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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 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
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Commission file number 001-8988
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ECC INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 23-1714658
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(State of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2001 West Oak Ridge Road, Orlando, Florida 32809-3803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 859-7410
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.10 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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 the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 17, 2001, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $16,586,570. (This figure was
computed on the basis of the closing price for the Registrant's Common Stock on
September 17, 2001, using the number of shares held by stockholders who are not
officers, directors or record holders of 10% or more of the Registrant's
outstanding Common Stock. The characterization of such officers, directors and
10% stockholders as affiliates is for purposes of the computation only and
should not be construed as an admission for any purpose whatsoever that any of
such persons are, in fact, affiliates of the Registrant.)
As of September 17, 2001, there were 7,830,285 shares of the Registrant's Common
Stock, $0.10 par value per share, outstanding.
Information with respect to directors in Item 10 and the information required by
Items 11-13 is incorporated by reference to the definitive proxy statement of
the Registrant to be filed with the Commission in connection with its Annual
Meeting of Stockholders scheduled for November 30, 2001.
The Exhibit Index is located on pages 38 through 41.
PART I
ITEM 1 BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
(1) ECC International Corp, a Delaware corporation organized in 1969 (the
"Company" or "ECC"), designs, manufactures and markets computer
controlled simulators used primarily for training personnel to perform
maintenance and operator procedures on military weapons systems. The
Company's simulators measure performance as a trainee operates the
equipment, conducts equipment tests, diagnoses programmed malfunctions
and takes corrective actions. The Company's equipment is used by all
four branches of the U.S. Department of Defense as well as numerous
foreign governments for familiarization, operator training and
maintenance training for aircraft, missiles, tanks, combat vehicles and
small arms weapons. The Company's systems also have application in
industrial and vocational training programs, such as control room
simulators for power plants and law enforcement training.
The Company also offers training and educational products to purchasers
of its simulators and to others. These products consist of the
development of training programs and curricula, development of
multimedia programs and computer based training, preparation of
training handbooks and instruction on the use of the Company's
simulators.
The Company designs and manufactures substantially all of the
components of its simulator systems, with the exception of certain
equipment such as commercially available computers, CRTs, disk drives
and printers, which it purchases. The Company is not dependent on any
one supplier for raw materials or computer related equipment used in or
sold as part of its systems. The Company's systems are marketed through
a direct sales force and independent international sales
representatives.
The Company was not in compliance with certain financial covenants
during fiscal year 2001. The Company is in the process of resolving the
non-compliance issues by negotiating amended covenants and a reduced
Credit Facility limit. Negotiations are expected to be completed by
November 1, 2001. Based on the Company's positive cash balance since
July 13, 2001, and the positive cash projections for the balance of
fiscal year 2002, it appears that operational cash requirements can be
funded internally and minimal borrowings are required.
During fiscal year 1999, the Company completed the wind-down of its
U.K. operation, ECC Simulation Limited (the "U.K. operation"). See Note
15 in the Notes to the Consolidated Financial Statements.
During fiscal year 1998, the Company completed the sale of the fixed
assets, inventory and trade receivables of the Company's vending
operation. The sale of the vending operation was accounted for as a
discontinued operation and accordingly, the vending operations were
segregated in the accompanying Selected Financial Data.
(2) Not applicable
2
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates only in the training segment. This segment
includes the design and manufacture of training simulators and the
development of training programs and curricula. See Note 12 in the
Notes to the Consolidated Financial Statements.
(C) NARRATIVE DESCRIPTION OF BUSINESS
(1) (i) Principal Products, Services and Revenue Sources
See the information set forth above in Item 1(a) and
(b).
(ii) New Products
Not applicable.
(iii) Raw Materials
The components used in training systems, as well as
the parts used to manufacture the computers and
devices used in the Company's systems are purchased
from original equipment manufacturers, electronics
supply firms and others. The Company has no reason to
believe that it cannot continue to obtain such
components, or suitable substitutes, as it may
require.
(iv) Patents, Trademarks, Licenses, Franchises and
Concessions
Not applicable.
(v) Seasonality of Business
The Company's business is not seasonal in nature.
(vi) Working Capital Practices
The Company's working capital practices are similar
to other government contractors.
(vii) Dependence on Customer
The Company's training business is government related
and channeled to the Company principally through the
United States Department of Defense. For the fiscal
year ended June 30, 2001, 41% of sales were made
directly to the U.S. Department of Defense, while 59%
of sales were made to various other contractors for
ultimate use by the U.S. Department of Defense.
Within the U.S. Department of Defense, there are
various agencies that are "customers" of the Company,
with the largest being the U.S. Navy and the U.S.
Army. The largest prime contractors that are
customers of the Company are Lockheed Martin
Corporation and Raytheon/Lockheed Martin JAVELIN
Joint Venture. See Note 12 in the Notes to the
Consolidated Financial Statements.
3
(viii) Backlog
At June 30, 2001, the Company's backlog (which
represents that portion of outstanding contracts not
yet included in revenue) was approximately $103
million of which $85 million represented contract
options. At June 30, 2000, the Company's backlog was
$86 million of which $64 million represented contract
options. It is anticipated that approximately 85% of
the backlog, exclusive of contract options, at June
30, 2001 will be delivered during the fiscal year
ending June 30, 2002.
(ix) Renegotiation or Termination of Contracts or
Subcontracts at Government's Election
The Company's government contracts contain standard
terms permitting termination without cause at the
option of the government. In the event of termination
of such contracts, the Company is entitled to receive
reimbursement on the basis of work completed (cost
incurred plus a reasonable profit).
(x) Competitive Conditions
The Company competes with a large number of
firms. Many of the Company's competitors are
substantially larger and have greater financial
resources. Competition is based upon both price and
performance considerations. Positive factors
pertaining to the Company's competitive position are
that the Company has a large base of installed
systems and substantially more experience than its
competitors in the computer controlled maintenance
simulation field. The Company believes that this
defense segment continues to have growth potential
and expects to see new competitors in this market.
(xi) Independent Research and Development (IR&D)
During the fiscal years ended June 30, 2001, 2000,
and 1999, approximately $957,000, $376,000 and
$803,000, respectively, was spent on Company
sponsored research activities, including
manufacturing, engineering and software development
relating to the development of new products and
product enhancements. During both fiscal years 2001
and 2000, the Company did not have any customer
sponsored research activities. During the fiscal year
ended June 30, 2001, the Company employed the
equivalent of four (4) full-time professional
employees whose prime responsibility was in research
and development activities. In addition, from time to
time the Company utilizes the specialized skills of
many of its other employees and contract personnel on
a limited engagement basis.
(xii) Environment
Not Applicable.
(xiii) Number of Persons Employed
As of June 30, 2001, the Company employed
approximately 200 persons.
4
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Export sales were immaterial to the Company's gross sales. See Note 12
in the Notes to the Consolidated Financial Statements.
ITEM 2 PROPERTIES
The Company owns its simulation development and manufacturing facilities, which
are situated on 25 acres in Orlando, Florida. The main plant facility totals
398,086 square feet. Ancillary buildings on the property total 69,847 square
feet. The Company subleases the 72,500 square foot facility previously used by
the former vending operation in Orlando, Florida. The Company considers the
capacity of its 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
approximately 150,000 square feet. To date, the Company has no agreements,
commitments or understandings with respect to the sale of the facility.
ITEM 3 LEGAL PROCEEDINGS
Currently, the Company is not a party to any material pending legal proceedings.
ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no vote of security holders during the fourth quarter of the fiscal
year.
5
EXECUTIVE OFFICERS AND KEY MANAGEMENT EMPLOYEES OF THE REGISTRANT
Each of the following officers and key management employees of the Company was
elected by the Board of Directors and serves at the discretion of the Board.
NAME AGE POSITION WITH THE REGISTRANT OFFICER SINCE
---- --- ---------------------------- -------------
Dr. James C. Garrett 56 President, Chief Executive 1998
Officer and Director
Glenn C. Andrew 53 Executive Vice President 1998
Melissa A. Van Valkenburgh 48 Vice President, Finance 1999
Chief Financial Officer
Stephen R. Stankiewicz 52 Vice President, Business Development 2000
Dr. Garrett assumed his position in June 1998; Mr. Andrew assumed his position
in October 1998; Ms. Van Valkenburgh assumed her position in March 1999; and Mr.
Stankiewicz assumed his position in May 2000.
DR. GARRETT has had an extensive career in the defense and aerospace industries
spanning over 29 years. Prior to joining ECC, he served as Vice President and
General Manager of the Raytheon E-Systems Communications Division, a position to
which he was named in 1991, with responsibility for a broad range of projects.
During the course of a twenty-year career with Rockwell International
Corporation, Dr. Garrett served as Vice President of the Command and Control
Systems, Satellite and Secure Systems, Tactical Products and Engineering
Divisions.
MR. ANDREW was with Rockwell International for 25 years, most recently as Vice
President and General Manager of the Communications Systems Division in Dallas,
Texas. In 1996, he was charged with putting a recovery plan in place for
Rockwell's combat systems for Australia. Mr. Andrew also served as director of
Rockwell's satellite communications business area and held various engineering
positions, including Director of Engineering.
MS. VAN VALKENBURGH is a Certified Public Accountant who most recently was
Controller of Applied Materials Incorporated at their Austin, Texas site. She
previously served for 17 years at Rockwell International where she was
Controller of several of its Defense Electronic Divisions. Prior to that, she
worked in public accounting with Deloitte & Touche for 5 years.
MR. STANKIEWICZ most recently served as Director of Marketing for AAI
Corporation. He previously served as Director of Government Programs at Evans &
Sutherland Computer Corporation. He also served as a naval flight officer in the
U.S. Navy Reserve.
6
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Common Stock of the Company is currently listed on the American Stock
Exchange (symbol ECC). Prior to November 6, 2000, the Company was listed on the
New York Stock Exchange. The price range of the Common Stock during the last two
fiscal years was as follows:
QUARTER ENDED HIGH LOW
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June 30, 2001 $ 3.66 $ 3.25
March 31, 2001 3.88 3.41
December 31, 2000 4.00 3.13
September 30, 2000 4.00 2.81
June 30, 2000 3.75 3.00
March 31, 2000 4.00 3.06
December 31, 1999 3.81 3.06
September 30, 1999 4.19 3.06
Common Stock prices shown above are the last daily sales prices on the American
or New York Stock Exchange. During the fiscal year ended June 30, 2001, the
Company repurchased 727,000 shares of Common Stock through open-market
purchases.
(B) HOLDERS
As of September 15, 2001, the Company had approximately 863 stockholders of
record of its Common Stock based on the transfer agent's listings. The Company
believes its shares are beneficially held by several thousand additional
stockholders based on broker dealer demand for proxy materials in 2000.
(C) DIVIDENDS
No cash dividends have been declared on the Company's common stock during the
last six years. Under the Company's Credit Facility, the Company is not
permitted to pay cash dividends. See Note 7 in the Notes to the Consolidated
Financial Statements.
7
ITEM 6 SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Years Ended June 30,
Operating Data:
---------------
Continuing Operations: 2001 2000 1999 1998 1997
--------------------- -------- ------- -------- ---------- --------
Net Sales $ 28,736 $40,876 $ 48,676 $ 52,618 $ 72,550
Operating Income/(Loss) (6,876) 3,985 (3,874) (13,775) (3,510)
Net Income/(Loss) (7,139) 3,389 (3,546) (12,409) (4,584)
Discontinued Operations:
------------------------
Net Sales -- -- -- -- 10,540
Operating Income/(Loss) -- -- -- -- (5,830)
Net Income/(Loss) -- -- -- (407) (3,951)
Per Share Data Basic:
--------------------
Weighted Average Number of
Common Shares Outstanding 8,025 8,436 8,346 8,174 7,916
Earnings/(Loss) Per Common Share
Continuing Operations $ (0.89) $ 0.40 $ (0.42) $ (1.52) $ (0.58)
Earnings/(Loss) Per Common Share
Discontinued Operations -- -- -- (0.05) (0.50)
-------- ------- -------- ---------- --------
Earnings/(Loss) Per Common Share $ (0.89) $ 0.40 $ (0.42) $ (1.57) $ (1.08)
======== ======= ======== ========== ========
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
======== ======= ======== ========== ========
Per Share Data-Assuming Dilution:
---------------------------------
Weighted Average Number of
Common Shares Outstanding 8,025 8,485 8,346 8,174 7,916
Earnings/(Loss) Per Common Share
Continuing Operations $ (0.89) $ 0.40 $ (0.42) $ (1.52) $ (0.58)
Earnings/(Loss) Per Common
Share Discontinued Operations -- -- -- (0.05) (0.50)
-------- ------- -------- ---------- --------
Earnings/(Loss) Per Common Share $ (0.89) $ 0.40 $ (0.42) $ (1.57) $ (1.08)
======== ======= ======== ========== ========
As of June 30
Balance Sheet Data: 2001 2000 1999 1998 1997
------------------ ------- ------- ------- ------- -------
Total Assets $27,772 $39,235 $48,713 $64,358 $82,034
Working Capital $10,391 $17,921 $13,063 $11,385 $35,357
Long-Term Debt $ -- $ -- $ -- $ -- $16,640
Stockholders' Equity $23,772 $33,689 $30,087 $33,437 $45,546
8
As a result of the Company's sale of its vending operation during fiscal year
1998, the vending operation was accounted for as a discontinued operation
beginning in fiscal year 1997. Accordingly, the vending operation was segregated
in the Consolidated Statements of Operations.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K 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) (1) AND (2) LIQUIDITY AND CAPITAL RESOURCES
During both fiscal years 2000 and 2001, the Company's principal source of cash
was from operations. The principal use of these funds was to pay down the
revolving Credit Facility and fund additions to property, plant and equipment.
In addition, during fiscal year 2001, funds were used to purchase Treasury
Stock.
Cash provided by operating activities was $627,000 in fiscal year 2001 compared
to $8.2 million for fiscal year 2000 and $1.3 million for fiscal year 1999.
Fiscal year 2001 operating cash flow reflects the Company's net loss of $7.1
million.
Cash used for investing activities was $381,000 in fiscal year 2001 compared to
$893,000 in fiscal year 2000 and $61,000 in fiscal year 1999. The decrease from
fiscal year 2000 is due primarily to lower investments in property, plant and
equipment.
The Company's financing activities used $2.6 million of cash in fiscal year 2001
compared to $6.4 million in fiscal year 2000 and $4.6 million in fiscal year
1999. Borrowings and repayments under the Credit Facility were approximately
equal in fiscal year 2001; however $2.9 million was utilized to repurchase
treasury stock.
On December 10, 1998, the U.K. operation entered into a Novation Agreement with
Lockheed. Under the agreement, the U.K. operation assigned all rights and
obligations under a certain contract to Lockheed. The terms of the novation
permitted the U.K. operation to extend payments already owing to Lockheed to
monthly installments through December 2000. At June 30, 2000, the total
outstanding amount due to Lockheed was approximately $1.2 million, which was
included in Accrued Expenses and Other of the Consolidated Financial Statements.
This balance was paid in full during fiscal year 2001.
On June 24, 1999, the Company entered into a new 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.
Proceeds from the Credit Facility were used to pay the outstanding balance under
the Company's loan facility with its previous primary lender. There was an
outstanding balance under the Credit Facility at June 30, 2001 of $157,000.
9
The Company was not in compliance with certain financial covenants during
fiscal year 2001. The Company is in the process of resolving the non-compliance
issues by negotiating amended covenants and a reduced Credit Facility limit.
Negotiations are expected to be completed by November 1, 2001. Based on the
Company's 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 anticipates spending approximately $500,000 for new machinery and
equipment and to continue to refurbish the Orlando, Florida facility during
fiscal year 2002.
During fiscal year 1999, the Company implemented various cost reduction
initiatives and changes in management including the relocation of the corporate
headquarters from Wayne, Pennsylvania to the Company's principal location in
Orlando, Florida. In addition, as a result of recurring net losses in the U.K.
operation ($2.7 million and $7.9 million in fiscal years 1999 and 1998,
respectively), the Board of Directors announced, during the first quarter of
fiscal year 1999, the approval of a plan to wind-down and discontinue the U.K.
operation. The wind-down was completed in May 1999. These initiatives resulted
in a charge of approximately $3.5 million during fiscal year 1999. See Note 15
in the Notes to the Consolidated Financial Statements.
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 savings associated with these actions in the
first and second quarters were $1,500,000 and $2,800,000, respectively. All
employee termination benefits were paid by June 30, 2001, with the exception of
$105,000, which is included in Accrued Expenses and Other.
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 has no other material commitments for
capital expenditures. Management believes that with the funds available under
its projected cash flow, the Company will have sufficient resources to meet
planned operating commitments for the foreseeable future.
In keeping in line with current corporate governance practices and the goal to
increase shareholder value, on August 9, 2000, the Board of Directors terminated
the Shareholders Rights Agreement dated August 27, 1996. All stockholders of
record at the close of business on August 9, 2000, received $0.01 for each Right
held. The Board also approved a stock repurchase plan to invest up to $3.0
million for the repurchase of the Company's common stock. Approval to execute
this plan was obtained from Mellon Bank, N.A. under the Company's Credit
Facility. A total of 727,000 shares were repurchased in fiscal year 2001 for
$2.9 million.
10
3) RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Net sales decreased $12.1 million (30%) in fiscal year 2001 compared to fiscal
year 2000. This decrease is primarily due to the completion of the Javelin
Multi-Year 1, F-18, UK CATT and AGTS contracts and delays in the awards of the
Javelin Multi-Year 2 and EST Lot 2 contracts.
Gross margin as a percentage of sales decreased to 14% in fiscal year 2001
compared to 33% in fiscal year 2000. The lower margins are primarily a result of
the completion of several high margin contracts in fiscal year 2000 and the
spreading of fixed costs over a smaller revenue base. In addition, the Company
incurred $1.4 million of severance costs in fiscal year 2001 and recorded
additional losses totaling $1.3 million related to completion of the EST system
development due to continuing technical issues.
Selling, general and administrative expense increased $791,000 (9%) in fiscal
year 2001 compared to fiscal year 2000. This increase is primarily a result of
increased bid and proposal, and marketing investments related to the pursuit of
new business and increased bad debt expense related to recording a reserve for
doubtful accounts for receivables associated with the former U.K. operation
totaling $657,000. See Note 2 in the Notes to the Consolidated Financial
Statements. These increases were partially offset by decreases in SG&A salaries
and bonuses.
Independent research and development (IR&D) expense increased $581,000 (155%) in
fiscal year 2001 compared to fiscal year 2000 primarily due to research in the
area of new simulation technologies and products.
Interest expense decreased $383,000 (53%) in fiscal year 2001 compared to fiscal
year 2000. This decrease is primarily a result of improved cash flows from
operations that enabled the Company to maintain a positive cash balance for the
first five months of fiscal year 2001.
Deferred tax assets increased $2.7 million (60%) in fiscal year 2001 compared to
fiscal year 2000 due primarily to increased Federal Operating Loss
Carryforwards. The tax valuation allowance was increased by the same amount due
to the uncertainty as to the ultimate realization of these assets.
2000 COMPARED WITH 1999
Net Sales decreased $7.8 million (16%) for fiscal year 2000 compared to fiscal
year 1999. This decrease is primarily due to reduced activity in the U.K.
resulting from the wind-down of its operations in fiscal year 1999. See Notes 12
and 15 in the Notes to the Consolidated Financial Statements.
Gross margin as a percentage of net sales increased to 33% in fiscal year 2000
compared to 25% in fiscal year 1999. This increase is primarily the result of
increased gross margin levels in several contracts including Javelin, F-18 and
UK CATT. In addition, the Company's cost reduction initiatives during fiscal
year 2000 reduced overhead costs, thus improving gross margins.
Selling, general and administrative expense decreased $2.6 million (22%) in
fiscal year 2000 compared to fiscal year 1999. The decrease is primarily the
result of continued cost containment initiatives during fiscal year 2000 as well
as the completion of the U.K. operations wind-down during fiscal year 1999. See
Note 15 in the Notes to the Consolidated Financial Statements.
11
Additionally, the Company's legal and bad debt expenses were significantly lower
in fiscal year 2000 due to the settlement of the Company's Economic Price
Adjustment claim in the fourth quarter of fiscal year 1999. See Note 2 in the
Notes to the Consolidated Financial Statements.
IR&D expense decreased $427,000 (53%) in fiscal year 2000 compared to fiscal
year 1999. This decrease was primarily a result of more focused initiatives and
cost containment efforts.
Unusual expenses decreased to zero compared to fiscal year 1999 as a result of
recognizing approximately $3.5 million in expenses during fiscal year 1999
relating to the U.K. operation wind-down and relocation of the Company
headquarters. See Note 15 in the Notes to the Consolidated Financial Statements.
Interest expense decreased $325,000 (31%) compared to fiscal year 1999 as a
result of improved cash flows from operations.
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 Annual Report on Form 10-K and presented elsewhere by management from time
to time. All forward-looking statements included in this Form 10-K 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, amending the covenants to 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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a variable rate revolving credit facility and, as such, has
exposure to interest rate fluctuations. Under current market conditions, the
impact of an increase or decrease in the prevailing interest rates would not
materially effect the Company's consolidated financial position or results of
operations. As of June 30, 2001, the outstanding balance under the revolving
credit facility was $157,000.
12
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
Report of Independent Certified Public Accountants 14
Consolidated Statements of Operations for the Years
Ended June 30, 2001, 2000 and 1999 15
Consolidated Balance Sheets as of June 30, 2001 and 2000 16
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 2001, 2000 and 1999 17
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2001, 2000 and 1999 18-19
Notes to Consolidated Financial Statements 20-36
Schedule II-Valuation and Qualifying Accounts
For the Years Ended June 30, 2001, 2000, and 1999 42
13
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
the Board of Directors of
ECC International Corp.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of ECC
International Corp. and its Subsidiaries (the "Company") at June 30, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index, presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Orlando, Florida
September 11, 2001
14
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2001, 2000 and 1999
(In Thousands, Except Per Share Data)
2001 2000 1999
-------- -------- --------
Net Sales $ 28,736 $ 40,876 $ 48,676
Cost of Sales 24,735 27,386 36,549
-------- -------- --------
Gross Profit 4,001 13,490 12,127
-------- -------- --------
Expense:
Selling, General & Administrative 9,920 9,129 11,747
Independent Research and Development 957 376 803
Unusual Expenses -- -- 3,451
-------- -------- --------
Total Expense 10,877 9,505 16,001
-------- -------- --------
Operating Income/(Loss) (6,876) 3,985 (3,874)
-------- -------- --------
Other Income/(Expense):
Interest Income 62 151 312
Interest Expense (344) (727) (1,052)
Other-Net 179 (20) (3)
-------- -------- --------
Total Other Expense (103) (596) (743)
-------- -------- --------
Income/(Loss) Before Income Taxes (6,979) 3,389 (4,617)
Provision/(Benefit) for Income Taxes 160 -- (1,071)
-------- -------- --------
Net Income/(Loss) $ (7,139) $ 3,389 $ (3,546)
======== ======== ========
Net Income/(Loss) Per Common Share-Basic and Assuming Dilution: $ (0.89) $ 0.40 $ (0.42)
======== ======== ========
See accompanying notes to consolidated financial statements.
15
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2001 and 2000
(In Thousands, Except Share and Per Share Data)
2001 2000
-------- --------
ASSETS
Current:
Cash $ 39 $ 2,406
Accounts Receivable 4,521 7,359
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 8,283 10,455
Inventories 1,154 2,559
Prepaid Expenses and Other 307 449
-------- --------
Total Current Assets 14,304 23,228
-------- --------
Property, Plant and Equipment, Net 13,352 15,476
Other Assets 116 531
-------- --------
Total Assets $ 27,772 $ 39,235
======== ========
LIABILITIES
Current:
Current Portion of Long-Term Debt $ 157 $ --
Accounts Payable 1,829 1,438
Accrued Expenses and Other 1,927 3,869
-------- --------
Total Current Liabilities 3,913 5,307
-------- --------
Deferred Income Taxes 61 80
Other Long-Term Liabilities 26 159
-------- --------
Total Liabilities 4,000 5,546
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par; 1,000,000 shares authorized;
None issued and outstanding -- --
Common Stock, $0.10 par; 20,000,000 shares authorized;
8,557,285 shares issued and 7,830,285 outstanding in 2001 and 856 848
8,481,067 shares issued and outstanding in 2000
Note Receivable from Stockholder (168) (146)
Capital in Excess of Par 25,441 25,211
Retained Earnings 552 7,776
Treasury Stock 727,000 shares (2,909) --
-------- --------
Total Stockholders' Equity 23,772 33,689
-------- --------
Total Liabilities and Stockholders' Equity $ 27,772 $ 39,235
======== ========
See accompanying notes to consolidated financial statements.
16
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2001, 2000 and 1999
(In Thousands, Except Share Data)
Accumulated Note
Capital Other Receivable Total
Common Treasury In Excess Retained Comprehensive From Stockholders'
Stock Stock of Par Earnings Income/(Loss) Stockholders Equity
------ --------- ------------ ------- ------------- ------------ -------------
Balance as of June 30, 1998 $832 $ -- $ 24,804 $ 7,933 $ 14 $ (146) $ 33,437
---- --------- ------- ------- ----- -------- --------
Net Loss -- -- -- (3,546) -- -- (3,546)
Stock Issued:
Employee Stock Purchase
Plan-59,349 Shares 6 -- 115 -- -- -- 121
Exercise of Options-
2,000 Shares -- -- 4 -- -- -- 4
Issuance of Common Stock
32,558 Shares 3 -- 82 -- -- -- 85
Translation Adjustment -- -- -- -- (14) -- (14)
---- --------- ------- ------- ----- -------- --------
Balance as of June 30, 1999 841 -- 25,005 4,387 -- (146) 30,087
---- --------- ------- ------- ----- -------- --------
Net Income -- -- -- 3,389 -- -- 3,389
Stock Issued:
Employee Stock Purchase
Plan-38,291 Shares 4 -- 112 -- -- -- 116
Exercise of Options -
3,400 Shares -- -- 7 -- -- -- 7
Issuance of Common Stock-
27,211 Shares 3 -- 87 -- -- -- 90
---- --------- ------- ------- ----- -------- --------
Balance as of June 30, 2000 848 -- 25,211 7,776 -- (146) 33,689
---- --------- ------- ------- ----- -------- --------
Net Loss -- -- -- (7,139) -- -- (7,139)
Stock Issued:
Employee Stock Purchase
Plan-17,529 Shares 2 -- 49 -- -- -- 51
Exercise of Options -
54,337 Shares 6 -- 166 -- -- -- 172
Issuance of Common Stock-
4,354 Shares -- -- 15 -- -- -- 15
Renegotiation of Note
Recvd from Stockholder -- -- -- -- -- (22) (22)
Purchase of Stockholder Rights -- -- -- (85) -- -- (85)
Treasury Stock
727,000 shares -- (2,909) -- -- -- -- (2,909)
---- --------- ------- ------- ----- -------- --------
Balance as of June 30, 2001 $856 $ (2,909) $25,441 $ 552 $ -- $ (168) $ 23,772
==== ========= ======= ======= ===== ======== ========
Common shares outstanding at June 30, 1999, 2000 and 2001 were 8,412,165,
8,481,067 and 7,830,285 shares, respectively.
See accompanying notes to consolidated financial statements
17
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2001, 2000 and 1999
(In Thousands)
2001 2000 1999
------- ------- -------
Cash Flows From Operating Activities:
Net Income/(Loss) $(7,139) $ 3,389 $(3,546)
Adjustments to Reconcile Net Income to Net Cash
Provided by/(Used For) Operating Activities:
Depreciation 2,645 3,919 4,296
Amortization 101 421 --
Loss/(Gain) on Sale of Assets (140) 25 (209)
Deferred Income Taxes -- -- (1,467)
Changes in Certain Assets and Liabilities:
Accounts Receivable 2,816 (2,621) 3,359
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 2,172 8,039 (2,103)
Inventories 1,405 1,752 891
Prepaid Expenses and Other 436 (329) 4,821
Accounts Payable 258 (1,479) (200)
Advances on Long-Term Contracts -- -- (3,277)
Accrued Expenses and Other (1,927) (4,914) (1,266)
------- ------- -------
Net Cash Provided By Operating Activities 627 8,202 1,299
------- ------- -------
Cash Flows From Investing Activities:
Proceeds From Sale of Assets 154 18 595
Additions to Property, Plant and Equipment (535) (911) (1,961)
Other, Primarily Cash Surrender Value of Life Insurance -- -- 1,305
------- ------- -------
Net Cash Used In Investing Activities $ (381) $ (893) $ (61)
------- ------- -------
Continued...
18
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2001, 2000 and 1999
(In Thousands)
2001 2000 1999
-------- ------- -------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock and
Options Exercised $ 223 $ 123 $ 125
Purchase of Treasury Stock (2,909) -- --
Purchase of Stockholder Rights (85) -- --
Debt Issue Costs for Revolving Credit Facility -- (87) --
Net Repayments Under Revolving Credit Facility (18,800) (6,424) (4,708)
Net Borrowings Under Revolving Credit Facility 18,957 -- --
-------- ------- -------
Net Cash Used In Financing Activities (2,614) (6,388) (4,583)
-------- ------- -------
Net Increase/(Decrease) in Cash (2,367) 921 (3,345)
Cash at Beginning of the Year 2,406 1,485 4,830
-------- ------- -------
Cash at End of the Year $ 39 $ 2,406 $ 1485
======== ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest $ 329 $ 720 $ 1,086
Supplemental Schedule of Non Cash Financing Activities:
Issuance of Director Equity Compensation $ 15 $ 90 $ 85
Purchase of Fixed Assets Through Capital Leases $ -- $ 254 $ --
Extended Payment Terms in Connection with
Novation Agreement $ -- $ -- $ 4,552
See accompanying notes to consolidated financial statements
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of ECC International
Corp. and its wholly owned subsidiaries (collectively, the "Company").
Intercompany transactions have been eliminated in consolidation.
REVENUE AND COST RECOGNITION
Contract sales and anticipated profits are recognized using the percentage of
completion method, measured by the ratio of costs incurred to date to estimated
total costs. Since many contracts extend over a long period of time, any
revisions in estimated costs or contract value during the progress of work have
the effect of adjusting the current period earnings applicable to performance in
prior periods.
Contract costs include all direct labor and material costs and an allocation of
indirect costs, such as indirect labor, supplies and depreciation.
Anticipated losses on contracts in progress are recorded in the period in which
the losses are identified. Claims are included as a component of contract value
for purposes of revenue recognition at such time as the amount is reasonably
determinable and probable.
Unbilled costs and estimated earnings consists principally of contract revenue
related to long term contracts which has been recognized for accounting purposes
but is not yet billable to the customer. Substantially all of these amounts will
be billed in the following fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVENTORIES
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.
CASH AND CASH EQUIVALENTS
Cash equivalents are comprised of highly liquid financial instruments with
maturities of three months or less when purchased.
20
PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets
and ranges from 10 to 30 years for buildings and building improvements, 3 to 10
years for machinery and equipment, and 5 years for demonstration and test
equipment.
The cost of maintenance and repairs is charged to expense as incurred. Renewals
and betterments are capitalized. Applicable asset and accumulated depreciation
accounts are reduced for a sale or other disposition and the resulting gain or
loss is included in the Consolidated Statements of Operations.
IMPAIRMENT OF LONG LIVED ASSETS
Long lived assets are reviewed for impairment when events or circumstances
indicate that the carrying amount of the asset may not be recoverable. The
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying value to determine if a write-down is required. If
impairment is indicated, the carrying amount of the asset is reduced to its fair
value.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized by
applying enacted statutory tax rates to temporary differences between the tax
basis and financial statement carrying value of the Company's assets and
liabilities. A valuation allowance is provided where it is more likely than not
that deferred tax assets will not be realized.
RESEARCH AND DEVELOPMENT COSTS
Company sponsored research and development costs are included as part of the
general and administrative costs. These activities include manufacturing,
engineering and software research and development relating to the development of
new products and product enhancements. Customer sponsored research and
development costs incurred pursuant to contracts are accounted for as contract
costs. There were no customer sponsored research and development costs for
fiscal years 1999, 2000 and 2001.
TREASURY STOCK
Repurchased shares of the Company's common stock are included in treasury stock
at cost.
STOCK-BASED COMPENSATION
The Company measures compensation expense for employee and director stock
options as the aggregate difference between the market and exercise prices of
the options on the date that both the number of shares the grantee is entitled
to receive and the purchase price are known. Pro-forma information relating to
the fair value of stock-based compensation is presented in Note 11 to the
Consolidated Financial Statements.
21
EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is computed by
dividing net income/(loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period adjusted
for the number of shares that would have been outstanding if 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 consists of stock options. In
calculating diluted earnings per share, approximately 49,000 dilutive potential
common shares were included in fiscal year 2000. The number of potentially
dilutive common shares in 2001 and 1999 was 60,000 and 53,000, however they were
not included in computing earnings per share since they would have had an
antidilutive effect. The number of shares used in computing earnings per share
is as follows:
Years Ended June 30,
2001 2000 1999
--------- --------- ---------
Basic 8,025,000 8,436,000 8,346,000
Dilutive 8,025,000 8,485,000 8,346,000
PRESENTATION
Certain amounts in fiscal year 1999 have been reclassified to conform to the
fiscal year 2000 Financial Statement presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 addresses financial accounting and
reporting for business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Under SFAS 142, goodwill and certain other intangible assets will no longer be
systematically amortized but instead will be reviewed for impairment and written
down and charged to results of operations when their recorded value exceeds
their estimated fair value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001, with early adoption permitted for entities with fiscal
years beginning after March 15, 2001. The Company expects to adopt SFAS 142
effective July 1, 2001. The Company does not expect a significant impact on
future financial results as a result of adopting this standard.
22
NOTE 2 ACCOUNTS RECEIVABLE
(In Thousands)
2001 2000
------- -------
Contract Receivables, Billed Amounts $ 4,200 $ 7,077
Other 321 282
------- -------
Total $ 4,521 $ 7,359
======= =======
Contract receivables include amounts under long-term contracts and subcontracts
principally with the U.S. Government or its contractors.
During fiscal year 1996, the Company submitted a claim for contract adjustment
under the Economic Price Adjustment ("EPA") provisions of a major contract
seeking approximately $950,000. The value of the claim was included as a
component of contract value for purposes of revenue recognition and accordingly
was included in costs and estimated earnings in excess of billings on completed
contracts at June 30, 1998. During the fourth quarter of fiscal year 1999, a
settlement was agreed to on all claims in the form of a $15,000 sum payable to
the Company. This settlement resulted in a $935,000 charge to earnings during
the fourth quarter of fiscal year 1999.
During the fourth quarter of fiscal year 2001, upon advice of legal counsel, the
Company recorded a reserve for doubtful accounts for $657,000 against the
collection of receivables related to the former U.K. operation. The U.K.
operation wind down was completed in May 1999 and there have been no collections
against these receivables. There was no reserve for doubtful accounts in fiscal
year 2000.
NOTE 3 INVENTORIES
(In Thousands)
2001 2000
------- -------
Work in Process $ 97 $ 88
Raw Materials 3,869 4,635
Reserve for Excess & Obsolete (2,812) (2,164)
------- -------
Total $ 1,154 $ 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. 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. During the fourth quarter
of fiscal year 2001, the Company commenced a reconfiguration process of its
plant, which will require the disposition of low value excess raw material
inventory. As a result, the reserve was increased by $1,041,000.
23
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
2001 2000
-------- --------
Land $ 2,216 $ 2,216
Buildings/Improvements 20,957 20,883
Machinery and Equipment 19,361 20,106
Demonstration and Test Equipment 8,914 8,914
-------- --------
Total 51,448 52,119
Less Accumulated Depreciation (38,096) (36,643)
-------- --------
Total $ 13,352 $ 15,476
======== ========
The Company considers its facilities to be excessive for its present needs and
is in the process of attempting to sell the facilities to a third party and
implement a long term leaseback of approximately 150,000 square feet.
Repairs and maintenance expense for the fiscal years ended June 30, 2001, 2000
and 1999 were $713,000, $1,093,000 and $582,000, respectively.
NOTE 5 ACCRUED EXPENSES AND OTHER
(In Thousands)
2001 2000
------ ------
Compensation $ 278 $ 321
Vacation 436 844
Incentive Plans -- 561
Contract Losses 281 162
Lockheed Novation Payable -- 1,199
Other 932 782
------ ------
Total $1,927 $3,869
====== ======
On December 10, 1998, the U.K. operation entered into a Novation Agreement with
Lockheed Martin ASIC (Lockheed). Under the agreement, the U.K. operation
assigned all rights and obligations under a certain contract to Lockheed. The
terms of the novation permitted the U.K. operation to extend payments, already
owing to Lockheed, to monthly installments through December 2000. The total
outstanding due to Lockheed was approximately $1.2 million as of June 30, 2000.
The final installment was paid in January 2001.
NOTE 6 EMPLOYEE BENEFIT PLANS
The Company has a 401K plan that was established in fiscal year 1999 and covers
all employees. Employer contributions are based on a percentage of employee
contributions and certain other restrictions as defined in the plan document. In
addition, the Company may also make discretionary contributions at the end of
the plan year. Employer contributions of approximately $263,000, $378,000 and
$421,000 were expensed in the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
Prior to fiscal year 2000, the Company had a profit sharing plan, which covered
all employees who worked in excess of 1,000 hours per year. Minimum
contributions were based on income before income taxes, subject to limitations
based on employee compensation and certain other restrictions defined in the
plan document.
24
Contributions of approximately $161,000 were expensed in the fiscal year ended
June 30, 1999.
NOTE 7 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. Proceeds from the Credit Facility were used to pay the outstanding balance
($6.8 million at June 24, 1999) under the Company's loan facility with its
previous primary lender. Borrowings are based on a formula of receivables and
property as defined in the Credit Facility, however, the Company was in default
of certain covenants at June 30, 2001. There was an outstanding balance under
the Credit Facility as of June 30, 2001 of $157,000.
Interest is payable monthly, in arrears, at a rate defined in the credit
facility (8.0% at June 30, 2001.) The Company is required to pay certain fees on
a quarterly basis as calculated by the bank. The unused line fee is equal to
.50% per annum of the average daily unused balance. The agreement includes a
letter of credit fee equal to .75% per annum and a standby letter of credit fee
equal to 1.5% per annum. There were no outstanding letters of credit at June 30,
2001.
The Credit Facility includes certain covenants related to, among other things,
working capital, tangible net worth, net income, cash flow and capital
expenditures. In addition, the Company is not permitted to pay dividends and
substantially all of the assets of the Company are pledged as collateral for the
Credit Facility.
At June 30, 2001, the Company was not in compliance with certain financial
covenants under the Company's Credit Facility. See note 16 in the Notes to the
Consolidated Financial Statements. The Company is in the process of resolving
the non-compliance issues by negotiating amended covenants and a reduced Credit
Facility limit. Negotiations are expected to be completed by November 1, 2001.
Based on the Company's 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 Credit Facility includes a subjective acceleration clause as well as a
lockbox requirement under the control of the lender, whereby collections of
trade receivables are used to immediately reduce the balance of the Credit
Facility.
Under the former loan facility, interest was payable monthly, in arrears, at a
rate defined in the agreement (ranging from 7.19% to 10.62% during fiscal year
1999). The Company was also required to pay fees on an annual basis as
calculated by the lender. The revolving credit commitment fee was equal to .25%
per annum on the total outstanding balance.
25
NOTE 8 INCOME TAXES
The domestic and foreign components of income/(loss) before income taxes are
presented below for the years ended June 30, (in thousands):
2001 2000 1999
------- ------- -------
Continuing Operations:
Domestic $(6,979) $ 3,389 $(1,883)
Foreign -- -- (2,734)
------- ------- -------
Total $(6,979) $ 3,389 $(4,617)
======= ======= =======
The components of the benefit for income taxes are as follows for the years
ended June 30, (in thousands):
2001 2000 1999
---- ---- -------
Current:
Federal $ -- $ -- $ --
State -- -- --
---- ---- -------
Subtotal -- -- --
---- ---- -------
Deferred:
Federal 160 -- (1,171)
State -- -- 100
---- ---- -------
Subtotal 160 -- (1,071)
---- ---- -------
Provision/(Benefit)
for Income Taxes $160 $ -- $(1,071)
==== ==== =======
The Company has cumulative federal net operating loss carryforwards of
approximately $12.3 million, 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.
26
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities are as follows for the years ended
June 30, (in thousands):
2001 2000
-------------------- --------------------
Asset Liability Asset Liability
------- --------- ------- ---------
Revenue Recognized on Completed Contract for
Tax Return and on Percentage of Completion for
Financial Reporting $ 104 $ -- $ -- $ 8
Federal Operating Loss Carryforwards 4,183 -- 1,825 --
Federal Tax Credit Carryforwards 510 -- 393 --
State Tax Loss Carryforwards 705 -- 469 --
Difference between Book and Tax Depreciation 224 -- -- 10
Capitalized Bid and Proposal Expense 194 -- 651 --
Accruals Not Currently Deductible 1,148 61 1,062 62
------- ---- ------- ----
Subtotal 7,068 61 4,400 80
Valuation Allowance (7,068) -- (4,382) --
------- ---- ------- ----
Total $ -- $ 61 $ 18 $ 80
======= ==== ======= ====
A valuation allowance provided at June 30, 2001 and 2000 relates primarily to
federal and state net operating loss carryforwards which are subject to
uncertainty as to their ultimate realization.
These deferred tax assets and liabilities are included in/or classified as
follows on the Consolidated Balance Sheets for the years ended June 30, (in
thousands):
2001 2000
---- ----
Prepaid Expenses and Other $ -- $ 18
Accrued Expenses and Other $ -- $ --
Deferred Income Tax Liability $ 61 $ 80
Differences between the statutory U.S. Federal Income Tax rate and the effective
income tax rate reported in the financial statements are as follows for
continuing operations for the years ended June 30:
2001 2000 1999
------- ------- -------
Federal Statutory Rates (34.0%) 34.0% (34.0%)
Decrease/(Increase) in Taxes Resulting From:
State Income Taxes (after deducting
Federal Income Tax Benefit) 0.0% 1.3% 1.4%
Valuation Allowance 35.O% (34.9%) 13.5%
Other 1.3% (0.4%) (4.1%)
------- ------- -------
Total Provision/(Benefit)
for Income Taxes 2.3% -- (23.2%)
======= ======= =======
The tax benefit realized from the exercise of stock options was immaterial in
fiscal years 2001, 2000 and 1999. These tax benefits were credited to Capital in
Excess of Par.
27
NOTE 9 FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist principally of accounts receivables from major defense
prime contractors and U.S. government agencies which minimizes the Company's
credit risk. The Company generally does not require collateral or other security
to support customer receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their fair values because of the
short maturity of these instruments. The fair value of the Company's debt
approximates fair value due to the variable nature of the interest rate on the
debt.
NOTE 10 SHAREHOLDERS EQUITY
Due to the excess cash position and in order to enhance shareholder value, the
Board of Directors authorized a common stock repurchase plan of up to $3,000,000
during fiscal year 2001. A total of 727,000 shares of stock was repurchased for
approximately $2,909,000 and is reflected as Treasury Stock, which is accounted
for at actual cost.
On August 27, 1996, the Board of Directors declared a dividend distribution of
one Right (a "Right") for each outstanding share of the Company's Common Stock
to stockholders of record at the close of business on September 17, 1996. Each
Right entitles the registered holder to purchase from the Company one
one-thousandth of a share (a "Unit") of Series B Junior Participating Preferred
Stock, $0.10 par value per share at a purchase price of $40.00 per Unit, subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated August 27, 1996 between the Company and Mellon Bank, N.A. as
Rights Agent, as amended (the "Rights Agreement"). On August 9, 2000, the Board
of Directors terminated the Rights Agreement and, as required under the Rights
Agreement, on September 1, 2000, stockholders of record at the close of business
on August 9, 2000 received $0.01 for each Right held.
NOTE 11 STOCK COMPENSATION
The Company has several stock-based compensation plans, which are described
below. The Company's Organization and Compensation Committee administers all the
stock benefit plans of the Company. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Since stock option exercise
prices are equal to the fair market value of the stock on the date of grant for
its fixed stock option plans and equal to 85% of the fair market value on the
date of exercise for stock issued under the employee stock purchase plans,
compensation expense is not recognized. However, had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
of the options at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income/(loss) and net
income/(loss) per share for fiscal years 2001, 2000 and 1999 would have been
changed to the pro-forma amounts indicated below (in thousands, except per share
data):
2001 2000 1999
-------- ------- --------
Net Income/(Loss) $ (7,367) $ 3,251 $ (4,027)
Net Income/(Loss) Per Share-Basic $ (0.92) $ 0.39 $ (0.48)
Net Income/(Loss) Per Share-Diluted $ (0.92) $ 0.38 $ (0.48)
28
In accordance with FAS Statement 123, "Accounting for Stock-Based Compensation",
the pro-forma calculations do not include the effects of options granted prior
to fiscal year 1996. As such, the impact is not necessarily indicative of the
effects on reported net income in future years.
The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
2001 2000 1999
----- ----- -----
Expected Dividend Yield 0.00% 0.00% 0.00%
Risk-free Interest Rate 6.22% 5.49% 4.61%
Expected Volatility 40.18% 41.59% 49.10%
Expected Life (in years) 6.00 6.00 3.00
There were 152,500, 215,000 and 65,586 options granted during fiscal years 2001,
2000 and 1999, respectively, with weighted average fair values of $1.70 in 2001,
$1.80 in 2000 and $2.29 in 1999.
Under the Company's 1998 Stock Incentive Plan, directors, officers and certain
key employees may purchase the Company's Common Stock at 100% of the fair market
value of the shares on the date of grant. Vesting of options is determined by
the Board of Directors. Generally, options granted based on performance in the
previous fiscal year are exercisable on the date granted. Options granted to
provide an incentive for future performance are exercisable one year from the
date granted. All options expire ten years from the date granted. There were
600,000 shares reserved for issuance under the 1998 Plan. There were 152,500,
185,000 and 60,586 options granted under the plan during fiscal years 2001, 2000
and 1999, respectively.
Under the Company's 1991 Stock Incentive Plan, directors, officers and key
employees were granted the right to purchase the Company's Common Stock at 100%
of fair market value of the shares on the date of the grant. Unless the Board of
Directors determined otherwise, 20% of the options granted under the Plan were
exercisable one year from the date the option was granted. An additional 20% was
exercisable each year thereafter. All options expire upon the earlier of 10
years and 30 days from date of grant or, with respect to shares covered by such
options, five years from the date the option first became exercisable. The 1991
Plan expired in 2001. No additional options can be granted pursuant to the Plan.
There were 30,000 and 5,000 options granted under the 1991 Plan during fiscal
years 2000 and 1999, respectively. A summary of stock option transactions for
the fiscal years ended June 30, 2001, 2000 and 1999 are as follows:
29
Shares Under Weighted Average
Option Exercise Price
------------ ----------------
Balance at June 30, 1998 1,027,036 $ 8.02
Options Granted 65,586 2.29
Options Exercised (2,000) 2.13
Options Terminated (297,554) 10.17
---------- ------
Balance at June 30, 1999 793,068 $ 6.75
Options Granted 215,000 3.71
Options Exercised (3,400) 2.13
Options Terminated (94,195) 10.77
---------- ------
Balance at June 30, 2000 910,473 $ 5.63
Options Granted 152,500 3.47
Options Exercised (54,337) 3.15
Options Terminated (143,800) 9.03
---------- ------
Balance at June 30, 2001 864,836 $ 4.84
========== ======
Options exercisable were 804,836, 735,473 and 603,798 at June 30, 2001, 2000 and
1999, respectively.
Stock options outstanding at June 30, 2001 are summarized as follows:
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$1.15-2.30 28,586 7 years $ 1.82 28,586 $ 1.82
$2.30-3.45 382,500 7 years $ 3.15 382,500 $ 3.15
$3.45-4.60 290,000 8 years $ 3.77 230,000 $ 3.82
$9.20-10.35 22,000 5 years $ 10.00 22,000 $ 10.00
$10.35-11.50 141,750 4 years $ 11.41 141,750 $ 11.41
The Company currently maintains an Employee Stock Purchase Plan which is
intended to provide eligible employees with an opportunity to purchase the
Company's Common Stock through payroll deductions at eighty-five percent of the
market price on specified dates. The Stockholders approved the 1999 Employee
Stock Purchase Plan during fiscal year 1999 reserving 360,000 shares for
issuance under this plan. In prior years, the Company maintained several
Employee Stock Purchase Plans, which were the same in all respects to the
current plan, including the number of shares reserved. Shares issued under the
previous Employee Stock Purchase plans during fiscal years ended June 30, 2001,
2000, and 1999, were 17,529, 38,291 and 59,349, respectively. The fair value of
shares issued during fiscal years 2001, 2000 and 1999 were $0.65, $0.94 and
$0.78 share, respectively. The fair value of these shares was estimated using a
Black-Scholes Option pricing model with the following weighted average
assumptions for fiscal years:
30
2001 2000 1999
----- ----- -----
Expected Dividend Yield 0.00% 0.00% 0.00%
Risk-free Interest Rate 6.22% 5.49% 4.61%
Expected Volatility 40.18% 41.59% 49.10%
Expected Life (in months) 6 6 3
The Company has available 1,000,000 authorized and unissued shares of $0.10 par
value Preferred Stock. Shares may be issued from time to time in one or more
series, each series having such special rights, privileges and preferences as
may be determined by the Board of Directors at the time of issuance.
During fiscal year 1998, the Board of Directors and Stockholders approved a
Director Equity Compensation Plan. Under the Plan, the members of the Company's
Board of Directors can choose to receive unrestricted shares of the Company's
Common Stock in lieu of 50% of the otherwise payable directors' fees. A total of
75,000 shares of Common Stock were reserved for issuance under the Plan. During
fiscal year 2000, the Board of Directors approved an additional 50,000 shares of
the Company's Common Stock for issuance under the Plan. During fiscal years
2001, 2000 and 1999, 4,354, 27,211 and 32,558 shares, respectively, were issued
under this Plan.
On June 15, 1998, the Company entered into a Stock Purchase Agreement with its
Chief Executive Officer (CEO). In connection with this agreement, the CEO
purchased 50,000 shares of common stock. The CEO paid $10,000 cash and issued a
non-recourse Promissory Note to the Company in the amount of $146,250 in payment
of the shares. The Promissory Note bears an interest rate of 5.58% and was
repayable together with interest on June 15, 2001. On May 3, 2001, the Company
extended the Employment Agreement with the CEO and the maturity date of the
Promissory Note to July 1, 2002. At that time, the accrued interest was added to
the Note resulting in a balance of $168,004 at June 30, 2001.
As a result of the note receivable and related accrued interest being
non-recourse to the CEO, the sale of stock has been treated as variable stock
compensation arrangement. Compensation expense relating to the arrangement was
not material in fiscal year 1999, 2000 or 2001.
NOTE 12 BUSINESS SEGMENT INFORMATION
The Company operates in one segment; training. This segment includes the design
and manufacture of training simulators.
31
SALES BY CLASS OF CUSTOMER
(In Thousands)
2001 2000 1999
------- ------- -------
U.S. Department of Defense
Direct $11,847 $ 4,562 $ 5,734
Subcontract 16,878 36,314 35,696
------- ------- -------
Total U.S. Department of Defense 28,725 40,876 41,430
------- ------- -------
Foreign Governments 11 -- 5,147
Foreign Commercial -- -- 2,099
------- ------- -------
Total Foreign and Other 11 -- 7,246
------- ------- -------
Total Sales $28,736 $40,876 $48,676
======= ======= =======
Export Sales from the U.S. were not material for the fiscal year ended June 30,
2001, 2000 and 1999. Export sales do not include Foreign Military Sales through
U.S. Government agencies and prime contractors of $416,000 and $911,000 in the
fiscal years ended June 30, 2000 and 1999, respectively. There were no Foreign
Military Sales in the fiscal year ended June 30, 2001.
Since the substantial portion of the Company's revenue is 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 award could
have a material adverse effect on the Company's financial condition and results
of operations.
In fiscal year 2001, sales to Raytheon/Lockheed Martin JAVELIN Joint Venture
(the "Joint Venture") and Lockheed Martin Corporation ("Lockheed") were $7.4
million or 26% of total sales and $6.2 million or 22% of total sales,
respectively. In fiscal year 2000, sales to the Joint Venture, Lockheed and The
Boeing Company ("Boeing") were $12.1 million or 30% of total sales, $11.8
million or 29% of total sales, and $10.3 million or 25% of total sales,
respectively.
32
In fiscal year 1999, sales to the Joint Venture, Lockheed and Boeing were $20.2
million or 41% of total sales, $8.0 million or 16% of total sales, and $8.5
Million or 17% of total sales, respectively.
SALES BY GEOGRAPHIC AREA
(In Thousands)
United Europe and
States Middle East Consolidated
-------- ----------- ------------
Revenues
2001 $ 28,736 $ -- $ 28,736
2000 40,876 -- 40,876
1999 41,439 7,237 48,676
Operating Income/(Loss)
2001 $ (6,876) $ -- $ (6,876)
2000 3,985 -- 3,985
1999 (1,942) (1,932) (3,874)
Long-Lived Assets
2001 $ 13,352 $ -- $ 13,352
2000 15,476 -- 15,476
1999 18,273 -- 18,273
NOTE 13 SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(In Thousands Except Per Share Data)
September December March June
2001 30 31 31 30
---- --------- -------- ------- -------
Net Sales $ 7,471 $ 7,548 $ 5,749 $ 7,968
Gross Profit 2,159 394 863 585
Operating Loss (110) (1,880) (1,886) (3,000)
Net Income/(Loss) 9 (2,020) (2,055) (3,073)
Income Per Common Share -
Basic and Assuming Dilution
Basic -- (0.25) (0.26) (0.38)
Dilutive -- (0.25) (0.26) (0.38)
As a result of the periodic review of estimated costs at completion and
consideration of changes in facts and circumstances, revisions were
made to the estimated cost to complete for certain contracts in the
second and fourth quarters of fiscal year 2001. Gross margin
adjustments on contracts resulted in a reduction to income of
approximately $700,000 during the second quarter and additional income
of approximately $500,000 during the fourth quarter of fiscal year
2001.
33
In addition, a $657,000 reserve for doubtful accounts and a $1,041,000
reserve for excess and obsolete inventory were recorded in the fourth
quarter of fiscal year 2001. See Notes 2 and 3 to the Consolidated
Financial Statements.
(In Thousands Except Per Share Data)
September December March June
2000 30 31 31 30
---- --------- -------- ------ ------
Net Sales $10,188 $11,058 $9,888 $9,742
Gross Profit 2,963 3,668 3,930 2,929
Operating Income 898 1,241 1,459 387
Net Income 573 1,058 1,310 448
Income Per Common Share -
Basic and Assuming Dilution
Basic $ 0.07 $ 0.13 $ 0.16 $ 0.05
Dilutive $ 0.07 $ 0.12 $ 0.15 $ 0.05
As a result of the periodic review of estimated costs at completion and
consideration of changes in facts and circumstances, revisions were made in the
estimated costs to complete for certain contracts in the second and third
quarters of fiscal year 2000. Gross margin adjustments on contracts resulted in
a reduction to income of approximately $200,000 during the second quarter and
additional income of approximately $1.0 million during the third quarter of
fiscal year 2000.
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain equipment under operating leases.
Future minimum lease payments under all non-cancelable operating leases as of
June 30, 2001 are as follows:
(In Thousands)
--------------
2002 $ 59
2003 46
2004 25
-----
Total Minimum Lease Payments $ 130
=====
Rent expense under all operating leases was approximately $435,000, $456,000 and
$970,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
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.
34
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.
NOTE 15 UNUSUAL EXPENSES
During the first quarter of fiscal year 1999, the Board of Directors announced
the approval of a plan to wind-down and discontinue the U.K. operation. The U.K.
operation wind-down was completed in May 1999. In addition, on September 30,
1998, the Company relocated its corporate headquarters from Wayne, Pennsylvania
to Orlando, Florida. As a result of the efforts to wind-down the U.K. operation
and the relocation of the corporate headquarters, the Company recorded
non-recurring charges of approximately $3.5 million (after the effect of writing
off the U.K. operation's cumulative translation adjustment of $267,000) in
fiscal year 1999. These charges primarily relate to employee termination
benefits and lease termination costs.
The following table sets forth the details and the cumulative activity in the
various accruals associated with the wind down of the U.K. operation and
relocation of the corporate headquarters in the Consolidated Balance Sheet at
June 30, 1999, June 30, 2000 and June 30, 2001 (in thousands):
Facility
Lease
Severance Obligation Other Total
--------- ---------- ----- -------
Incurred in 1999 $ 2,249 $ 1,408 $ 212 $ 3,869
Cash Reductions (2,205) (834) (14) (3,053)
Non-Cash Activity -- (7) (40) (47)
Reversal (8) -- (142) (150)
------- ------- ----- -------
Balance 6/30/99 36 567 16 619
Cash Reductions (36) (436) (16) (488)
Non-Cash Activity -- 11 -- 11
------- ------- ----- -------
Balance 6/30/00 -- 142 -- 142
Cash Reductions -- (140) -- (140)
Non-Cash Activity -- (2) -- (2)
------- ------- ----- -------
Balance 6/30/01 $ -- $ -- $ -- $ --
======= ======= ===== =======
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.
35
Annual compensation costs associated with these actions were $1,500,000 and
$2,800,000, respectively. All employee termination benefits were paid by June
30, 2001, with the exception of $105,000, which is included in Accrued Expenses
and Other.
NOTE 16 LIQUIDITY
At June 30, 2001, the Company was not in compliance with certain financial
covenants under the Company's Credit Facility. See note 7 in the Notes to the
Consolidated Financial Statements. The Company is in the process of resolving
the non-compliance issues by negotiating amended covenants and a reduced Credit
Facility limit. Negotiations are expected to be completed by November 1, 2001.
Based on the Company's 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.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
The Company has nothing to report under this item.
36
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required by Item 10 is included under the
caption "Election of Directors" in the Company's definitive Proxy Statement (the
"2001 Proxy Statement") to be filed pursuant to Regulation 14A on or before
October 29, 2001, and that information is incorporated by reference in this Form
10-K. Information concerning executive officers required by Item 10 is located
at the end of Part I of this Form 10-K under the caption "Executive Officers and
Key Management Employees of the Registrant."
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is included under the subcaption "Directors'
Compensation" and in the text and tables under the caption "Executive
Compensation" in the 2001 Proxy Statement, and that information is incorporated
by reference in this Form 10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the 2001 Proxy
Statement, and that information is incorporated by reference in this Form 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
37
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) and (2) Financial Statements
The financial statements filed as part of this Annual Report are listed in the
Index to Consolidated Financial Statements on page 14. Schedules other than
those so listed are omitted for the reason that they are either not applicable
or not required or because the information required is contained in the
consolidated financial statements or notes thereto.
(3) Exhibits
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation(4)
3.2 By-Laws(1)
4.1 Form of Common Stock Certificate(4)
10.3* Educational Computer Corporation 1986 Non-Qualified Stock
Option Plan(4)
10.4* ECC International Corp. 1991 Option Plan(3)
10.5* Form of Stock Option Agreement for outside directors.(6)
10.8* Form of Director's and Officer's Agreement to Defend and
Indemnify.(2)
10.10 Overdraft Facility dated as of April 3, 1995 by and among ECC
Simulation Limited and First Fidelity Bank, N.A., London
Branch.(7)
10.12 Lease between ECC International Corp and State of Wisconsin
Investment Board for the premises 2900 Titan Row, Orlando,
Florida.(5)
10.16* ECC International Corp Executive Savings Plan.(5)
10.23* Director Equity Compensation Plan(8)
10.28* 1998 Stock Incentive Plan.(10)
10.30* Stock Purchase Agreement dated as of June 15, 1998 by and
between the Company and James C. Garrett.(10)
38
10.31* Promissory Note dated as of June 15, 1998 by and between the
Company and James C. Garrett.(10)
10.32* Consulting Agreement dated as of April 1, 1998 by and between
the Company and George W. Murphy.(10)
10.33* Non-Competition and Non-Solicitation Agreement dated as of
April 1, 1998 by and between the Company and George W.
Murphy.(10)
10.37 Loan and Security Agreement dated June 24, 1999 by and between
the Company and Mellon Bank, N.A.(11)
10.38 1999 Employee Stock Purchase Plan.(12)
10.39 Agreement dated September 16, 1999 by and between the Company,
Steel Partners II, L.P. and Warren G. Lichtenstein.(13)
10.41* Amendment and Restated Non-Competition and Non-Solicitation
Agreement dated August 9, 1999 by and between the Company and
James C. Garrett.(13)
10.42* Employment Agreement dated August 9, 1999 by and between the
Company and Glenn Andrew.(13)
10.43* Non-Competition and Non-Solicitation Agreement dated August 9,
1999 by and between the Company and Glenn Andrew.(13)
10.44* Employment Agreement dated August 9, 1999 by and between the
Company and Melissa Van Valkenburgh.(13)
10.45* Non-Competition and Non-Solicitation Agreement dated August 9,
1999 by and between the Company and Melissa Van
Valkenburgh.(13)
10.46* Employment Agreement dated May 3, 2001 by and between the
Company and James C. Garrett.(13)
10.47* Change of Control Contract dated May 3, 2001 by and the
Company and James C. Garrett.(14)
21 Subsidiaries of the Registrant.(9)
23 Consent of PricewaterhouseCoopers, LLP.
27 Financial Data Schedule.
* Management contract or other compensatory plan or arrangement.
1 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for
39
the quarter ended December 31, 1996. (Commission File No. 001-8988)
2 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996. (Commission File No.
001-8988)
3 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1991. (Commission File No. 001-8988)
4 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1993. (Commission File No. 001-8988)
5 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995. (Commission File No.
001-8988)
6 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1994. (Commission File No. 001-8988)
7 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1995. (Commission File No. 001-8988)
8 Incorporated by reference to Annex A of the Registrant's Definitive
Schedule 14A filed with the SEC on October 27, 1997. (Commission File
No. 001-8988)
9 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997. (Commission File No. 001-8988)
10 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1998. (Commission File No. 001-8988)
11 Incorporated by reference to the Registrant's Current Report on Form
8-K filed July 8, 1999. (Commission File No. 001-8988)
40
12 Incorporated by reference to the Registrant's Definitive Schedule 14A
filed on October 28, 1998. (Commission File No. 001-8988)
13 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999. (Commission File No.
001-8988)
14 Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001. (Commission File No.
001-8988)
(B) REPORTS ON FORM 8-K
None.
41
Schedule II-Valuation and Qualifying Accounts
For the Years Ended June 30, 2001, 2000, and 1999
(In Thousands)
Additions
Charged to Charged to
Beginning Costs and Other Ending
Description Balance Expenses Accounts Deductions Balance
----------- --------- ---------- ---------- ---------- -------
Inventory Reserve
1999 $ 110 $ 398 $ -- $ -- $ 508
2000 508 2,080 -- (424) $2,164
2001 2,164 1,282 -- (634) $2,812
Allowance for
Doubtful Accounts
1999 -- -- -- -- --
2000 -- -- -- -- --
2001 -- 657 -- -- 657
Valuation Allowance
for Deferred Tax Assets
1999 4,857 711 -- -- 5,568
2000 5,568 -- -- (1,186) 4,382
2001 $4,382 $2,686 $ -- $ -- 7,068
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Melissa Van Valkenburgh
--------------------------------------------------------
Melissa Van Valkenburgh, Vice President, Finance
Date: October 11, 2001
------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated, by a majority of the Board of
Directors.
/s/ James C. Garrett )
------------------------------------------------------- )
James C. Garrett, President, Chief Executive )
Officer and Principal Executive Officer )
)
)
/s/ Julian Demora )
------------------------------------------------------- )
Julian Demora, Director )
)
)
/s/ James Henderson )
------------------------------------------------------- )
James Henderson, Director )
)
)
/s/ Jesse Krasnow )
------------------------------------------------------- )
Jesse Krasnow, Director ) October 11, 2001
)
)
/s/ Warren Lichtenstein )
------------------------------------------------------- )
Warren Lichtenstein, Director )
)
)
/s/ Merrill A. McPeak )
------------------------------------------------------- )
Merrill A. McPeak, Director )
)
)
/s/ Robert F. Mehmel )
------------------------------------------------------- )
Robert F. Mehmel, Director )
)
)
/s/ Melissa Van Valkenburgh )
------------------------------------------------------- )
Melissa Van Valkenburgh, Principal Financial Officer )
43
ECC International Corp. Corporate Directory
DIRECTORS OFFICERS CORPORATE COUNCEL
Julian J. Demora James C. Garrett Olshan, Grundman, Frome,
President President and Chief Rosenzweig & Wolosky, LLP
Key Realty Development, Inc. Executive Officer 505 Park Ave, 17th Floor
Hollywood, Florida New York, NY 10022
Glenn C. Andrew
James C. Garrett Executive Vice President ANNUAL MEETING
President The 2001 Annual Meeting
ECC International Corp. Melissa A. Van Valkenburgh will be held November 30,
Orlando, Florida Vice President, Finance, 2001 at:
Chief Financial Officer, ECC International Corp.
James R. Henderson Secretary/Treasurer 2001 West Oak Ridge Rd
Vice President of Operations Orlando, FL 32809-3803
Steel Partners, LLP Steve Stankiewicz
New York, New York Vice President, Business ADDITIONAL INFORMATION
Development Copies of the Company's
Jesse L. Krasnow Annual Report can be
Partner: Lefferts Fore Associates CORPORATE INFORMATION obtained without charge by
New York, New York ECC International Corp. writing to:
2001 West Oak Ridge Road
Warren G. Lichtenstein Orlando, FL 32809-3803 INVESTOR RELATIONS
President (407) 859-7410 ECC International Corp.
Steel Partners, LLP 2001 West Oak Ridge Road
New York, New York Transfer Agent and Registrar Orlando, FL 32809-3803
Mellon Investor Services
Merrill A. McPeak P.O. Box 590
General USAF (Retired) Ridgefield Park, NJ 07660
President www.chasemellon.com
McPeak & Associates
Lake Oswego, Oregon Independent Accountants
PricewaterhouseCoopers, LLP
Robert F. Mehmel 390 N. Orange Avenue
DRS Technology Suite 2400
Parsippany, NJ Orlando, FL 32801
44