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 September 30, 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 _________________________
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 November 9, 2001 there were 7,831,573 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
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Three Months
Ended Ended
9/30/01 9/30/00
------------ ------------
Sales $ 6,147 $ 7,471
Cost of Sales 4,430 5,312
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Gross Profit 1,717 2,159
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Expenses:
Selling, General & Administrative 1,797 2,199
Independent Research and Development 484 70
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Total Expenses 2,281 2,269
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Operating Loss (564) (110)
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Other Income/(Expense):
Interest Income 8 37
Interest Expense (24) (44)
Other - Net 44 126
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Total Other Income/(Expense) 28 119
------- -------
(Loss)/Income Before Income Taxes (536) 9
Provision for Income Taxes -- --
------- -------
Net (Loss)/Income $ (536) $ 9
======= =======
Income Per Common Share -
Basic and Diluted:
Net (Loss)/Income Per Common Share-Basic/Diluted $ (0.07) $ 0.00
======= =======
See accompanying notes to the consolidated financial statements.
2
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited) (Audited)
9/30/01 6/30/01
----------- ---------
ASSETS
Current Assets:
Cash $ 1,414 $ 39
Accounts Receivable 3,947 4,521
Cost and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 7,073 8,283
Inventories 1,217 1,154
Prepaid Expenses and Other 286 307
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Total Current Assets 13,937 14,304
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Property, Plant and Equipment - Net 13,013 13,352
Other Assets 86 116
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Total Assets $27,036 $27,772
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Continued ......
3
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands Except Share and Per Share Data)
(Unaudited) (Audited)
9/30/01 6/30/01
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LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ -- $ 157
Accounts Payable 1,491 1,829
Accrued Expenses and Other 2,243 1,927
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Total Current Liabilities 3,734 3,913
Deferred Income Taxes 61 61
Other Long-Term Liabilities -- 26
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Total Liabilities 3,795 4,000
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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; issued and outstanding,
8,558,573 and 7,831,573 (8,557,285 and 7,830,285 at 6/30/01) 856 856
Note Receivable from Stockholder (168) (168)
Capital in Excess of Par 25,445 25,441
Retained Earnings 17 552
Treasury Stock, at cost (727,000 shares) (2,909) (2,909)
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Total Stockholders' Equity 23,241 23,772
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Total Liabilities & Stockholders' Equity $ 27,036 $ 27,772
======== ========
See accompanying notes to the consolidated financial statements.
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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In Thousands)
(Unaudited)
Three Months Three Months
Ended Ended
9/30/01 9/30/00
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Cash Flows From Operating Activities:
Net (Loss)/Income $ (536) $ 9
Items Not Requiring Cash:
Depreciation 528 712
Amortization 25 137
Gain on Disposal of Equipment (4) (119)
Changes in Certain Assets and Liabilities:
Accounts Receivable 574 1,757
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 1,210 (989)
Inventories (63) (372)
Prepaid Expenses and Other 26 (3)
Accounts Payable (338) (729)
Accrued Expenses and Other Long-Term Liabilities 295 (837)
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Net Cash Provided by/(Used In) Operating Activities 1,717 (434)
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Cash Flows From Investing Activities:
Proceeds from Sales of Assets 4 120
Additions to Property, Plant and Equipment (189) (111)
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Net Cash Provided/(Used In) by Investing Activities (185) 9
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Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock and
Options Exercised -- 1
Purchase of Treasury Stock -- (1,407)
Dividends Paid -- (85)
Borrowings Under Revolving Credit Facility 4,873 --
Repayments Under Revolving Credit Facility (5,030) --
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Net Cash Used In By Financing Activities (157) (1,491)
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Net Increase/(Decrease) in Cash 1,375 (1,916)
Cash at Beginning of the Period 39 2,406
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Cash at End of the Period $ 1,414 $ 490
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Continued.....
5
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Continued)
(In Thousands)
(Unaudited)
Three Months Three Months
Ended Ended
9/30/01 9/30/00
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Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 24 $ 40
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 4 $ 4
See accompanying notes to the consolidated financial statements.
6
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. 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 periods 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, 2001.
The Company has no other Comprehensive Income other than Net Income.
2. Inventories
(In Thousands)
9/30/01 6/30/01
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Work in Process $ 161 $ 97
Raw Materials 3,898 3,869
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Total Gross Value 4,059 3,966
Reserves for Excess/Obsolete (2,842) (2,812)
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Net Value $ 1,217 $ 1,154
======= =======
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. The reserve for excess and
obsolete inventory is based on an analysis of the specific parts, which
includes an assessment of their potential use on future programs.
3. Debt
On June 24, 1999, the Company entered into a revolving credit facility
("Credit Facility") with Mellon Bank, N.A., which was subsequently
purchased by LaSalle Business Credit, totaling $12.5 million and expiring
on June 24, 2003. Available borrowings are based on a formula of
receivables and property, as defined in the Credit Facility. As of
September 30, 2001, there was no outstanding balance under the Credit
Facility.
The Company was not in compliance with certain financial covenants
required under the Credit Facility during fiscal year 2001. On November
5, 2001, the Credit Facility was amended whereby the Company paid a fee
of $40,000 to resolve the prior non-compliance issues, adjust the future
financial covenant requirements, reduce the line of credit from $12.5
million to $5.0 million and revise the fee structure. As of September 30,
2001, the Company is in compliance with the amended covenants. Based on
the positive cash balance since July 13, 2001 and the positive cash
projections for the balance of fiscal year 2002, management believes that
operational cash requirements can be funded internally.
7
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.
4. Income Taxes
The Company has approximately $12.3 million of cumulative federal net
operating loss carryforwards, which expire between 2019 and 2021. In
addition, the Company had available at June 30, 2001, cumulative net
operating loss carryforwards of $12.8 million for Florida state income
tax purposes, which expire between 2019 and 2021. This amount is prior to
any potential net operating losses generated in the current year.
5. Unusual Expenses
During fiscal year 2001, the Company reduced its operating costs by
eliminating approximately 45 employees or 15% of the total number of
employees during the first quarter and 60 employees or 24% of the total
number of employees during the second quarter. Termination benefits
associated with the reductions were approximately $517,000 in the first
quarter and approximately $901,000 in the second quarter. Annual
compensation costs associated with these actions were $1.5 million and
$2.8 million, respectively.
On September 27, 2001, the Company further reduced its operating costs by
eliminating approximately 35 employees or 20% of the total number of
employees. Annual compensation costs associated with these actions were
approximately $2.2 million. The employee termination benefits associated
with the reduction in workforce totaled approximately $272,000, of which
approximately $253,000 was recorded to cost of sales and $19,000 to
selling, general and administrative expenses.
The following table sets forth the details and the cumulative activity
associated with the accrual of these termination costs (in thousands):
Accrued Employee Termination Benefits at 6/30/01 $ 105
Employee Termination Benefits Incurred 272
Cash Payments (93)
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Accrued Employee Termination Benefits at 9/30/01 $ 284
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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)
Three Months Ended
9/30/01 9/30/00
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U.S. Department of Defense
Direct $ 1,571 $ 2,260
Subcontract 4,576 5,211
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Total Sales $ 6,147 $ 7,471
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Export Sales from the U.S. were not material for the three-month periods
ended September 30, 2001 and September 30, 2000. There were no Foreign
Military Sales for the three-month periods ended September 30, 2001 and
September 30, 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.
7. Earnings/(Loss) 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
resulting from the exercise of stock options had been issued. The diluted
earnings/(loss) per share does not assume the exercise of stock options
that would have an antidilutive effect on earnings/(loss) per share.
The Company's dilutive potential common shares consist of stock options.
In calculating diluted earnings per share, approximately 57,000 dilutive
potential common shares were included for the three-month period ended
September 30, 2000. The number of potentially dilutive common shares for
the three-month period ended September 30, 2001 was 49,500; however they
were not included in computing earnings per share since they would have
an anti-dilutive effect.
9
The number of shares outstanding for each period presented is as follows:
Three-Months Ended
9/30/01 9/30/00
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Basic 7,830,299 8,379,690
Dilutive 7,830,299 8,437,062
8. Commitments and Contingencies
During fiscal year 2001, the Company announced the formation of a
strategic planning committee to evaluate various strategic alternatives
for enhancing stockholder value including a potential sale of the
Company. In order to retain critical employees, retention agreements were
implemented with 30 key employees whereby an incentive of 15-20% of their
salaries would be payable in two increments: half at the date of the sale
of the Company and half six months after the close of the sale. These
payments totaling $500,000 will be recorded in the event the Company is
sold.
The Company is party to various legal proceedings arising from normal
business activity. Management believes that the ultimate resolution of
these matters will not have an adverse material effect on the Company's
financial condition or results of operations.
9. New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets (SFAS
143), and Statement of Financial Accounting Standards No. 144, Asset
Impairment and Disposal Issues (SFAS 144). SFAS 143 addresses the
diversity in practice for recognizing asset retirement obligations. SFAS
143 is effective for fiscal years beginning after June 15, 2002. SFAS 144
requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell. SFAS
144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of and amends Accounting
Principles Board Opinion No. 30 (APB 30) Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company
does not expect a significant impact on future financial results as a
result of adopting these standards.
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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 three-month period ended September 30, 2001, the Company's
principal source of cash was from operations. The Company's cash balance
increased by $1,375,000 since fiscal year end 2001 primarily due to
collections on accounts receivables.
LIQUIDITY AND CAPITAL RESOURCES
The Company was not in compliance with certain financial covenants
required under the Credit Facility during fiscal year 2001. On November
5, 2001, the Credit Facility was amended whereby the Company paid a fee
of $40,000 to resolve the prior non-compliance issues, adjust the future
financial covenant requirements, reduce the line of credit from $12.5
million to $5.0 million and revise the fee structure. As of September 30,
2001, the Company is in compliance with the amended covenants. Based on
the positive cash balance since July 13, 2001 and the positive cash
projections for the balance of fiscal year 2002, management believes that
operational cash requirements can be funded internally.
The Company considers the capacity of its Orlando, Florida facilities to
exceed its present needs and is in the process of attempting to sell the
facilities to a third party with a long term leaseback of 75,000 to
100,000 square feet. The Company is also considering selling the facility
and moving to a new location. At this time, the Company has no
agreements, commitments or understandings with respect to the sale of the
facility.
During the remainder of fiscal year 2002, the Company currently
anticipates spending approximately $300,000 for refurbishment of the
Orlando facility and new machinery and equipment.
During fiscal year 2001, the Company reduced its operating costs by
eliminating approximately 105 employees or 35% of the total number of
employees. Termination benefits associated with the reductions were
approximately $1.4 million and annual compensation costs associated with
these actions were $4.3 million. All employee termination benefits were
paid by June 30, 2001, with the exception of $105,000.
11
On September 27, 2001, the Company further reduced its operating costs by
eliminating approximately 35 employees or 20% of the total number of
employees. Annual compensation costs associated with these actions were
approximately $2.2 million. The employee termination benefits associated
with the reduction in workforce totaled approximately $272,000, of which
approximately $253,000 was recorded to cost of sales and $19,000 to
selling, general and administrative expenses.
Management's plans to improve future profitability include: (1) a
continuation of both direct and indirect cost reduction initiatives and
improvement of operating performance, (2) an aggressive focus on
obtaining follow-on awards to existing business, and (3) the
implementation of strategies to procure new business and penetrate new
markets.
Other than as stated above, the Company currently has no other material
commitments for capital expenditures. Management believes that with the
funds available under its projected cash flows, the Company will have
sufficient resources to meet planned operating commitments for the
foreseeable future.
b) MATERIAL CHANGES IN RESULTS OF OPERATIONS.
Sales decreased 18% or $1.3 million for the three-month period ended
September 30, 2001, compared to the same period ended September 30, 2000
due primarily to the completion of the Javelin Multi-year 1 program and
an F-18 E/F maintenance trainer program.
Selling, general and administrative expenses decreased 18% or $402,000
during the three-month period ended September 30, 2001, compared to the
same period ended September 30, 2000, due primarily to decreased bid and
proposal activity and the reductions in workforce that took place during
the first and second quarter of fiscal year 2001.
Independent research and development expenses increased $414,000 or 591%
for the three-month period ended September 30, 2001, compared to the same
period ended September 30, 2000, due primarily to research in the area of
new simulation products and technologies for potential application to the
Company's products.
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 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
12
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.
13
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.
14
PART II. OTHER INFORMATION
ECC INTERNATIONAL CORP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 99.1
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Forbearance Agreement and Fourth Amendment to Loan and
Security Agreement by and among ECC International Corp.,
ECC Vending Corp., Educational Computer Corporation
International, and Standard Federal Bank National
Association dated November 5, 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 November 14, 2001 /S/ Melissa Van Valkenburgh
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Melissa Van Valkenburgh
Chief Financial Officer
16