 23, 2002 and August 24, 2001.
5
Thirteen Weeks Ended Twenty Six Weeks Ended
--------------------------- ---------------------------
August 23, August 24, August 23, August 24,
2002 2001 2002 2001
----------- ------------ ----------- ----------
(amounts in thousands, except
share and per share information)
Net income $736 $297 $1,321 $521
Income available to common
stockholders $736 $297 $1,321 $521
=========== ============ =========== ==========
Basic earnings per share:
Weighted average shares 7,153,000 7,143,000 7,153,000 7,143,000
Per share amount $0.10 $0.04 $0.18 $0.07
=========== ============ =========== ==========
Diluted earnings per share:
Weighted average shares 7,153,000 7,143,000 7,153,000 7,143,000
Effect of dilutive securities:
Stock options 29,000 43,000 34,000 74,000
Stock warrants 307,000 311,000 309,000 332,000
----------- ------------ ----------- ----------
7,489,000 7,497,000 7,496,000 7,549,000
Per share amount $0.10 $0.04 $0.18 $0.07
=========== ============ =========== ==========
At August 23, 2002, there were employee stock options to purchase the Company's
stock totaling 329,000 shares which were not included in the computation of
diluted earnings per share, as the effect of such options would be
anti-dilutive.
3. Accounts Receivable
The components of accounts receivable are as follows:
August 23, February 22,
2002 2002
------------ ------------
(amounts in thousands)
U.S. Government receivables billed and unbilled contract costs
subject to negotiation $ 1,098 $ 6,281
U.S. commercial receivables billed 5,456 2,918
International receivables billed and unbilled contract costs
subject to negotiation 7,493 11,030
------- -------
14,047 20,229
Less allowance for doubtful accounts (1,092) (373)
------ -------
$12,955 $19,856
======= =======
U.S. Government receivables billed and unbilled contract costs subject to
negotiation:
At February 22, 2002, billed and unbilled contract costs subject to
negotiation included claims made against the U.S. Government under a contract
for a centrifuge. These costs totaled $5,547,000. On May 9, 2002, the Company
reached a final settlement agreement totaling approximately $6,900,000 with the
U.S. Navy for all outstanding amounts. This amount was collected in full on July
2, 2002. The results of operations for the second quarter ended August 23, 2002,
includes sales of $300,000 as part of this settlement. As of August 23, 2002,
there were two additional claims in process totaling $724,000 for U.S.
government projects.
International receivables billed and unbilled contract costs subject to
negotiation:
International receivables billed includes $700,000 at August 23, 2002 and
February 22, 2002, respectively, related to a contract with the Royal Thai Air
Force (RTAF).
6
In October 1993, the Company was notified by the 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 $230,000 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 export license to ship
parts required to complete the trainers. On August 30, 2001, the Company
received a payment of $230,000 representing the amount due on the performance
bond; the balance of $700,000 due on the contract is still under review by the
customer but it is probable that the Company will institute legal proceedings to
collect the balance. 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.
Unbilled contract costs subject to negotiation represent claims made or to
be made against an international customer for two contracts covering 1996 to the
present. Claims receivables and resulting revenue aggregating $5,450,000 have
been recorded. 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 2003. In
conformity with accounting principles generally accepted in the United States of
America, revenue recorded by the Company from a claim does not exceed the
incurred contract costs related to the claim. The Company has submitted a claim
for one of the contracts to the customer and has also submitted to the customer
requests for equitable contract price adjustments on the other contract. The
Company is currently updating and finalizing additional claims. 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.
On July 20, 2001, the Company was notified by the international customer
that they were terminating the centrifuge contract, which was approximately 90%
complete. The termination included a request for the refund of advance milestone
payments made to date. At this point the Company is arbitrating in the United
Kingdom disputes which have arisen under this contract but is not able to assess
the ultimate impact of the termination on current operations and financial
results. As of August 23, 2002, the Company had recorded on its books the
following amounts for the contract from inception to date: revenue (including
claims revenue) of $19,730,000, cost of goods sold of $13,202,000, costs and
estimated earnings in excess of billings on uncompleted long term contracts of
$16,605,000, claims receivables of $2,840,000, and billings in excess of costs
and estimated earnings on uncompleted long term contracts of $10,099,000.
7
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):
August 23, February 22,
2002 2002
------------ ------------
(amounts in thousands)
Raw materials $ 92 $ 110
Work in Process 6,470 4,470
Finished Goods 2,491 2,581
------ ------
Total $9,053 $7,161
5. Stockholders' Equity
The components of stockholders' equity at February 22, 2002 and August 23,
2002 were as follows:
(amounts in thousands, except share information)
Common Stock Additional Accumulated
------------ Paid in other comp. Retained
Shares Amount Capital income Earnings Total
--------- ------ ---------- -------- -------- --------
Balance, February 22,
2002 7,142,946 $357 $6,703 $ (172) $13,894 $20,782
Net income for twenty
Six weeks ended
August 23, 2002 - - - - 1,321 1,321
Foreign Currency Translation
Adjustment - - - (40) - (40)
-------- ---- ------ ------- ------- -------
Total comprehensive income - - - (40) 1,321 1,281
Shares issued in con-
nection with employee
stock option plans 10,482 1 19 - - 20
-------- ---- ------ ------- ------- -------
Balance at August 23,
2002 7,153,428 $358 $6,722 $(212) $15,215 $22,083
========= ==== ====== ===== ======= =======
8
6. Long Term Debt and Other Long Term Obligations
The following table lists the long term debt and other long term
obligations of the Company as of August 23, 2002.
Payments due by Period
Obligation Total Less than 1-3 years 4-5 years After 5 years
1 year
Long term debt $4,490 $ - $4,490 $ - $ -
Long term bonds 4,645 - - - 4,645
Capital Leases 10 3 7 - -
Operating leases 498 102 352 44 -
Other long term - - - - -
Total obligations $9,643 $ 105 $4,849 $ 44 $4,645
7. Business Segment Presentation:
The Company primarily manufactures under contract various types of
high-technology equipment that 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)
Thirteen weeks ended
August 23, 2002
-------------------
Net Sales $ 9,326 $1,715 $ 11,041
Interest Expense 107 18 125
Deprec. And Amort. 253 52 305
Operating Income/(loss) 1,462 (140) 1,322
Income Tax Provision 297 (35) 262
Identifiable Assets 27,597 5,886 33,483
Expend. For Seg. Assets 61 13 74
Thirteen weeks ended
August 24, 2001
-------------------
Net Sales $ 5,041 $2,373 $ 7,414
Interest Expense 228 44 272
Deprec. And Amort. 193 87 280
Operating Income 393 410 803
Income Tax Provision 19 41 60
Identifiable Assets 29,614 6,156 35,770
Expend. For Seg. Assets 101 21 122
9
Reconciliation to 2002 2001
consolidated amounts ----- -----
Corporate Assets $ 9,234 $ 9,096
Total Assets 42,717 44,866
Segment operating income $ 1,322 $ 803
Less interest expense (125) (272)
Less income taxes (262) (60)
----- -----
Total profit for segments $ 935 $ 471
Corporate home off. exps. (214) (257)
Interest and other exps. (47) 1
Income tax benefit 57 78
Minority interest 5 4
----- -----
Net income $ 736 $ 297
===== =====
Industrial
ATS Group Total
---------- ---------- ----------
(amounts in thousands)
Twenty six weeks ended
August 23, 2002
-------------------
Net Sales $17,118 $5,130 $ 22,248
Interest Expense 232 34 266
Deprec. And Amort. 458 174 632
Operating Income/(loss) 3,005 (275) 2,730
Income Tax Provision 765 (84) 681
Identifiable Assets 27,597 5,886 33,483
Expend. For Seg. Assets 92 17 109
Twenty six weeks ended
August 24, 2001
-------------------
Net Sales $10,586 $5,168 $15,754
Interest Expense 442 88 530
Deprec. And Amort. 413 174 587
Operating Income 344 1,103 1,447
Income Tax Prov/(Benefit) 127 (83) 44
Identifiable Assets 29,614 6,156 35,770
Expend. For Seg. Assets 494 102 596
10
Reconciliation to 2002 2001
consolidated amounts ----- -----
Corporate Assets $ 9,234 $ 9,096
Total Assets 42,717 44,866
Segment operating income $ 2,730 $ 1,447
Less interest expense (266) (530)
Less income taxes (681) (76)
-------- -------
Total profit for segments $ 1,783 $ 841
Corporate home off. exps. (547) (442)
Interest and other exps. (150) ( 32)
Income tax benefit 204 155
Minority interest 31 (1)
-------- -------
Net income $ 1,321 $ 521
======== =======
Segment operating income 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, stockholder 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 73% of sales totaling $8,107,000 in the second quarter of fiscal
2003 were made to one domestic customer in the ATS segment. Approximately 55% of
sales totaling $4,070,000 in the second quarter of fiscal 2002 were made to one
international and one domestic customer in the ATS segment.
Approximately 65% of sales totaling $14,383,000 in the six months ended August
23, 2002 were made to one domestic customer in the ATS segment. Approximately
51% of sales totaling $8,098,000 in the six months ended August 24, 2001 were
made to one international and one domestic customer in the ATS segment.
11
Included in the segment information for the second quarter of fiscal 2003 are
export sales of $1,351,000. A significant portion of this amount consisted of
sales to commercial or government accounts in China of $335,000 and Thailand of
$306,000. In addition, sales to the US government and its agencies aggregated
$855,000 for the period.
Included in the segment information for the second quarter of fiscal 2002 are
export sales of $2,344,000. A significant portion of this amount consisted of
sales to commercial or government accounts in Thailand of $832,000, Great
Britain of $471,000, Japan of $324,000 and Turkey of $259,000. In addition,
sales to the U.S. government and its agencies aggregated $124,000 for the
period.
Included in the segment information for the six months ended August 23, 2002 are
export sales of $4,037,000. A significant portion of this amount consisted of
sales to commercial or government accounts in China of $1,847,000 and Thailand
of $893,000. In addition, sales to the US government and its agencies aggregated
$1,434,000 for the period.
Included in the segment information for the six months ended August 24, 2001 are
export sales of $5,178,000. A significant portion of this amount consisted of
sales to commercial or government accounts in Thailand of $1,143,000, Great
Britain of $1,030,000, Japan of $1,021,000, and Russia of $533,000. In addition,
sales to the US government and its agencies aggregated $910,000 for the period.
8. Recent Accounting Pronouncements
Business Combinations and Goodwill and Intangible Assets
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Intangible Assets". SFAS 141 is effective for
all business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001, and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates are as follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001.
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
12
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective February 23,
2002, all previously recognized goodwill and intangible assets with
indefinite lives are no longer subject to amortization.
o effective February 23, 2002, goodwill and intangible assets with
indefinite lives are to be tested for impairment annually and whenever
there is an impairment indicator.
o all acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
The adoption of SFAS No. 141 and 142 did not have a material impact on the
Company's financial position or results of operations.
Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 applies to all entities, including
rate-regulated entities, that have legal obligations associated with the
retirement of a tangible long-lived asset that result from acquisition,
construction or development and (or) normal operations of the long-lived asset.
The application of this statement is not limited to certain specialized
industries, such as the extractive or nuclear industries. This Statement also
applies, for example, to a company that operates a manufacturing facility and
has a legal obligation to dismantle the manufacturing plant and restore the
underlying land when it ceases operation of that plant. A liability for an asset
retirement obligation should be recognized if the obligation meets the
definition of a liability and can be reasonably estimated. The initial recording
should be at fair value. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The provisions of this statement are not expected to have a material
impact on the financial condition or results of operations of the Company.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS No. 144 makes changes
to the scope and certain measurement requirements of existing accounting
guidance. SFAS No. 144 also changes the requirements related to reporting the
effects of a disposal or discontinuance of a segment of a business. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The adoption of
this statement did not have a significant impact on the financial condition or
results of operations of the Company.
13
Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB No.
13, and Technical Corrections.
In April 2002 the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4,44 and 64, Amendment of FASB No. 13, and Technical Corrections. SFAS No.
145 changes the accounting principles governing extraordinary items by
clarifying and, to some extent, modifying the existing definition and criteria,
specifying disclosure for extraordinary items and specifying disclosure
requirements for other unusual or infrequently occurring events and transactions
that are not extraordinary items. SFAS No. 145 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, with early
adoption encouraged. The adoption of this statement is not expected to have a
significant impact on the financial condition or results of operations of the
Company.
Accounting for Costs Associated with Exit or Disposal Activities.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement provides financial accounting
and reporting guidance for costs associated with exit or disposal activities and
nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, with early adoption
encouraged. The adoption of the statement is not expected to have a significant
impact on the financial condition or results of operations of the Company.
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)
Forward Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are based on the Company's current expectations and
projections about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about the Company and its
subsidiaries that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements.
14
These forward-looking statements include statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including but not
limited to, (i) projections of revenue, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
the effects of currency fluctuations, capital structure and other financial
items, (ii) statements of plans and objectives of the Company or its management
or Board of Directors, including the introduction of new products, or estimates
or predictions of actions of customers, suppliers, competitors or regulating
authorities, (iii) statements of future economic performance, (iv) statements of
assumptions and other statements about the Company or its business, and (v)
statements preceeded by, followed by or that include the words "may", "could",
"should", "proforma", "looking forward", "would", "believe", "expect",
"anticipate", "estimate", "intend", "plan", or the negative of such terms or
similar expressions.
These forward-looking statements involve risks and uncertainties, which
are subject to change based on various important factors (some of which, in
whole or in part, are beyond the Company's control). The following factors,
among others, could cause the Company's financial performance to differ
materially from the goals, plans, objectives, intentions and expectations
expressed in such forward-looking statements: (1) the strength of the United
States and global economies in general and the strength of the regional and
local economies in which the Company conducts operations; (2) the effects of,
and changes in, U.S. and foreign governmental trade, monetary and fiscal
policies and laws; (3) the impact of domestic or foreign military or political
conflicts and turmoil; (4) the timely development of competitive new products
and services by the Company and the acceptance of such products and services by
customers; (5) willingness of customers to substitute competitors' products and
services and vice versa; (6) the impact on operations of changes in U.S. and
governmental laws and public policy, including environmental regulations; (7)
the level of export sales impacted by export controls, changes in legal and
regulatory requirements, policy changes affecting the markets, changes in tax
laws and tariffs, exchange rate fluctuations, political and economic
instability, and accounts receivable collection; (8) technological changes; (9)
regulatory or judicial proceedings; (10) the impact of any current or future
litigation involving the Company, and; (11) the success of the Company at
managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of the
Company's financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
15
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
For a detailed discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 22, 2002.
Revenue Recognition on Long-Term Contracts
As discussed below, when the performance of a contract will extend beyond a
12-month period (and is greater than $100,000 in contract value), revenue and
related costs are recognized on the percentage-of-completion method of
accounting. Profits expected to be realized on such contracts are based on total
estimated sales for the contract compared to total estimated costs at completion
of the contract. These estimates are reviewed periodically throughout the lives
of the contracts, and adjustments to profits resulting from such revisions are
made cumulative to the date of the change. Estimated losses on long-term
contracts are recorded in the period in which the losses become known to the
Company.
Some of the Company's largest contracts, including its contracts with the
U.S. and other foreign governments, are accounted for using the
percentage-of-completion method. If the Company does not accurately estimate the
total sales and related costs on such contracts, or if the Company is
unsuccessful in the ultimate collection of associated contract claims, the
estimated gross margins may be significantly impacted or losses may need to be
recognized in future periods. Any such resulting reductions in margins or
contract losses could be material to the Company's results of operations and
financial position.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based on payment history and the customer's current credit
worthiness, as determined by a review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based on historical experience
and any specific customer collection issues that have been identified. While
such credit losses have historically been within the Company's expectations and
the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past. Additionally,
as a result of the concentration of international receivables, the Company
cannot predict the effect, if any, which geopolitical risk and uncertainty will
have on the ultimate collection of such receivables.
16
Results of Operations
Thirteen weeks ended August 23, 2002 compared to August 24, 2001.
The Company had net income of $736,000, or $.10 per share (diluted), during
the second quarter of fiscal 2003, versus net income of $297,000 or $.04 per
share (diluted), for the corresponding second quarter of fiscal 2002. Sales for
the second quarter were $11,041,000, an increase of $3,627,000 or 48.9%, over
the corresponding second quarter of fiscal 2002. The primary contributors to the
sales increase were additional revenues in domestic entertainment, which
benefited from continued full production on a large entertainment project, and
increased US government sales for hyperbaric and Aircrew Training Systems,
including sales of $300,000 from the aforementioned settlement with the US Navy.
Providing partial offsets were reductions in domestic and international
hyperbaric systems, especially for the Company's Baramed monoplace chambers, and
international sales for Aircrew Training Systems products, which have been
negatively impacted by global economic conditions. Overall, domestic sales
increased $3,890,000, or 78.6% from the second quarter of fiscal 2002, primarily
reflecting the aforementioned entertainment increase, and represented 80.0% of
the Company's total sales, up from 66.7% for the second quarter of fiscal 2002.
Sales to the U.S. Government increased $730,000, or 588.7%, as compared to the
second quarter of fiscal 2002, and represented 7.7% of total sales versus 1.7%
for the second quarter of fiscal 2002. International sales were down $993,000 or
42.4%, versus the second quarter of fiscal 2002, and represented 12.3% of total
sales, down from 31.6% in the second quarter of fiscal 2002, reflecting the
aforementioned global economic downturn and increased entertainment sales.
Throughout the Company's history, most of the sales for Aircrew Training
Products have been made to international customers. The Company has subsidiaries
in the United Kingdom, Poland and Turkey, maintains regional offices in the
Middle East, Asia, and Canada, and uses the services of approximately 100
independent sales organizations and agents throughout the world. In the thirteen
weeks ended August 23, 2002, there were no international sales totaling at least
ten percent of total sales for any foreign country. In the thirteen weeks ended
August 24, 2001, sales totaling $832,000 were made to Thailand. Fluctuations in
sales to international countries from year to year primarily reflect revenue
recognition on the level and stage of development and production on multi-year
long-term contracts.
Risks associated with international operations that might be different
from those domestically include the strength of global economies in general and
the strength of the regional and local economies in which the Company conducts
operations, the effect of foreign military or political conflicts and turmoil,
changes in foreign government trade, monetary and fiscal policies and laws,
export controls, exchange rate fluctuations and political and economic
instability. Unusual risks that might be associated with sales to less developed
nations include U.S. Dollar and monetary system controls and a heightened risk
of political, economic and civil turmoil.
17
The Company recognizes revenue utilizing three methods. On long-term
contracts, the percentage of completion method is applied based on costs
incurred as a percentage of estimated total costs. Revenue recognized on
uncompleted long-term contracts in excess of amounts billed to customer 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 to the Company. 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 recognition under the percentage of completion method requires
significant judgment and therefore involves significant estimates, which are
reasonably subject to change. Revenue for contracts under $100,000, or to be
completed in less than one year, and where there are no post shipment services
included in the contract, and revenue on parts and services, is recognized as
shipped. Revenue on contracts under $100,000, or to be completed in less than
one year, and where post shipment services (such as installation and customer
acceptance) are required, is recognized after customer acceptance. Revenue for
service contracts is recognized ratably over the life of the contract with
related material costs expensed as incurred.
In accordance with accounting principles generally accepted in the United
States of America, revenue on contract claims and disputes, for customer caused
delays, errors in specifications and designs, and other unanticipated causes,
and for amounts in excess of contract value, is generally appropriate if it is
probable that the claim will result in additional contract revenue and if the
amount can be reliably estimated.
Revenue recorded on a contract claim cannot exceed the incurred contract
costs related to that claim. Significant claims outstanding at February 22, 2002
included the U.S. Navy ($5.5 million recorded) and two claims against an
international customer ($5.7 million recorded). On May 9, 2002, the Company
reached a final settlement agreement totaling approximately $6.9 million with
the U.S. Navy for all outstanding amounts. The Company received this settlement
payment on July 2, 2002. The results of operation for the three months ended
August includes sales of $300,000 as part of this settlement. Although claim
receivables are recorded as current assets in the financial statements, claim
revenues may not be received in full during fiscal 2003. One of the claims
against the international customer was filed in March 2001, and the other is
being developed. As of August 23, 2002, claims recorded against the U.S.
government totaled $724 and claims recorded against an international customer
totaled $5,450.
18
Gross profit for the second quarter of fiscal 2003 increased by $870,000 or
36.4% reflecting the increased sales volume partially offset by a 2.7 percentage
point reduction in the rate as a percent of sales. Rate decreases were evidenced
primarily in international environmental and domestic simulation sales.
Selling and administrative expenses for the second quarter of fiscal 2003
increased $351,000 or 20.8% as compared to the second quarter of fiscal 2002,
primarily reflecting increased commissions.
Research and development expenses, which are charged to operations as
incurred, decreased by $43,000 or 27.6% for the second quarter of fiscal 2003 as
compared to the second quarter of fiscal 2002 reflecting reduced product
development primarily in the Company's Turkish operation. 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.
Interest expense for the second quarter of fiscal 2003 decreased $147,000
or 54.0%. This reflected lower interest rates on a lower average loan balance in
the current period and reduced amortization of deferred finance costs as most of
these balances were charged off in the third quarter of fiscal 2002.
The Company's tax provision for the second quarter of fiscal 2003 reflected
an estimated 20% rate domestically and a consolidated estimated rate of 21.9%.
The lower effective tax rate reflects the ongoing effect of offsetting research
and development tax credits. The consolidated rate for the second quarter of
fiscal 2002 reflected an estimated rate of 30%, which was offset by a $100,000
research tax credit.
During the second quarter of fiscal 2003, the Company reached a settlement
with Inland Revenue in Great Britain which resulted in a small additional tax
assessment. Additionally, the U. S. Internal Revenue Service is currently
performing a routine audit of the Company's fiscal 2000 tax filing. At this
point the Company is not able to assess whether any additional tax liability
will result from the audit.
19
Results of Operations
Twenty-six weeks ended August 23, 2002 compared to August 24, 2001.
The Company had net income of $1,321,000, or $.18 per share (diluted), for
the twenty-six weeks ended August 23,2002 versus net income of $521,000 or $.07
per share (diluted), for the corresponding period of fiscal 2002. Sales were
$22,248,000, an increase of $6,494,000 or 41.2%, over the corresponding second
quarter of fiscal 2002. The primary contributors to the sales increase were
additional revenues in domestic entertainment, which benefited from continued
full production on a large entertainment project, increased domestic and
international sales for environmental products, and higher US government sales
for Aircrew Training Systems, including sales of $300,000 from the
aforementioned settlement with the US Navy. Providing partial offsets were
across the board reductions in hyperbaric systems, especially for the Company's
Baramed monoplace chambers, and international sales for Aircrew Training Systems
products, which have been negatively impacted by global economic conditions.
Overall, domestic sales increased $7,240,000, or 75.9% from the prior period of
fiscal 2002, primarily reflecting the aforementioned entertainment increase, and
represented 75.4% of the Company's total sales, up from 60.5% in the prior
period. Sales to the U.S. Government increased $524,000, or 57.5%, and
represented 6.4% of total sales versus 5.8% for the prior period. International
sales were down $1,270,000 or 23.9%, versus the prior period, and represented
18.2% of total sales, down from 33.7% in the prior period, reflecting the
aforementioned global economic downturn and increased entertainment sales.
Throughout the Company's history, most of the sales for Aircrew Training
Products have been made to international customers. The Company has subsidiaries
in the United Kingdom, Poland and Turkey, maintains regional offices in the
Middle East, Asia, and Canada, and uses the services of approximately 100
independent sales organizations and agents throughout the world. In the
twenty-six weeks ended August 23, 2002, there were no international sales
totaling at least ten percent of total sales for any foreign country. In the
twenty-six weeks ended August 24, 2001, there were no international sales
totaling at least ten percent of total sales for any foreign country.
Fluctuations in sales to international countries from year to year primarily
reflect revenue recognition on the level and stage of development and production
on multi-year long-term contracts.
Risks associated with international operations that might be different
from those domestically include the strength of global economies in general and
the strength of the regional and local economies in which the Company conducts
operations, the effect of foreign military or political conflicts and turmoil,
changes in foreign government trade, monetary and fiscal policies and laws,
export controls, exchange rate fluctuations and political and economic
instability. Unusual risks that might be associated with sales to less developed
nations include U.S. Dollar and monetary system controls and a heightened risk
of political, economic and civil turmoil.
The Company recognizes revenue utilizing three methods. On long-term
contracts, the percentage of completion method is applied based on costs
incurred as a percentage of estimated total costs. Revenue recognized on
uncompleted long-term contracts in excess of amounts billed to customer 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 recognition
under the percentage of completion method requires significant judgment and
therefore involves significant estimates, which are reasonably subject to
change. Revenue for contracts under $100,000, or to be completed in less than
one year, and where there are no post shipment services included in the
contract, and revenue on parts and services, is recognized as shipped. Revenue
on contracts under $100,000, or to be completed in less than one year, and where
post shipment services (such as installation and customer acceptance) are
required, is recognized after customer acceptance. Revenue for service contracts
is recognized ratably over the life of the contract with related material costs
expensed as incurred.
20
In accordance with accounting principles generally accepted in the United
States of America, revenue on contract claims and disputes, for customer caused
delays, errors in specifications and designs, and other unanticipated causes,
and for amounts in excess of contract value, is generally appropriate if it is
probable that the claim will result in additional contract revenue and if the
amount can be reliably estimated.
Revenue recorded on a contract claim cannot exceed the incurred contract
costs related to that claim. Significant claims outstanding at February 22, 2002
included the U.S. Navy ($5.5 million recorded) and two claims against an
international customer ($5.7 million recorded). On May 9, 2002, the Company
reached a final settlement agreement totaling approximately $6.9 million with
the U.S. Navy for all outstanding amounts. The Company received this settlement
payment on July 2, 2002. The results of operation for the six months ended
August includes sales of $300,000 as part of this settlement. Although claim
receivables are recorded as current assets in the financial statements, claim
revenues may not be received in full during fiscal 2003. One of the claims
against the international customer was filed in March 2001, and the other is
being developed. As of August 23, 2002, claims recorded against the U.S.
government totaled $724 and claims recorded against an international customer
totaled $5,450.
Gross profit for the twenty-six weeks ended August 23, 2002 increased by
$1,760,000 or 34.6% reflecting the increased sales volume partially offset by a
1.5 percentage point reduction in the rate as a percent of sales. Rate decreases
were evidenced primarily in international environmental and domestic simulation
sales.
Selling and administrative expenses for the twenty-six weeks ended August
23, 2002 increased $677,000 or 18.0% as compared to the corresponding prior
period of fiscal 2002, primarily reflecting increased commissions.
21
Research and development expenses, which are charged to operations as
incurred, decreased by $105,000 or 32.4% for the twenty-six weeks ended August
23, 2002 as compared to the prior period in fiscal 2002, reflecting reduced
product development primarily in the Company's Turkish operation. 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.
Interest expense for the twenty-six weeks ended August 23, 2002 was down
$264,000 or 49.8% as compared to the corresponding period in fiscal 2002. This
reflected lower interest rates on a lower average loan balance in the current
quarter and reduced amortization of deferred finance costs as most of these
balances were charged off in the third quarter of fiscal 2002.
The Company's tax provision for the twenty-six weeks ended August 23, 2002
reflected an estimated 20% rate domestically and a consolidated estimated rate
of 27.0%. The lower effective tax rate reflects the ongoing effect of offsetting
research and development tax credits. The consolidated rate for the six months
ended August 24, 2001 reflected an estimated rate of 30%, which was offset by a
$200,000 research tax credit.
During the twenty-six weeks ended August 23, 2002 the Company reached a
settlement with Inland Revenue in Great Britain which resulted in a small
additional tax assessment. Additionally, the U. S. Internal Revenue Service is
currently performing a routine audit of the Company's fiscal 2000 tax filing. At
this point the Company is not able to assess whether any additional tax
liability will result from the audit.
Liquidity and Capital Resources
During the twenty-six week period ended August 23,2002, the Company
generated $6,476,000 of cash from operating activities. This was primarily a
result of cash from the collection of the $6.9 million settlement agreement with
the US Navy. A partial offset was an increase in inventories evidencing a
contract mix shift to non-POC projects, whose costs are accumulated in
inventory. Versus last year's corresponding period, net cash from operations
reflected an increase of $9,176,000.
Investing activities in the twenty-six weeks ended August 23, 2002
consisted of minimal purchases for capital equipment and capitalized software.
Spending in both of these categories was down from the prior period reflecting a
basic maintenance level of capital replacement.
Financing activities consisted primarily of significant net repayments on
the Company's bank line and long term bonds and an increase in cash required to
secure international letters of credit. Since the Company's bank line expires
November 30, 2002 (see below), most new international bid bonds and letters of
credit to support new projects have required cash collaterialization.
22
Assuming that it is able to obtain an extension of or replacement for its
Revolving Credit Agreement, the Company believes that cash generated from
operating activities and available borrowings under its Revolving Credit
Agreement will be sufficient to meet its future obligations.
With respect to the Company's outstanding claims with 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 the carrying value of claims.
On May 9, 2002, the Company reached a final settlement agreement totaling
approximately $6.9 million with the U.S. Navy for all outstanding amounts. The
Company received this settlement payment on July 2, 2002. The carrying value of
this claim at the time of settlement was $5.5 million.
On March 29, 2002, the Company signed an amendment to its Revolving Credit
Agreement which extended the expiration date of the of the agreement to November
30, 2002 and increased the interest rate from (i) the bank's prime rate less a
factor ranging from 0% to 0.5% based on the Company's leverage ratio or adjusted
LIBOR to (ii) the bank's prime rate plus 1% for adjusted base rate loans or
adjusted LIBOR plus 3.5% for adjusted LIBOR rate loans. The amendment also
adjusts the Funds Flow Ratio through the expiration date of the Credit
Agreement.
On June 5, 2002 the Company's bank agreed to the terms upon which it would
agree to extend the expiration date of the Revolving Credit Agreement to
February 28, 2003. The Company is currently evaluating the terms and conditions
of this extension. Substantially all of the Company's short-term financing is
provided by this bank. As of October 7, 2002, the Company had approximately $3.6
million available under its Revolving Credit Agreement.
The Company's current bank agreement is scheduled to expire on November 30,
2002. The accompanying balance sheet as of August 23, 2002 classifies the
Company's bank borrowings under the line as long term debt, in accordance with
FASB No. 6. The Company has received term sheets from new lenders which will
allow for all the Company's bank debt to be refinanced on a long term basis.
This refinancing is currently expected to be completed before the expiration of
the Company's current bank agreement. Under the guidelines of FASB SFAS No. 6,
short term obligations which the Company intends to refinance on a long term
basis and which are supported by a financing agreement(s) that clearly permits
the Company to refinance all the short-term obligation on a long term basis on
readily determinable terms may be properly classified as long-term at the
balance sheet date.
23
Backlog
The Company's sales backlog at August 23, 2002, and February 22, 2002, for
work to be performed and revenue to be recognized under written agreements after
such dates was approximately $28,329,000 and $28,148,000 respectively. In
addition, the Company's training, maintenance and upgrade contracts backlog at
August 23, 2002, and February 22, 2002, for work to be performed and revenue to
be recognized after that date under written agreements was approximately
$3,078,000 and $1,485,000 respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
24
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Item
------ ----
3.1 Registrant's Articles of Incorporation, as amended, were filed as
Exhibit 3.1 to Registrant's Form 10-K for the year ended February 28,
1997 and are incorporated herein by reference.
3.2 Registrant's By-Laws, as amended, were filed as Exhibit 3 (ii) to
Registrant's Form 10-K for the year ended February 25, 1994, and are
incorporated herein by reference.
10.1 Registrant's 1998 Stock Option Plan was filed on October 8, 1998 on
Form S-8 and is incorporated herein by reference.
10.2 Registrant's Employee Stock Purchase Plan was filed on July 6, 1988 as
exhibit A to the Prospectus included in Registrant's Registration
Statement (File No. 33-42219) on Form S-8 and is incorporated herein by
reference. *
25
Number Item
------ ----
10.3 Registrant's Stock Award Plan adopted April 7, 1993, filed as Exhibit
10(ix) to the Registrant's Form 10-K for the fiscal year ended February
25, 1994 and is incorporated herein by reference. *
10.5 Revolving Credit Agreement, dated as of march 27, 1997, between the
Registrant and First Union National Bank was filed as Exhibit 10.6 to
Registrant's Form 10-K for the year ended February 28, 1997, and is
incorporated herein by reference.
10.6 Amendment to Revolving Credit Agreement dated as of March 29, 2002 was
filed as Exhibit 10.6 to Registrant's Annual Report on Form 10-K for
the year ended February 22, 2002, and is incorporated herein by
reference.
10.7 Stock Purchase Warrant dated as of December 26, 2001, issued by the
Registrant to ETC Asset Management, LLC was filed as Exhibit 10.7 to
Registrant's Annual Report on Form 10-K for the year ended February 22,
2002, and is incorporated herein by reference.
* Represents a management contract or a compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any current Reports on Form 8-K during the
fiscal quarter ended August 23, 2002.
26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL TECTONICS
CORPORTION
(Registrant)
Date: October 15, 2002 By: /s/ William F. Mitchell
-------------------------------
William F. Mitchell
President and Chief Executive
Officer
(Principal Executive Officer)
Date: October 15, 2002 By: /s/ Duane D. Deaner
-------------------------------
Duane D. Deaner
Chief Financial Officer
(Principal Financial and
Accounting Officer)
27
CERTIFICATIONS
I, William F. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Environmental
Tectonics Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 15, 2002 By: /s/ William F. Mitchell
-------------------------------
William F. Mitchell
President and Chief Executive
Officer
(Principal Executive Officer)
28
I, Duane D. Deaner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Environmental
Tectonics Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 15, 2002 By: /s/ Duane D. Deaner
-------------------------------
Duane D. Deaner
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29
EXHIBIT INDEX
-------------
99.1 Certification dated October 15, 2002 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
made by William F. Mitchell, Chief Executive Officer.
99.2 Certification dated October 15, 2002 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
made by Duane D. Deaner, Chief Financial Officer.
30