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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-8988
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ECC INTERNATIONAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-1714658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 WEST OAK RIDGE ROAD, ORLANDO, FL 32809-3803
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(Address of principal executive offices) (Zip Code)
(407) 859-7410
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of May 10, 2001 there were 7,823,785 shares of the Registrant's
Common Stock, $.10 par value per share outstanding.
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PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(In Thousands Except Per Share Data)
(Unaudited)
Nine Months Nine Months
Ended Ended
3/31/01 3/31/00
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Sales $ 20,768 $ 31,134
Cost of Sales 17,352 20,573
-------- --------
Gross Profit 3,416 10,561
-------- --------
Expenses:
Selling, General & Administrative 6,755 6,677
Independent Research and Development 537 286
-------- --------
Total Expenses 7,292 6,963
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Operating (Loss)/Income (3,876) 3,598
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Other Income/(Expense):
Interest Income 59 29
Interest Expense (275) (597)
Other - Net 145 (88)
-------- --------
Total Other Income/(Expense) (71) (656)
-------- --------
(Loss)/Income Before Income Taxes (3,947) 2,942
Provision for Income Taxes 120 --
-------- --------
Net (Loss)/Income $ (4,067) $ 2,942
======== ========
(Loss)/Income Per Common Share -
Basic and Assuming Dilution:
Net (Loss)/Income Per Common Share-Basic $ (0.49) $ 0.35
======== ========
Net (Loss)/Income Per Common Share-Dilutive $ (0.49) $ 0.35
======== ========
See accompanying notes to the consolidated financial statements.
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Three Months
Ended Ended
3/31/01 3/31/00
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Sales $ 5,749 $ 9,888
Cost of Sales 4,886 5,958
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Gross Profit 863 3,930
------- -------
Expenses:
Selling, General & Administrative 2,444 2,334
Independent Research and Development 305 137
------- -------
Total Expenses 2,749 2,471
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Operating (Loss)/Income (1,886) 1,459
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Other Income/(Expense):
Interest Income 2 5
Interest Expense (170) (158)
Other - Net (1) 4
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Total Other Expense (169) (149)
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(Loss)/Income Before Income Taxes (2,055) 1,310
Provision for Income Taxes -- --
------- -------
Net (Loss)/Income $(2,055) $ 1,310
======= =======
(Loss)/Income Per Common Share -
Basic and Assuming Dilution:
Net (Loss)/Income Per Common Share-Basic $ (0.26) $ 0.16
======= =======
Net (Loss)/Income Per Common Share-Dilutive $ (0.26) $ 0.15
======= =======
See accompanying notes to the consolidated financial statements.
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited) (Audited)
3/31/01 6/30/00
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ASSETS
Current Assets:
Cash $ -- $ 2,406
Accounts Receivable 5,405 7,359
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 9,899 10,455
Inventories 3,315 2,559
Prepaid Expenses and Other 558 449
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Total Current Assets 19,177 23,228
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Property, Plant and Equipment - Net 13,718 15,476
Other Assets 158 531
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Total Assets $33,053 $39,235
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Continued...
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands Except Share and Per Share Data)
(Unaudited) (Audited)
3/31/01 6/30/00
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LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 2,520 $ --
Accounts Payable 1,456 1,438
Accrued Expenses and Other 2,123 3,869
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Total Current Liabilities 6,099 5,307
Other Long-Term Liabilities 133 239
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Total Liabilities 6,232 5,546
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COMMITMENTS AND CONTINGENCIES
Stockholders' Equity:
Preferred Stock, $.10 par; 1,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $.10 par; 20,000,000
shares authorized; 8,550,785 (8,481,067 at 6/30/00)
shares issued and 7,823,785 (8,481,067 at 6/30/00)
shares outstanding 855 848
Note Receivable from Stockholder (168) (146)
Capital in Excess of Par 25,418 25,211
Retained Earnings 3,625 7,776
Treasury Stock, at cost (727,000 shares) (2,909) --
-------- --------
Total Stockholders' Equity 26,821 33,689
-------- --------
Total Liabilities & Stockholders' Equity $ 33,053 $ 39,235
======== ========
See accompanying notes to the consolidated financial statements.
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(In Thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
3/31/01 3/31/00
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Cash Flows From Operating Activities:
Net (Loss)/Income $ (4,066) $ 2,942
Items Not Requiring Cash:
Depreciation 2,058 2,979
Amortization 113 311
(Gain)/Loss on Disposal of Equipment (135) 5
Changes in Certain Assets and Liabilities:
Accounts Receivable 1,933 (4,386)
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 556 2,497
Inventories (756) 951
Prepaid Expenses and Other 151 (279)
Accounts Payable 17 (2,232)
Accrued Expenses and Other Long-Term Liabilities (1,843) (2,793)
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Net Cash Used In Operating Activities (1,972) (5)
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Cash Flows From Investing Activities:
Proceeds from Sales of Assets 149 --
Additions to Property, Plant and Equipment (314) (917)
-------- --------
Net Cash Used In Investing Activities (165) (917)
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Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock and
Options Exercised 205 67
Purchase of Treasury Stock (2,909) --
Dividends Paid (85) --
Debt Issue Cost for Revolving Credit Facility -- (87)
Borrowings Under Revolving Credit Facility 10,833 30,542
Repayments Under Revolving Credit Facility (8,313) (31,085)
-------- --------
Net Cash Used In Financing Activities (269) (563)
-------- --------
Net Decrease in Cash (2,406) (1,485)
Cash at Beginning of the Period 2,406 1,485
-------- --------
Cash at End of the Period $ -- $ --
======== ========
Continued....
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Continued)
(In Thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
3/31/01 3/31/00
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Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $262 $555
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 12 $ 71
Purchase of Fixed Assets Through Capital Leases $ -- $254
See accompanying notes to the consolidated financial statements.
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements are unaudited and
have been prepared by ECC International Corp. (the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission.
The June 30, 2000 consolidated balance sheet was derived from audited
consolidated financial statements but does not include all disclosures
required by generally accepted accounting principles. In the opinion of
management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial
position, results of operations, comprehensive income and cash flows
for the interim presented. These unaudited consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000.
The Company has no other Comprehensive Income other than Net Income.
2. Inventories
3/31/01 6/30/00
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(In Thousands)
Work in Process $ 937 $ 89
Raw Materials 4,563 4,635
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Total Gross Value 5,500 4,724
Reserves (2,184) (2,165)
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Net Value $ 3,316 $ 2,559
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Work in process inventory is valued using the specific identification
cost method, but not in excess of net realizable value. Raw materials
are valued at the lower of average cost or market. Reserve balances are
provided for excess and obsolete inventories.
3. Debt
On June 24, 1999, the Company entered into a revolving Credit Facility
("Credit Facility") with Mellon Bank, N.A. totaling $12.5 million and
expiring on June 24, 2003. Available borrowings are based on a formula
of accounts receivables and property, as defined in the Credit
Facility, and were approximately $4.8 million at March 31, 2001. The
outstanding balance under the Credit Facility as of March 31, 2001 was
approximately $2.5 million.
The Credit Facility includes a subjective acceleration clause as well
as a lockbox requirement under the control of the lender, whereby all
collections of trade receivables are used to immediately reduce
outstanding balances under the Credit Facility.
The Company was not in compliance with certain financial covenants
required under the Credit Facility for the periods ended September 30,
2000, December 31, 2000, and March 31, 2001. The Company resolved the
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non-compliance issue for the first and second quarters by obtaining
amendments from Mellon Bank, N.A. The Company is currently negotiating
with Mellon Bank, N.A., to amend the Credit Facility in order to
resolve the March 31, 2001 non-compliance issue and expects to complete
negotiations before the end of May 2001.
4. Income Taxes
During the second quarter of fiscal year 2001, the Company recorded a
tax provision of $120,000. This provision was recorded due to a
valuation allowance for an alternative minimum tax credit which is
necessary due to the uncertainty as to the ultimate realization of the
tax credit. In addition, the Company has approximately $5.4 million of
cumulative federal net operating loss carryforwards, which expire in
2013 and 2018. This amount is prior to any potential net operating
losses generated in the current year.
5. Unusual Expenses
During fiscal year 1999, the Company implemented various cost reduction
initiatives and changes in management including the relocation of the
corporate headquarters and Instructional System Development Group from
Wayne, Pennsylvania to the Company's principal System Design and
Production Center in Orlando, Florida. The relocation was completed in
September 1998. In addition, as a result of recurring net losses in the
UK operations, the Board of Directors announced, during the first
quarter of fiscal year 1999, the approval of a plan to wind-down and
discontinue the UK operations, which was completed in May 1999. Charges
totaling $3.2 million in 1999 related primarily to employee termination
benefits and lease termination costs. There were no additional charges
during fiscal year 2000 or the first three quarters of fiscal year
2001.
The following table sets forth the details and the cumulative activity
in the remaining accrual associated with the wind-down of the UK
operations and relocation of the Pennsylvania office in the
Consolidated Balance Sheet at June 30, 2000 and March 31, 2001 (in
thousands):
Facility Lease Obligations
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Balance at 6/30/00 $ 142
Cash Reduction Payments (140)
Non-Cash Activity (2)
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Balance at 9/30/00 $ --
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On November 1, 2000, the Company reduced its operating costs by
eliminating approximately 60 employee positions throughout the Company.
This reduction affected approximately 24% of all employees and
represents approximately $2.8 million in annual compensation costs. The
employee termination benefits associated with the reduction in force
totaled approximately $901,000 of which approximately $839,000 and
$62,000 were recorded to cost of sales and selling, general and
administrative expenses, respectively.
The balance of the accrued termination benefits is included in Accrued
Expenses and Other. In addition to the November reduction in force, the
Company previously terminated approximately 45 employees on July 14,
2000 affecting approximately 15% of all employees and approximately
$1.5 million in annual compensation costs. The employee termination
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benefits associated with the July reduction in force totaled
approximately $517,000 and were paid primarily during the first quarter
of fiscal year 2001.
The following table sets forth the details and the cumulative activity
associated with the accrual of these termination costs (in thousands):
Termination Benefits Incurred $ 1,418
Cash Reduction Payments (1,239)
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Balance at 3/31/01 $ 179
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6. Business Segment Information
The Company operates in one segment-training. This segment includes the
design and manufacture of training simulators.
Sales by Class of Customer (in thousands):
Nine Months Ended Three Months Ended
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3/31/01 3/31/00 3/31/01 3/31/00
------- ------- ------- -------
U.S. Department of Defense
Direct $ 9,268 $ 4,075 $3,504 $ 813
Subcontract 11,500 27,059 2,245 9,075
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Total Sales $20,768 $31,134 $5,749 $9,888
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Export Sales from the U.S. were not material for the three-month and
nine-month periods ended March 31, 2001 and March 31, 2000. Export
sales do not include Foreign Military Sales through U.S. Government
agencies and prime contractors of $416,000 for the nine-month period
ended March 31, 2000. There were no Foreign Military Sales for the
three-month and nine-month periods ended March 31, 2001.
Since a substantial portion of the Company's revenues are attributable
to long-term contracts with various government agencies, any factor
affecting procurement of long-term government contracts such as changes
in government spending, cancellation of weapons programs and delays in
contract awards could have a material impact on the Company's financial
condition and results of operations.
7. Earnings Per Share
Basic earnings/(loss) per common share is computed by dividing net
earnings/(loss) available to common stockholders by the
weighted-average number of common shares outstanding during the period.
Diluted earnings/(loss) per share is computed by dividing net
earnings/(loss) available to common stockholders by the
weighted-average number of common shares outstanding during the period
adjusted for the number of shares that would have been outstanding if
the dilutive potential common shares had been issued. The diluted
earnings earnings/(loss) per share does not assume the exercise of
options that would have an antidilutive effect on earnings
earnings/(loss) per share.
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The weighted-average number of common shares outstanding for each
period presented is as follows:
Nine Months Ended Three Months Ended
---------------------- ----------------------
3/31/01 3/31/00 3/31/01 3/31/00
------- ------- ------- -------
Basic 8,327,241 8,428,796 7,821,553 8,449,888
Dilutive 8,327,241 8,479,979 7,821,553 8,499,917
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended
to identify forward-looking statements. There are a number of factors
that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Operating Results."
a) MATERIAL CHANGES IN FINANCIAL CONDITION
During the nine-month period ended March 31, 2001, the Company's
principal source of cash was collections on accounts receivable and
borrowings on the Credit Facility. The principal uses of these funds
were for vendor and payroll payments, lease termination and contract
novation payments and treasury stock purchases.
The Company's cash balance decreased since fiscal year end 2000
primarily due to the repurchase of stock in the first two quarters of
fiscal year 2001.
Accounts receivable decreased in the nine-month period ended March 31,
2001 primarily as a result of receipts on the Javelin Multi-Year 1 and
F-18 programs, which were essentially completed by December 31, 2000.
Property, plant and equipment decreased since fiscal year end 2000
primarily due to disposals of equipment and minimal new assets
purchased during fiscal year 2001.
Accrued expenses decreased since fiscal year end 2000 primarily as a
result of the payment of incentives earned in fiscal year 2000 as well
as novation and lease termination payments associated with the wind
down of the UK division. (See Note 5 to the Consolidated Financial
Statements.) In addition, accrued wages decreased since fiscal year end
2000 primarily due to the reductions in workforce during the first half
of fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
In April 2001, the Company signed a purchase agreement for the sale of
its facilities and is negotiating a long-term lease back of a portion
of the space. This transaction may close prior to fiscal 2001 year end.
During the remainder of fiscal year 2001, the Company anticipates
spending approximately $500,000 for refurbishment of the Orlando
facility and new machinery and equipment.
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Other than as stated above, the Company currently has no other material
commitments for capital expenditures. Assuming that the Company and
Mellon Bank, N.A., amend the Credit Facility to resolve the March 31,
2001 non-compliance issue, Management believes that the funds available
under the Credit Facility and the Company's projected cash flows
(including funds generated from operations) will be sufficient to meet
planned capital commitments and working capital requirements for the
foreseeable future.
b) MATERIAL CHANGES IN RESULTS OF OPERATIONS.
Sales decreased 42% or $4.1 million and 33% or $10.4 million for the
three-month and nine-month periods ended March 31, 2001, respectively,
as compared to the same periods ended March 31, 2000. The reduction in
sales is primarily due to the completion of the Javelin Multi-Year 1,
F-18, UK Combined Arms Tactical Trainer (UKCATT) and AGTS contracts,
and the delay in the award of the Javelin Multi-Year 2 program.
Gross profit as a percentage of net sales was 15% and 16% for the
three-month and nine-month periods ended March 31, 2001, respectively,
as compared to 40% and 34% for the same periods ended March 31, 2000.
The lower margins in fiscal year 2001 are primarily a result of reduced
volume and higher overhead absorption rates. The overhead rate
increased primarily due to $1.4 million of severance cost incurred in
fiscal year 2001 and a 36% decrease in the projected direct labor base.
Also, additional losses were recorded in fiscal year 2001 related to
completion of the EST system development.
Independent research and development expenses increased 124% and 88%
for the three-month and nine-month periods ended March 31, 2001,
respectively, due primarily to research in the area of new simulation
technologies.
Interest expense decreased 54% during the nine-month period ended March
31, 2001 as compared to the same period ended March 31, 2000. This
decrease is primarily a result of the Company maintaining a positive
cash balance for the first five months of fiscal year 2001.
Other-Net increased 265% during the nine-month period ended March 31,
2001 as compared to the same period ended March 31, 2000. This change
is primarily a result of gains on the sale of certain fixed assets and
translation gains on foreign exchange transactions in fiscal year 2001,
whereas the Company suffered translation losses in fiscal year 2000.
The tax provision recorded during the second quarter of fiscal year
2001 is due to a valuation allowance for an alternative minimum tax
credit of $120,000 paid for the fiscal year ended June 30, 2000. This
valuation allowance was recorded due to the uncertainty as to the
ultimate realization of the tax credit. In addition, the Company has
approximately $5.4 million of cumulative federal net operating loss
carryforwards, which expire in 2013 and 2018. This amount is prior to
any potential net operating losses generated in the current year.
c) CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking
statements made in this Quarterly Report on Form 10-Q and presented
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elsewhere by management from time to time. All forward-looking
statements included in this Form 10-Q are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update such forward-looking statements.
A number of uncertainties exist that could affect the Company's future
operating results including, without limitation, general economic
conditions, changes in government spending, borrowing availability
under and compliance with the Credit Facility, cancellation of weapons
programs, delays in contract awards, delays in the acceptance process
of contract deliverables, the Company's continued ability to develop
and introduce products, the introduction of new products by
competitors, pricing practices of competitors, the cost and
availability of parts and the Company's ability to control costs.
To date, a substantial portion of the Company's revenues have been
attributable to long-term contracts with various government agencies.
As a result, any factor adversely affecting procurement of long-term
government contracts could have a material adverse effect on the
Company's financial condition and results of operations.
Because of these and other factors, past financial performance should
not be considered an indication of future performance. The Company's
future quarterly operating results may vary significantly. Investors
should not use historical trends to anticipate future results and
should be aware that the trading price of the Company's Common Stock
may be subject to wide fluctuations in response to quarterly variations
in operating results and other factors, including those discussed
above.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk on its borrowings under the Credit
Facility. The Credit Facility has a floating interest rate based on prevailing
market rates. Accordingly, the carrying value of the debt is generally not
affected by fluctuations in interest rates. However, such changes in interest
rates could affect future interest expense and hence earnings and cash flows.
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PART II. OTHER INFORMATION
ECC INTERNATIONAL CORP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EXHIBIT 99.1 - Purchase and Sale Agreement between ECC
International Corp., Panther Oak Ridge, Inc., and Oak Ridge
Investment Associates, LLC., signed March 27, 2001.
EXHIBIT 99.2 - Employment Agreement between ECC International
Corp., and James C. Garrett dated May 3, 2001.
EXHIBIT 99.3 - Change of Control Contract between ECC
International Corp., and James C. Garrett dated, May 3, 2001.
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECC INTERNATIONAL CORP.
Date /s/ MELISSA VAN VALKENBURGH
----------------------- ---------------------------------
Melissa Van Valkenburgh
Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECC INTERNATIONAL CORP.
Date 5-15-01 /s/ MELISSA VAN VALKENBURGH
----------------------- ---------------------------------
Melissa Van Valkenburgh
Chief Financial Officer
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