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 December 31, 2000
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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 Identification No.)
incorporation or organization)
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 January 31, 2001 there were 8,545,705 shares of the
Registrant's Common Stock, $.10 par value per share, issued and outstanding.
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PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(In Thousands Except Per Share Data)
(Unaudited)
Six Months Six Months
Ended Ended
12/31/00 12/31/99
-------- --------
Sales $ 15,019 $ 21,246
Cost of Sales 12,466 14,615
-------- --------
Gross Profit 2,553 6,631
-------- --------
Expenses:
Selling, General & Administrative 4,311 4,342
Independent Research and Development 232 150
-------- --------
Total Expenses 4,543 4,492
-------- --------
Operating (Loss)/Income (1,990) 2,139
--------- --------
Other Income/(Expense):
Interest Income 57 24
Interest Expense (105) (440)
Other - Net 147 (92)
-------- --------
Total Other Income/(Expense) 99 (508)
-------- --------
(Loss)/Income Before Income Taxes (1,891) 1,631
Provision for Income Taxes 120 -
--------- --------
Net (Loss)/Income $ (2,011) $ 1,631
========= ========
(Loss)/Income Per Common Share -
Basic and Assuming Dilution:
Net (Loss)/Income Per Common Share-Basic $ (0.24) $ 0.19
======== ========
Net (Loss)/Income Per Common Share-Dilutive $ (0.24) $ 0.19
======== ========
See accompanying notes to the consolidated financial statements.
2
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Three Months
Ended Ended
12/31/00 12/31/99
-------- --------
Sales $ 7,548 $ 11,058
Cost of Sales 7,154 7,390
------- --------
Gross Profit 394 3,668
------- --------
Expenses:
Selling, General & Administrative 2,112 2,318
Independent Research and Development 162 109
------- --------
Total Expenses 2,274 2,427
------- --------
Operating (Loss)/Income (1,880) 1,241
-------- --------
Other Income/(Expense):
Interest Income 20 12
Interest Expense (61) (231)
Other - Net 21 36
------- --------
Total Other Expense (20) (183)
-------- ---------
(Loss)/Income Before Income Taxes (1,900) 1,058
Provision for Income Taxes 120 -
-------- --------
Net (Loss)/Income $ (2,020) $ 1,058
========= ========
(Loss)/Income Per Common Share -
Basic and Assuming Dilution:
Net (Loss)/Income Per Common Share-Basic $ (0.25) $ 0.13
========= =======
Net (Loss)/Income Per Common Share-Dilutive $ (0.25) $ 0.12
========= =======
See accompanying notes the consolidated financial statements.
3
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited) (Audited)
12/31/00 6/30/00
-------- -------
ASSETS
Current Assets:
Cash $ - $ 2,406
Accounts Receivable 3,975 7,359
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 12,833 10,455
Inventories 3,094 2,559
Prepaid Expenses and Other 601 449
-------- ----------
Total Current Assets 20,503 23,228
-------- ----------
Property, Plant and Equipment - Net 14,240 15,476
Other Assets 350 531
-------- ----------
Total Assets $ 35,093 $ 39,235
======== ==========
Continued...
4
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands Except Share and Per Share Data)
(Unaudited) (Audited)
12/31/00 6/30/00
-------- -------
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 1,462 $ --
Accounts Payable 1,849 1,438
Accrued Expenses and Other 2,749 3,869
-------- --------
Total Current Liabilities 6,060 5,307
Deferred Income Taxes 80 80
Other Long-Term Liabilities 85 159
-------- --------
Total Liabilities 6,225 5,546
-------- --------
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; issued and outstanding,
8,545,705 and 8,481,067 854 848
Note Receivable from Stockholder (146) (146)
Capital in Excess of Par 25,389 25,211
Retained Earnings 5,680 7,776
Treasury Stock, at cost (727,000 shares) (2,909) --
-------- --------
Total Stockholders' Equity 28,868 33,689
-------- --------
Total Liabilities & Stockholders' Equity $ 35,093 $ 39,235
======== ========
See accompanying notes to the consolidated financial statements.
5
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(In Thousands)
(Unaudited)
Six Months Six Months
Ended Ended
12/31/00 12/31/99
-------- --------
Cash Flows From Operating Activities:
Net Income $(2,011) $ 1,631
Items Not Requiring Cash:
Depreciation 1,411 1,994
Amortization 38 171
(Gain)/Loss on Disposal of Equipment (137) 5
Changes in Certain Assets and Liabilities:
Accounts Receivable 3,384 37
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts (2,378) 1,598
Inventories (535) 165
Prepaid Expenses and Other (9) (18)
Accounts Payable 411 (1,704)
Accrued Expenses and Other Long-Term Liabilities (1,186) (2,407)
------- --------
Net Cash (Used In)/Provided By Operating Activities (1,012) 1,472
------- --------
Cash Flows From Investing Activities:
Proceeds from Sales of Assets 148 --
Additions to Property, Plant and Equipment (186) (792)
------- --------
Net Cash Used In Investing Activities (38) (792)
------- --------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock and
Options Exercised 176 67
Purchase of Treasury Stock (2,909) --
Dividends Paid (85) --
Debt Issue Cost for Revolving Credit Facility -- (87)
Borrowings Under Revolving Credit Facility 1,955 21,585
Repayments Under Revolving Credit Facility (493) (23,730)
------- --------
Net Cash Used In Financing Activities (1,356) (2,165)
------- --------
Net Decrease in Cash (2,406) (1,485)
Cash at Beginning of the Period 2,406 1,485
------- --------
Cash at End of the Period $ -- $ --
======= ========
Continuted....
6
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (Continued)
(In Thousands)
(Unaudited)
Six Months Six Months
Ended Ended
12/31/00 12/31/99
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 99 $ 377
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 8 $ 52
Purchase of Fixed Assets Through Capital Leases $ - $ 254
See accompanying notes to the consolidated financial statements.
7
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
12/31/00 6/30/00
-------- -------
(In Thousands)
Work in Process $ 686 $ 89
Raw Materials 4,633 4,635
------- -------
Total Gross Value 5,319 4,724
Reserves (2,225) (2,165)
------- -------
Net Value $ 3,094 $ 2,559
======= =======
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 $5.8 million at December 31, 2000. The
outstanding balance under the Credit Facility as of December 31, 2000
was approximately $1.5 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 any
outstanding balance under the Credit Facility.
For the periods ended December 31, 2000, and September 30, 2000, the
Company was not in compliance with certain financial covenants required
under the Credit Facility. The Company
8
resolved the first quarter non-compliance issue by obtaining a waiver
for the financial defaults from Mellon Bank, N.A. The Company is
currently negotiating with Mellon Bank, N.A. to amend the Credit
Facility and the December 31, 2000 covenants and anticipates that any
such amendment will result in a revision to the financial covenants
such that the Company will be in compliance with such revised financial
covenants. However, there can be no assurance that the Company will be
successful in negotiating revised covenants under the Credit Facility.
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 two 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 Wayne Office in the Consolidated
Balance Sheet at June 30, 2000 and December 31, 2000 (in thousands).
Balance at 6/30/00 $ 142
Cash Reduction Payments (93)
Non-Cash Activity (2)
--------
Balance at 12/31/00 $ 47
========
On November 1, 2000, the Company reduced its operating costs by
eliminating approximately 60 employee positions throughout the Company.
This reduction in force 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 following table sets forth
the details and the cumulative activity associated with the accrual of
these termination costs.
9
Termination Benefits Incurred $ 901
Cash Reduction Payments (300)
-------
Balance at 12/31/00 $ 601
=======
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
benefits associated with the July reduction in force totaled
approximately $517,000 and were paid primarily during the first quarter
of fiscal year 2001.
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
Six Months Ended Three Months Ended
12/31/00 12/31/99 12/31/00 12/31/99
-------- -------- -------- --------
(In Thousands)
U.S. Department of Defense
Direct $ 5,765 $ 3,262 $ 3,504 $ 1,260
Subcontract 9,254 17,984 4,044 9,798
-------- -------- ------- -------
Total Sales $ 15,019 $ 21,246 $ 7,548 $11,058
======== ======== ======= =======
Export Sales from the U.S. were not material for the three-month and
six-month periods ended December 31, 2000 and December 31, 1999. Export
sales do not include Foreign Military Sales through U.S. Government
agencies and prime contractors of $219,000 and $416,000 for the
three-month and six-month periods ended December 31, 1999,
respectively. There were no Foreign Military Sales for the three-month
and six-month periods ended December 31, 2000.
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.
Sales by Geographic Area
All of the Company's Revenues, Operating Income and Long-Lived Assets
are within the United States.
10
7. Earnings Per Share
Basic earnings per common share is computed by dividing net earnings
available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
is computed by dividing net earnings 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 per share does not assume the exercise of options
that would have an antidilutive effect on earnings per share.
The weighted-average number of common shares outstanding for each
period presented is as follows:
Six Months Ended Three Months Ended
12/31/00 12/31/99 12/31/00 12/31/99
-------- -------- -------- --------
Basic 8,223,757 8,418,345 8,067,825 8,424,088
Dilutive 8,223,757 8,470,330 8,067,825 8,472,827
11
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 six-month period ended December 31, 2000, 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 to make vendor and payroll payments, lease termination and
contract novation payments and treasury stock purchases.
The 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 six-month period ended December
31, 2000 primarily as a result of receipts on the Javelin Multi-Year
1 and F-18 programs, which were essentially completed by December
31, 2000.
Costs and estimated earnings in excess of billings increased in the
six-month period ended December 31, 2000 primarily due to the timing
of billings on the EST program and the start-up of the Javelin
Multi-Year 2 program which had significant material purchases during
the second quarter of fiscal year 2001.
Inventories increased since fiscal year end 2000 primarily due to
unabsorbed overhead, which will be charged to programs during the
balance of the year.
Prepaid expenses and other increased primarily due to the
pre-payment of certain property taxes.
Other assets decreased since fiscal year 2000 primarily due to the
amortization of loan costs and other deferred charges.
Accounts payable increased since fiscal year end 2000 due to
increased material purchases primarily on the EST and Javelin
Multi-Year 2 programs.
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 made
12
associated with the wind down of the UK division. (See Note 5 to the
Consolidated Financial Statements.)
Liquidity and Capital Resources
During the remainder of fiscal year 2001, the Company anticipates
spending approximately $300,000 for new machinery and equipment and
to continue to refurbish the Orlando facility.
For the periods ended December 31, 2000, and September 30, 2000, the
Company was not in compliance with certain financial covenants
required under the Credit Facility. The Company resolved the first
quarter non-compliance issue by obtaining a waiver for the financial
defaults from Mellon Bank, N.A. The Company is currently negotiating
with Mellon Bank, N.A. to amend the Credit Facility and the December
31, 2000 covenants and anticipates that any such amendment will
result in a revision to the financial covenants such that the
Company will be in compliance with such revised financial covenants.
In the event the Company is not successful in negotiating revised
covenants with its current lender, the debt may become immediately
due and payable. In such an event, the Company would seek
alternative sources of financing or capital funding to continue to
fund operations. However, there can be no assurance that the Company
could obtain such financing.
Other than as stated above, the Company currently has no other
material commitments for capital expenditures. Management believes
that if it is successful in revising the financial covenants under
the Credit Facility such that the Company will be in compliance with
such revised financial covenants, 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. However, there can be no assurance that the
Company will be successful in negotiating revised covenants under
the Credit Facility.
b) Material Changes in Results of Operations.
Sales decreased 32% or $3.5 million and 29% or $6.2 million for the
three-month and six-month periods ended December 31, 2000,
respectively, as compared to the same periods ended December 31,
1999. The reduction in sales is primarily due to the completion of
the Javelin Multi-Year 1 and AGTS contracts, and the delay in the
award of the Javelin Multi-Year 2 program.
Gross profit decreased 89% and 61% during the three-month and
six-month periods ended December 31, 2000, respectively, as compared
to the same periods ended December 31, 1999. In addition, gross
profit as a percentage of sales decreased to 3% and 17% during the
three-month and six-month periods ended December 31, 2000,
respectively, as compared to 33% and 31% for the same periods ended
December 31, 1999. The decreases are due to reduced volume and
higher overhead absorption rates. The overhead rate increased
primarily due to the $1.4 million of severance costs incurred in
fiscal year 2001 and a 40% decrease in projected direct labor base.
Also, additional losses were recorded in fiscal year 2001 related to
the development phase of the EST program.
13
Interest expense decreased 74% and 76% during the three-month and
six-month periods ended December 31, 2000, respectively, as compared
to the same periods ended December 31, 1999. 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 42% and 260% during the three-month and
six-month periods ended December 31, 2000, respectively, as compared
to the same period ended December 31, 1999. 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
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 any 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 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.
14
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on November 8, 2000, the
following proposals were adopted by the vote specified below:
Votes Votes Broker
Proposal For Against Abstain NonVotes
(1) To elect the Board of Directors
Julian J. Demora 7,546,921 61,408 - 196,221
James C. Garrett 7,607,466 863 - 135,676
James R. Henderson 7,602,103 6,226 - 141,039
Jesse L. Krasnow 7,607,084 1,245 - 136,058
Warren G. Lichtenstein 7,548,390 59,939 - 194,752
Merrill A. McPeak 7,517,824 90,505 - 225,318
Robert F. Mehmel 7,601,203 7,126 - 141,939
(2) To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants for the fiscal year ending June
30, 2001.
7,713,546 19,583 10,013 396,697
15
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: February 6, 2001 /s/ Melissa Van Valkenburgh
---------------------------
Melissa Van Valkenburgh
Chief Financial Officer