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 ------------------------------------------------- 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 -------------------------------------------------------- ECC International Corp. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 23-1714658 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2001 West Oak Ridge Road, Orlando, FL 32809-3803 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (407) 859-7410 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------------------------------------- (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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 ------- ------- Gross Profit 1,717 2,159 ------- ------- Expenses: Selling, General & Administrative 1,797 2,199 Independent Research and Development 484 70 ------- ------- Total Expenses 2,281 2,269 ------- ------- Operating Loss (564) (110) ------- ------- Other Income/(Expense): Interest Income 8 37 Interest Expense (24) (44) Other - Net 44 126 ------- ------- 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 ------- ------- Total Current Assets 13,937 14,304 ------- ------- Property, Plant and Equipment - Net 13,013 13,352 Other Assets 86 116 ------- ------- Total Assets $27,036 $27,772 ======= ======= 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 ----------- --------- 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 -------- -------- Total Current Liabilities 3,734 3,913 Deferred Income Taxes 61 61 Other Long-Term Liabilities -- 26 -------- -------- Total Liabilities 3,795 4,000 -------- -------- 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) -------- -------- Total Stockholders' Equity 23,241 23,772 -------- -------- Total Liabilities & Stockholders' Equity $ 27,036 $ 27,772 ======== ======== See accompanying notes to the consolidated financial statements. 4 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 ------------ ------------ 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) ------- ------- Net Cash Provided by/(Used In) Operating Activities 1,717 (434) ------- ------- Cash Flows From Investing Activities: Proceeds from Sales of Assets 4 120 Additions to Property, Plant and Equipment (189) (111) ------- ------- Net Cash Provided/(Used In) by Investing Activities (185) 9 ------- ------- 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) -- ------- ------- Net Cash Used In By Financing Activities (157) (1,491) ------- ------- Net Increase/(Decrease) in Cash 1,375 (1,916) Cash at Beginning of the Period 39 2,406 ------- ------- Cash at End of the Period $ 1,414 $ 490 ======= ======= 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 ------------ ------------ 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 -------- -------- Work in Process $ 161 $ 97 Raw Materials 3,898 3,869 ------- ------- Total Gross Value 4,059 3,966 Reserves for Excess/Obsolete (2,842) (2,812) ------- ------- 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) ------- Accrued Employee Termination Benefits at 9/30/01 $ 284 ======= 8 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 ------- ------- U.S. Department of Defense Direct $ 1,571 $ 2,260 Subcontract 4,576 5,211 ------- ------- Total Sales $ 6,147 $ 7,471 ======= ======= 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 --------- --------- 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. 10 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 ------------ 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 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECC INTERNATIONAL CORP. Date November 14, 2001 /S/ Melissa Van Valkenburgh ----------------- ---------------------------------- Melissa Van Valkenburgh Chief Financial Officer 16