e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 2009
Commission File Number 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
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Pennsylvania
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23-1714256 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
County Line Industrial Park
Southampton, Pennsylvania 18966
(Address of principal executive offices, Zip Code)
Registrants telephone number, including area code (215) 355-9100
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.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted,
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or such shorter period that the registrant was required to submit and post such files).
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
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Large Accelerated Filer o
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Accelerated Filer o
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Non-accelerated Filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined on Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of January 8, 2010, there were 9,073,052 shares of the registrants common stock issued and
outstanding.
Index
When used in this Quarterly Report on Form 10-Q, except where the context otherwise requires,
the terms we, us, our, ETC and the Company refer to Environmental Tectonics Corporation
and its subsidiaries.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Environmental
Tectonics Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share information)
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Thirteen week period |
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Thirty-nine week period |
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ended |
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ended |
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November 27, |
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November 28, |
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November 27, |
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November 28, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
10,974 |
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$ |
8,706 |
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$ |
30,415 |
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$ |
27,405 |
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Cost of goods sold |
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6,530 |
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5,749 |
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16,588 |
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19,911 |
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Gross profit |
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4,444 |
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2,957 |
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13,827 |
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7,494 |
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Operating expenses: |
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Selling and administrative |
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2,905 |
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2,434 |
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8,599 |
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8,502 |
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Research and development |
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(201 |
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247 |
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254 |
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946 |
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2,704 |
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2,681 |
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8,853 |
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9,448 |
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Operating profit (loss) |
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1,740 |
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276 |
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4,974 |
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(1,954 |
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Other expenses: |
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Interest expense |
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164 |
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417 |
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1,030 |
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1,287 |
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Loss on extinguishment of debt |
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91 |
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315 |
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Other, net |
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121 |
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(27 |
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242 |
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(38 |
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376 |
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390 |
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1,587 |
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1,249 |
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Income (loss) before income taxes |
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1,364 |
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(114 |
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3,387 |
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(3,203 |
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Income tax benefit |
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2,606 |
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2,606 |
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Income (loss) before noncontrolling interest |
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3,970 |
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(114 |
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5,993 |
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(3,203 |
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Income (loss) attributable to noncontrolling interest |
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(8 |
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(1 |
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(4 |
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(6 |
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Net income (loss) |
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3,978 |
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(113 |
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5,997 |
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(3,197 |
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Preferred stock dividends |
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(594 |
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(230 |
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(1,289 |
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(695 |
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Income (loss) applicable to common shareholders |
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$ |
3,384 |
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$ |
(343 |
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$ |
4,708 |
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$ |
(3,892 |
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Per share information: |
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Earnings (loss) per common share: |
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Basic |
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$ |
0.37 |
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$ |
(0.04 |
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$ |
0.52 |
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$ |
(0.43 |
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Diluted |
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$ |
0.19 |
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$ |
(0.04 |
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$ |
0.28 |
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$ |
(0.43 |
) |
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Weighted average common shares: |
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Basic |
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9,071,000 |
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9,035,000 |
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9,066,000 |
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9,035,000 |
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Diluted |
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21,277,000 |
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9,035,000 |
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21,290,000 |
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9,035,000 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Environmental
Tectonics Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share information)
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November 27, |
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February 27, |
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2009 |
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2009 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
2,973 |
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$ |
520 |
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Restricted cash |
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3,018 |
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4,454 |
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Accounts receivable, net of allowance for bad debt of $411 and $364 |
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9,194 |
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5,100 |
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Costs and estimated earnings in excess of billings on uncompleted long-term contracts |
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4,470 |
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2,460 |
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Inventories, net |
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6,084 |
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4,435 |
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Deferred tax assets, current |
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5,683 |
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2,431 |
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Prepaid expenses and other current assets |
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890 |
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398 |
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Total current assets |
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32,312 |
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19,798 |
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Property, plant and equipment, at cost, net |
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13,581 |
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15,786 |
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Construction in progress |
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275 |
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Software development costs, net of accumulated amortization of $13,773 and $13,105 |
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712 |
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1,013 |
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Other assets |
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411 |
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406 |
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Total assets |
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$ |
47,016 |
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$ |
37,278 |
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LIABILITIES |
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Current portion of long-term debt |
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$ |
130 |
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$ |
9 |
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Accounts payable trade |
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2,233 |
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2,105 |
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Billings in excess of costs and estimated earnings on uncompleted long-term contracts |
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4,314 |
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4,155 |
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Customer deposits |
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2,164 |
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2,397 |
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Accrued interest and dividends |
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725 |
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4,197 |
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Deferred tax liabilities, current |
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Other accrued liabilities |
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2,739 |
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2,251 |
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Total current liabilities |
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12,305 |
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15,114 |
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Long-term obligations, less current portion: |
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Credit facility payable to bank |
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13,843 |
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10,510 |
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Promissory note payable |
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1,891 |
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Subordinated convertible debt |
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9,664 |
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Other long-term debt |
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26 |
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7 |
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13,869 |
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22,072 |
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Deferred tax liabilities |
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3,003 |
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2,350 |
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Unearned interest |
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95 |
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152 |
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Total liabilities |
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29,272 |
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39,688 |
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Commitments and contingencies |
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Cumulative convertible participating preferred stock, Series B, $.05 par value, 15,000 shares authorized; 6,000 shares issued and outstanding at
February 27, 2009 |
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6,000 |
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Cumulative convertible participating preferred stock, Series C, $.05 par value, 3,300 shares authorized, issued and outstanding at February 27, 2009 |
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3,300 |
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STOCKHOLDERS EQUITY (DEFICIENCY) |
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Cumulative convertible participating preferred stock, Series D, $.05 par value, 11,000 shares authorized; 155 shares outstanding |
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155 |
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Cumulative convertible participating preferred stock, Series E, $.05 par value, 25,000 shares authorized; 23,741 shares outstanding |
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23,741 |
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Common stock, $.05 par value, 50,000,000 shares authorized; 9,073,052 and 9,049,351 shares issued and outstanding |
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453 |
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452 |
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Additional paid-in capital |
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14,595 |
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15,399 |
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Accumulated other comprehensive loss |
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(189 |
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(557 |
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Accumulated deficit |
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(21,049 |
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(27,046 |
) |
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Total stockholders equity (deficiency) |
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17,706 |
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(11,752 |
) |
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Noncontrolling interest |
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38 |
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42 |
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Total stockholders equity (deficiency) |
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17,744 |
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(11,710 |
) |
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Total liabilities and stockholders equity (deficiency) |
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$ |
47,016 |
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$ |
37,278 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Environmental Tectonics Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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Thirty-nine week period ended |
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November 27, |
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November 28, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
5,997 |
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$ |
(3,197 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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1,458 |
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1,668 |
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Decrease in valuation allowance for deferred tax assets |
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(2,606 |
) |
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Loss on extinguishment of debt |
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315 |
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Accretion of debt discount |
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225 |
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223 |
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Increase in allowances for accounts receivable and inventories, net |
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497 |
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(5 |
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Loss attributable to noncontrolling interest |
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(4 |
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(6 |
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Stock compensation expense |
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43 |
|
Changes in operating assets and liabilities: |
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Accounts receivable |
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(4,141 |
) |
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(467 |
) |
Costs and estimated earnings in excess of billings on uncompleted long-term contracts |
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(2,010 |
) |
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2,696 |
|
Inventories |
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|
840 |
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|
1,702 |
|
Prepaid expenses and other assets |
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48 |
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(229 |
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Accounts payable |
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128 |
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(751 |
) |
Billings in excess of costs and estimated earnings on uncompleted long-term contracts |
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159 |
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(2,296 |
) |
Customer deposits |
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(233 |
) |
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|
(320 |
) |
Other accrued liabilities |
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492 |
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|
1,336 |
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Net cash provided by operating activities |
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1,165 |
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|
397 |
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Cash flows from investing activities: |
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Acquisition of equipment |
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(1,337 |
) |
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(982 |
) |
Capitalized software development costs |
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(279 |
) |
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(227 |
) |
Payments for construction in progress |
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(381 |
) |
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Net cash used in investing activities |
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(1,616 |
) |
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|
(1,590 |
) |
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Cash flows from financing activities: |
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Borrowings under lines of credit, net |
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3,333 |
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|
100 |
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Repayment of note payable |
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(2,000 |
) |
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Issuance of common stock |
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1 |
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Borrowings (payments) of other debt obligations |
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140 |
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(7 |
) |
Payment of dividends |
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(374 |
) |
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|
Payment of claim settlement costs |
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(2,275 |
) |
Decrease in restricted cash |
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1,436 |
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|
2,052 |
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Net cash provided by (used in) financing activities |
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2,536 |
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(130 |
) |
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Effect of exchange rate changes on cash |
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368 |
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Net increase (decrease) in cash |
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2,453 |
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(1,323 |
) |
Cash at beginning of period |
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|
520 |
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|
1,871 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
2,973 |
|
|
$ |
548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
364 |
|
|
$ |
383 |
|
Income taxes paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information on non-cash operating and investing activities: |
|
|
|
|
|
|
|
|
Accrued dividends on preferred stock |
|
$ |
319 |
|
|
$ |
695 |
|
On July 2, 2009, the Company exchanged certain existing related-party financial instruments for a newly-created class of Series E
Convertible Preferred Stock. The value of this exchange was $23,741. Additionally, the Company issued $155 of Series D Preferred Stock
as loan origination fees in connection with the $7,500 Lenfest Credit Facility. See Note 2 Long-Term Obligations and Credit
Arrangements.
In the thirty-nine week period ended November 27, 2009, the Company reclassed $2,939 from property, plant and equipment to contract
inventory.
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements include the accounts of
Environmental Tectonics Corporation (ETC or the Company), Entertainment Technology Corporation
(EnTCo), ETC International Corporation and ETC-Delaware, its wholly-owned subsidiaries, ETC
Europe, its 99% owned subsidiary, and ETC-PZL Aerospace Industries, Ltd. (ETC-PZL), its 95% owned
subsidiary. ETC Southampton refers to the Companys corporate headquarters and main production
plant located in Southampton, Pennsylvania, USA. All significant inter-company accounts and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all the information and the footnotes required by
accounting principles generally accepted in the United States of America (GAAP) for complete
financial statements. These condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) which are, in the opinion of management, necessary for
the fair presentation of the financial position, results of operations and cash flows for the
interim periods. These condensed consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended February 27, 2009. The results of operations for the interim
period are not indicative of results to be expected for the full year.
Certain amounts from the audited February 27, 2009 Balance Sheet have been reclassified for
comparative purposes.
References to fiscal third quarter 2010 and the nine months of fiscal 2010 are references to
the thirteen and thirty-nine week periods ended November 27, 2009, respectively. References to
fiscal third quarter 2009 and the first nine months of fiscal 2009 are references to the thirteen
and thirty-nine week periods ended November 28, 2008.
Earnings Per Common Share
Basic earnings (loss) per share is computed on the basis of the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of outstanding stock options
and common stock warrants using the treasury stock method plus the effect of all convertible
financial instruments including subordinated debt and preferred stock as if they had been converted
at the beginning of each period presented.
At November 27, 2009, there was $23,896,000 of cumulative convertible participating preferred
stock. These instruments were convertible at exercise prices of:
|
|
|
Series D Preferred Stock of $55,000 at $0.94 per share, equating to 58,511 shares of
common stock, issued in April 2009; |
|
|
|
|
Series D Preferred Stock of $100,000 at $1.11 per share, equating to 90,090 shares of
common stock, issued in July 2009; |
|
|
|
|
Series E Preferred Stock of $23,741,000 at $2.00 per share, equating to 11,870,500
shares of common stock, issued in July 2009. |
On February 20, 2009, in connection with the issuance of a $2,000,000 promissory note, the
Company issued warrants to purchase 143,885 shares of the Companys common stock at $1.39 per
share. Additionally, on July 2, 2009, in consideration of an increase of the guarantee on the PNC
line of credit, the Company issued warrants to purchase 450,450 shares of the Companys common
stock at $1.11 per share. (See Note 2, Long-Term Obligations and Credit Arrangements, following.)
At November 27, 2009 and November 28, 2008, there were options to purchase the Companys
common stock totaling 157,652 and 332,390 shares at an average price of $5.90 and $6.87 per share,
respectively. Due to the conversion price of these common stock options, these shares were excluded
from the calculation of diluted earnings (loss) per share because the effect was antidulutive.
6
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The following table is the reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations for the thirteen and thirty-nine week periods ended
November 27, 2009. Due to the loss for the thirteen and thirty-nine week periods ended November 28,
2008, the effect of dilutive securities for these periods are not presented since the effect would
be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen week period ended |
|
|
Thirty-nine week period ended |
|
|
|
November 27, 2009 |
|
|
November 27, 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
per |
|
|
|
|
|
|
Weighted |
|
|
per |
|
|
|
Income |
|
|
average |
|
|
share |
|
|
Income |
|
|
average |
|
|
share |
|
|
|
(in thousands) |
|
|
shares |
|
|
amount |
|
|
(in thousands) |
|
|
shares |
|
|
amount |
|
Net income |
|
$ |
3,978 |
|
|
|
|
|
|
|
|
|
|
$ |
5,997 |
|
|
|
|
|
|
|
|
|
Less preferred stock dividends |
|
|
(594 |
) |
|
|
|
|
|
|
|
|
|
|
(1,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings available to common shareholders |
|
$ |
3,384 |
|
|
|
9,071,000 |
|
|
$ |
0.37 |
|
|
$ |
4,708 |
|
|
|
9,066,000 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
12,019,000 |
|
|
|
|
|
|
|
|
|
|
|
12,019,000 |
|
|
|
|
|
Stock warrants |
|
|
|
|
|
|
187,000 |
|
|
|
|
|
|
|
|
|
|
|
205,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings available to common shareholders |
|
$ |
3,384 |
|
|
|
|
|
|
|
|
|
|
$ |
5,997 |
|
|
|
|
|
|
|
|
|
Add: Preferred stock dividend |
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders plus effect of dilutive securities |
|
$ |
3,978 |
|
|
|
21,277,000 |
|
|
$ |
0.19 |
|
|
$ |
5,997 |
|
|
|
21,290,000 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
Research and Development Costs
Research and development costs, which relate primarily to the development, design and testing
of products, are expensed as incurred. The Company enters into research grants with various
government entities, both in the United States and internationally. Payments received under these
grants are recorded as a reduction of research and development costs.
Significant Accounting Policies
Subsequent Events
These financial statements were approved by management and were issued on January 11, 2010.
Management has evaluated subsequent events through this date.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes as well as the valuation of net
loss carryforwards. Valuation allowances are reviewed each fiscal period to determine whether there
is sufficient positive or negative evidence to support a change in judgment about the realizability
of the related deferred tax asset.
We believe adequate provision has been made for all outstanding issues for all open years.
Significant judgments and estimates are required in determining the provision for taxes, including
judgments and estimates regarding the realization of deferred tax assets and the ultimate outcomes
of tax-related contingencies. During the normal course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We either recognize a
liability, including interest, or reduce a tax asset, for the anticipated outcome of tax audits. We
adjust these amounts in light of changing facts and circumstances.
Other than the aforementioned Subsequent Event disclosure, there have been no material changes
in the Companys significant accounting policies during fiscal 2010 as compared to what was
previously disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended February
27, 2009.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) revised the authoritative
guidance for financial instruments The guidance requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements. This guidance is effective for interim periods ending after June 15, 2009.
This pronouncement has not had a material impact on the Companys financial position and results of
operations.
In April 2009, the FASB revised the authoritative guidance for fair value measurements and
disclosures to provide additional guidance in determining whether a market for a financial asset is
not active and a transaction is not distressed for fair value measurement purposes. This guidance
is effective for interim periods ending after June 15, 2009. We adopted this guidance for the
period ending June 30, 2009. The adoption of this guidance had no effect on our consolidated
results of operations and financial condition for the thirteen and
twenty-six week periods ended August 28, 2009.
7
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
In June 2009, the FASB established the FASB Accounting Standards Codification the
Codification as the source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied to nongovernmental entities and rules and
interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification
supersedes all the existing non-SEC accounting and reporting standards upon its effective date and
subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions
or Emerging Issues Task Force Abstracts. This guidance is effective for interim periods ending
after September 15, 2009. We adopted this guidance for the thirteen week period ended November 27,
2009, with no effect on our consolidated results of operations and financial condition for the
thirteen and thirty-nine week periods ended November 27, 2009.
In October 2009, the FASB issued Update No. 2009-13, which amends the Revenue Recognition
topic of the Codification. This update provides amendments to the criteria in Subtopic 605-25 of
the Codification for separating consideration in multiple-deliverable arrangements. As a result of
those amendments, multiple-deliverable arrangements will be separated in more circumstances than
under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the
selling price of a deliverable and will replace the term fair value in the revenue allocation
guidance with selling price to clarify that the allocation of revenue is based on entity-specific
assumptions rather than assumptions of a marketplace participant. The amendments will also
eliminate the residual method of allocation and require that arrangement consideration be allocated
at the inception of the arrangement to all deliverables using the relative selling price method and
will require that a vendor determine its best estimate of selling price in a manner that is
consistent with that used to determine the price to sell the deliverable on a standalone basis.
These amendments will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact the adoption of this update might have on our
consolidated results of operations and financial condition.
2. Long-Term Obligations and Credit Arrangements
Lenfest Financing Transaction
On April 24, 2009, the Company entered into a transaction (the Lenfest Financing
Transaction) with H.F. Lenfest, a member of ETCs Board of Directors and a significant shareholder
of and investor in ETC (Lenfest), that provided for the following: (i) a $7,500,000 credit
facility provided by Lenfest to ETC; (ii) exchange of the Subordinated Note (as defined below) held
by Lenfest, together with all accrued interest and warrants issuable under the Subordinated Note,
and all Series B Preferred Stock (as defined below) and Series C Preferred Stock (as defined below)
held by Lenfest, together with all accrued dividends thereon, for a new class of preferred stock,
Series E Preferred Stock, of the Company; and (iii) the guarantee by Lenfest of all of ETCs
obligations to PNC Bank, National Association (PNC Bank) in connection with an increase of the
Companys existing $15,000,000 revolving line of credit with PNC Bank (the 2007 PNC Credit
Facility) to $20,000,000, and in connection with this guarantee, the pledge by Lenfest to PNC Bank
of $10,000,000 in marketable securities.
On July 2, 2009, the Company held its 2009 Annual Meeting of Shareholders, at which time the
Company obtained shareholder approval (the Shareholder Approvals) of the Lenfest Financing
Transaction and certain other matters.
Lenfest Credit Facility
As part of the Lenfest Financing Transaction, the Company established a credit facility in the
maximum amount of $7,500,000 with Lenfest (the Lenfest Credit Facility). The Lenfest Credit
Facility is required to be used to finance certain government projects that ETC has been awarded or
is seeking to be awarded. The terms of the Lenfest Credit Facility are set forth in a Secured
Credit Facility and Warrant Purchase Agreement between the Company and Lenfest, dated as of April
24, 2009 (the Lenfest Credit Agreement). In connection with the Lenfest Credit Agreement, the
Company has executed, and will in the future execute, promissory notes in favor of Lenfest, in the
aggregate principal amount of up to $7,500,000 (the Lenfest Credit Facility Note) based on the
amount borrowed by the Company pursuant to the Lenfest Credit Agreement. As a result of obtaining
the Shareholder Approvals, each Lenfest Credit Facility Note issued under the Lenfest Credit
Facility will accrue interest at the rate of 10% per annum (rather than the original interest rate
of 15% per annum), payable in cash or, at the option of Lenfest, in shares of Series D Preferred
Stock of the Company, as described below. As of November 27, 2009, the Company had $7.5 million
available funding under this facility.
Increase in Authorized Common Shares
On July 2, 2009, in connection with the closing of the Lenfest Financing Transaction, the
Company filed with the Department of State of the Commonwealth of Pennsylvania an Amendment to the
Articles of Incorporation increasing the number of authorized shares of common stock from
20,000,000 to 50,000,000.
8
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Exchange of Existing Instruments for Series E Preferred Stock
On April 24, 2009, the Company authorized the issuance of two newly-created classes of
Convertible Preferred Stock, Series D and Series E. Shares of these have been issued in connection
with the Lenfest Financing Transaction. In accordance with standards defined by generally accepted
accounting principles on classification and measurement of redeemable securities, the Company has
accounted for both of these issues as permanent equity under Shareholders Equity in the
accompanying consolidated condensed balance sheets. The Companys Series B and C Preferred Stock
had been classified as mezzanine due to a preferential redemption feature of these instruments,
which provided that a change in ownership would result in a forced liquidation. The Series D and E
shares do not contain this provision. With respect to the convertibility of the Series D and E
shares, in accordance with standards defined by generally accepted accounting principles on
determining whether an instrument (or embedded feature) is indexed to an entitys own stock and has
concluded that the embedded conversion feature did not have a material effect on its stated value.
As part of the Lenfest Financing Transaction, the senior subordinated convertible promissory
note (the Subordinated Note) in the original principal amount of $10,000,000 issued by ETC to
Lenfest on February 18, 2003, together with all accrued interest and warrants issuable pursuant to
the terms of the Subordinated Note, and all Series B Convertible Preferred Stock (the Series B
Preferred Stock) and Series C Cumulative Convertible Preferred Stock of the Company (the Series C
Preferred Stock) held by Lenfest, together with all accrued dividends thereon, were exchanged (the
Series E Exchange) for shares of a newly-created class of Series E Convertible Preferred Stock of
the Company (the Series E Preferred Stock).
On July 2, 2009, following the receipt of the Shareholder Approvals, the Company filed with
the Department of State of the Commonwealth of Pennsylvania a Statement with Respect to Shares of
Series E Convertible Preferred Stock creating a new class of preferred stock consisting of 25,000
shares with a stated value of $1,000 per share and designated Series E Convertible Preferred Stock.
Immediately thereafter, the Series E Exchange occurred and the Company issued 23,741 shares of
Series E Preferred Stock to Lenfest. The shares of Series E Preferred Stock are convertible to
common stock at a conversion price per share equal to $2.00 and would convert into 11,870,500
shares of ETC common stock.
Below is a summary of the instruments exchanged:
|
|
|
|
|
|
|
Balance |
|
|
|
upon |
|
Description |
|
exchange |
|
Subordinated convertible note |
|
$ |
10,000,000 |
|
Accrued interest on subordinated convertible note |
|
|
2,275,000 |
|
Series B Preferred stock |
|
|
6,000,000 |
|
Series C Preferred Stock |
|
|
3,300,000 |
|
Accrued dividends on preferred stock, Series B and C |
|
|
2,166,000 |
|
|
|
|
|
Series E Preferred Stock issued in exchange |
|
$ |
23,741,000 |
|
|
|
|
|
As a result of this exchange, the Company recorded a loss on extinguishment of debt on
the Subordinated Note of $224,000, representing the unamortized portion of the debt discount.
Lenfest Promissory Note
On February 20, 2009, Lenfest made a loan to ETC in the principal amount of $2,000,000 (the
$2 million Loan), which amount was considered as advanced under the Lenfest Credit Facility. The
$2 million Loan was used by ETC solely to support ETCs requirements under a proposal for a U.S.
Government bid. The terms of the $2 million Loan were set forth in a Secured Promissory Note,
dated February 20, 2009, by ETC in favor of Lenfest.
In connection with the $2 million Loan, the Company issued 143,885 warrants to purchase the
Companys common stock at $1.39 per share. Consequently, the Company recorded a debt discount of
$109,000 associated with these warrants using the Black-Scholes options-pricing model with the
following weighted average assumptions: expected volatility of 107.0%; risk-free interest rate of
0.64%; and an expected life of seven years. Additionally, the Company issued 20,000 shares of the
Companys common stock as part of this transaction. The value of the stock issued, $19,000, has
been recorded as a loan origination fee. The $2,000,000 in proceeds from the $2 Million Loan was
included in Restricted Cash on the accompanying Condensed Consolidated Balance Sheets as of
February 27, 2009. On September 1, 2009, the Company repaid the $2 million Loan in full. The
unamortized portion of the original debt discount, $91,000, was expensed during the fiscal quarter
ended November 27, 2009, and is reflected as extinguishment of debt on the accompanying Condensed
Consolidated Statement of Operations.
9
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Bank Credit and Facility
Increased PNC Bank Credit Facility and Issuance of New Guarantee
On April 24, 2009, PNC Bank agreed to increase the amount of financing available under the
2007 PNC Credit Facility from $15,000,000 to $20,000,000, subject to the condition that Lenfest
continue to personally guarantee all of ETCs obligations to PNC Bank (the Lenfest Guaranty) and
that Lenfest pledged $10,000,000 in marketable securities as collateral security for his guarantee
(the Lenfest Pledge).
Following the receipt of the Shareholder Approvals on July 2, 2009, ETC and PNC Bank entered
into the Amended and Restated Credit Agreement (the Amended and Restated PNC Credit Agreement)
and the Second Amended and Restated Reimbursement Agreement for Letters of Credit (the Amended and
Restated Reimbursement Agreement). The promissory note executed by ETC in favor of PNC Bank in
connection with the 2007 PNC Credit Facility was cancelled and replaced with the Amended and
Restated Promissory Note in the principal amount of $20,000,000 (the Amended and Restated PNC
Note).
In connection with the execution of the 2009 PNC Financing Documents, ETC paid to Lenfest an
origination fee of 100 shares of Series D Convertible Preferred Stock of the Company (the Series D
Preferred Stock), which is equal to one percent (1%) of the market value of the $10,000,000 in
marketable securities pledged by Lenfest to PNC Bank to secure ETCs obligations to PNC Bank. The
100 shares of Series D Preferred Stock have a stated value of $1,000 per share, or $100,000 in the
aggregate. These shares of Series D Preferred Stock have a conversion price per share equal to
$1.11, which price equaled the average closing price of ETC common stock during the 120 days prior
to the issuance of such shares, and would convert into 90,090 shares of ETC common stock.
Additionally, ETC will pay Lenfest annual interest equal to 2% of the amount of the Lenfest Pledge,
payable in Series D Preferred Stock.
In consideration of Lenfest entering into the Amended and Restated Guaranty, ETC issued to
Lenfest warrants to purchase 450,450 shares of ETC common stock, which shares were equal in value
to ten percent (10%) of the amount of the $5,000,000 increase under the 2007 PNC Bank Credit
Facility. The warrants are exercisable for seven years following issuance at an exercise price per
share equal to $1.11, which price equaled the average closing price of ETC common stock during the
120 days prior to the issuance of the warrant. The Company has recorded a loan origination deferred
charge associated with these warrants of $487,000 using the Black-Scholes options-pricing model
with the following weighted average assumptions: expected volatility of 91.9%; risk-free interest
rate of 0.49%; and an expected life of seven years.
Amounts borrowed under the Amended and Restated PNC Credit Agreement could be borrowed, repaid
and reborrowed from time to time until June 30, 2010. Borrowings made pursuant to the Amended and
Restated PNC Credit Agreement bear interest at either the prime rate (as described in the
promissory note executed pursuant to the Amended and Restated PNC Credit Agreement) plus 0.50
percentage points or the London Interbank Offered Rate (LIBOR) (as described in the Promissory
Note) plus 2.50 percentage points. Additionally, ETC is obligated to pay a fee of 0.125% per year
for unused but available funds under the line of credit.
The Amended and Restated PNC Credit Agreement signed on April 24, 2009 contains affirmative
and negative covenants including, but not limited to, limitations with respect to indebtedness,
liens, investments, distributions, dispositions of assets, change of business and transactions with
affiliates. The Company was required to maintain a minimum Consolidated Tangible Net Worth (which,
as defined, is total assets excluding intangibles less liabilities excluding the Subordinated
Convertible Debt) of $3,500,000 for each fiscal quarter starting February 27, 2009 and thereafter.
Additionally, the Company was required to maintain a minimum Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA), defined as net income plus interest expense plus income
tax expense plus amortization plus depreciation, as follows: fiscal 2010 third quarter $1,000,000,
fiscal 2010 fourth quarter $900,000 and all fiscal quarters ending after February 28, 2010,
$1,300,000.
On October 1, 2009, the PNC Credit Agreement was amended to extend the maturity date to June
30, 2011. Additionally, the affirmative covenants were adjusted. The Consolidated Tangible Net
Worth covenant was modified to reflect the impact on the Companys balance sheet of the Lenfest
Financing Transaction. Effective with each fiscal quarter ending after October 1, 2009, the Company
must maintain a minimum Consolidated Tangible Net Worth of at least $10,000,000. The EBITDA
covenant was changed for fiscal periods beginning after December 1, 2009. Beginning with the first
fiscal quarter ending after December 1, 2009, and for each fiscal quarter ending thereafter, the
Company must maintain a minimum cumulative aggregate EBITDA of $4,000,000 for the fiscal quarter
then ending and the three preceding fiscal quarters.
10
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
As of November 27, 2009, the Companys availability under the PNC Credit Agreement was
approximately $4,959,000. This reflected cash borrowings under the PNC Credit Agreement of
$13,360,000 and outstanding letters of credit of approximately $1,681,000.
For the purpose of reducing the risk associated with variable interest rates, ETC has entered
into an interest rate swap agreement (the Swap Agreement) with PNC Bank which provides for a
fixed rate through June 30, 2010, the maturity date of the Swap Agreement, for a portion of the
Companys bank borrowings. If the Swap Agreement is terminated prior to maturity, an additional
payment to PNC Bank or a credit to the Company might be due, based on the relative market rates at
the time of termination. The Swap Agreement transaction has been accounted for under the generally
accepted accounting principle for accounting for derivative instruments and hedging activities. At
November 27, 2009, ETC recorded a Comprehensive Loss of $146,000 reflecting the reduced value of
the interest rate hedge in the accompanying Condensed Consolidated Balance Sheets.
Due to the Companys accumulated deficit, all dividends accruing for the previous Series B and
C and current Series D and E Preferred Stock issuances have been recorded in the accompanying
financial statements as a reduction in additional paid-in capital.
Subordinated Convertible Debt
As part of the Lenfest Financing Transaction, subordinated convertible debt, which had a
face-value of $10 million, was exchanged for Series E Preferred Stock on July 2, 2009. The
unamortized portion of the original debt discount, $224,000, was expensed during the fiscal quarter
ended August 28, 2009, and is reflected as extinguishment of debt on the accompanying Condensed
Consolidated Statement of Operations.
At the Companys option, the quarterly interest payments due on this convertible debt had been
deferred and added to the outstanding principal. As of July 2, 2009 and February 27, 2009, a total
of $2,275,000 and $2,000,000, respectively, in accrued interest was due under the Subordinated
Note. As part of the Lenfest Financing Transaction, all accrued interest was exchanged for Series E
Preferred Stock.
Dedicated Line of Credit Agreement with PNC Bank
On November 16, 2009, the Company and PNC Bank entered into a Letter Agreement, Reimbursement
Agreement, Pledge Agreement, and Amendment to Subordination Agreement (collectively, the Dedicated
Line of Credit Agreement), pursuant to which the Company has received a committed line of credit
in the amount of $5,422,405 (the Line of Credit) which the Company used to satisfy performance
bond and repayment guarantee requirements in a contract with an existing customer. Use of this
dedicated line of credit is restricted to funding contract requirements under this specific
contract.
As security for this line of credit, ETC and H.F. Lenfest were each required to provide PNC
Bank with the equivalent of $2,711,000 in the form of cash or other financial instruments. To meet
this requirement, ETC has deposited cash in this amount in a restricted bank account with PNC Bank.
H.F. Lenfest has guaranteed the Companys obligations under the Dedicated Line of Credit Agreement,
and has pledged to PNC Bank $2,711,000 in certificated securities. By August 19, 2010, ETC is
required to place additional cash funds of $2,711,000 with PNC Bank, at which time the Lenfest
guarantee will be terminated and the Lenfest securities will be returned to Lenfest.
ETC-PZL Project Financing
In September 2009 ETC-PZL located in Warsaw, Poland, entered into a project financing
agreement with a Warsaw bank to fund a research and development contract with the Polish
government. The amount of this facility is $604,000 and it is being repaid in quarterly
installments of approximately $70,000 commencing in September 2009. This facility will expire in
September 2011. Use of this line of credit is restricted to funding contract requirements under a
specific research and development contract with the Polish government.
Long-term obligations at November 27, 2009 and February 27, 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
November 27, |
|
February 27, |
|
|
2009 |
|
2009 |
|
|
(in thousands) |
Note payable to bank |
|
$ |
13,360 |
|
|
$ |
10,510 |
|
ETC-PZL project financing |
|
|
604 |
|
|
|
|
|
Automobile loan |
|
|
9 |
|
|
|
16 |
|
Other |
|
|
26 |
|
|
|
|
|
Promissory note, net of unamortized discount of $109 |
|
|
|
|
|
|
1,891 |
|
Subordinated convertible debt, net of unamortized discount $336 |
|
|
|
|
|
|
9,664 |
|
|
|
|
Total debt obligations |
|
|
13,999 |
|
|
|
22,081 |
|
Less current maturities |
|
|
130 |
|
|
|
9 |
|
|
|
|
Long-term obligations, net of current maturities |
|
$ |
13,869 |
|
|
$ |
22,072 |
|
|
|
|
11
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
3. Inventories
Inventories are valued at the lower of cost or market using the first in, first out (FIFO)
method and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
November 27, |
|
|
February 27, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
88 |
|
|
$ |
92 |
|
Work in process |
|
|
5,213 |
|
|
|
3,564 |
|
Finished goods |
|
|
783 |
|
|
|
779 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,084 |
|
|
$ |
4,435 |
|
|
|
|
|
|
|
|
Inventory is presented net of an allowance for obsolescence of $2,270,000 (Raw material
$89,000, Work in process $1,480,000 and Finished goods $701,000) and $1,820,000 (Raw material
$92,000, Work in process $1,027,000 and Finished goods $701,000) at November 27, 2009 and February
27, 2009, respectively. During the third quarter of fiscal 2010, the Company has reclassed
$2,939,000 from property, plant and equipment to inventory.
4. Accounts Receivable:
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
November 27, |
|
|
February 27, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(in thousands) |
|
U.S. government receivables |
|
$ |
2,509 |
|
|
$ |
551 |
|
U.S. commercial receivables |
|
|
2,055 |
|
|
|
1,002 |
|
International receivables |
|
|
5,041 |
|
|
|
3,911 |
|
|
|
|
|
|
|
|
|
|
|
9,605 |
|
|
|
5,464 |
|
Less: allowance for doubtful accounts |
|
|
(411 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
$ |
9,194 |
|
|
$ |
5,100 |
|
|
|
|
|
|
|
|
5. Fair Value of Financial Instruments
Effective March 1, 2008, the Company adopted FASB SFAS No. 157, Fair Value Measurement. The
effect of adopting this standard was not significant. This standard defines fair value, provides
guidance for measuring fair value and requires certain disclosures. The standard utilizes a fair
value hierarchy which is categorized into three levels based on the inputs to the valuation
techniques used to measure fair value. The standard does not require any new fair value
measurements, but discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flows) and the cost approach
(cost to replace the service capacity of an asset or replacement cost). The levels of the hierarchy
are described below:
|
|
|
Level 1: Observable inputs such as quoted prices in active markets for identical
assets or liabilities; |
|
|
|
|
Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical assets or liabilities in
markets that are not active; |
|
|
|
|
Level 3: Unobservable inputs that are supported by little or no market activity, which
require the reporting entitys judgment or estimation. |
12
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The assessment of the significance of a particular input to the fair value measurement
requires judgment and may affect the valuation of financial assets and financial liabilities and
their placement within the fair value hierarchy. The Companys financial liabilities that are
accounted for at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at |
|
|
|
November 27, 2009 |
|
|
|
(amounts in thousands) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility payable to bank |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,182 |
|
|
$ |
14,182 |
|
ETC-PZL contract financing |
|
|
|
|
|
|
|
|
|
|
558 |
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dedicated line of credit with bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
146 |
|
|
$ |
14,740 |
|
|
$ |
14,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the interest rate swap agreements, fair value is calculated using standard industry
models used to calculate the fair value of the various financial instruments based on significant
observable market inputs such as swap rates, interest rates, and implied volatilities obtained from
various market sources. For the other financial instruments, fair value is determined using the
discounted cash flow methodology.
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values due to the short maturity of
these financial instruments.
7. Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes as well as the valuation of net
loss carryforwards. Valuation allowances are reviewed each fiscal period to determine whether there
is sufficient positive or negative evidence to support a change in judgment about the realizability
of the related deferred tax asset.
Valuation allowances had been recorded against the entire deferred tax asset as of February
27, 2009 due an uncertainty of sustaining an appropriate level of profitability in future periods.
As of November 27, 2009, the Company has reviewed the components of its deferred tax asset and has
determined, based upon all available information, that its current and expected future operating
income will more likely than not result in the realization of a portion of its deferred tax assets
relating primarily to its net operating loss carryforwards. As of November 27, 2009, the Company
had approximately $36.8 million of federal net loss carry forwards available to offset future
income tax liabilities, beginning to expire in 2025. In addition, the Company has the ability to
offset deferred tax assets against deferred tax liabilities created for such items as depreciation
and amortization.
As a result of the Companys analysis, an income tax benefit of $2,606,000 has been recorded
in the thirteen week period ended November 27, 2009.
We believe adequate provision has been made for all outstanding issues for all open years.
Significant judgments and estimates are required in determining the provision for taxes, including
judgments and estimates regarding the realization of deferred tax assets and the ultimate outcomes
of tax-related contingencies. During the normal course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We either recognize a
liability, including interest, or reduce a tax asset, for the anticipated outcome of tax audits. We
adjust these amounts in light of changing facts and circumstances.
13
Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
A reconciliation of the statutory federal income tax rate to the effective tax rate is as
follows:
|
|
|
|
|
|
|
Thirty-nine week |
|
|
|
period ended |
|
|
|
November 27, 2009 |
|
Statutory income tax |
|
|
(34.0 |
)% |
State income tax, net of federal tax benefit |
|
|
(3.4 |
) |
Research and experimentation and other tax credits |
|
|
4.3 |
|
Benefit of foreign and foreign-source income or loss |
|
|
(3.2 |
) |
Change in valuation allowance |
|
|
113.0 |
|
|
Effect of change in effective tax rate |
|
|
(2.6 |
) |
|
Other, net |
|
|
0.07 |
|
|
|
|
|
|
|
|
|
73.3 |
% |
|
|
|
|
For the thirty-nine week period ended November 28, 2008, the Company did not record any
benefit for income taxes due to continuing operating losses.
The tax effects of the primary components of the temporary differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
November 27, |
|
|
February 27, |
|
|
|
2009 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss and credits |
|
$ |
15,527 |
|
|
$ |
16,520 |
|
Vacation reserve |
|
|
74 |
|
|
|
74 |
|
Inventory reserve |
|
|
843 |
|
|
|
676 |
|
Receivable reserve |
|
|
153 |
|
|
|
135 |
|
Warranty reserve |
|
|
63 |
|
|
|
63 |
|
Compensation and other reserves |
|
|
312 |
|
|
|
76 |
|
Stock options |
|
|
96 |
|
|
|
96 |
|
ETC PZL deferred tax asset |
|
|
74 |
|
|
|
81 |
|
Other, net |
|
|
64 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
17,206 |
|
|
|
17,795 |
|
|
Valuation Reserve |
|
|
(11,523 |
) |
|
|
(15,364 |
) |
|
|
|
|
|
|
|
|
Total current deferred tax asset |
|
|
5,683 |
|
|
|
2,431 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Amortization of capitalized software |
|
|
343 |
|
|
|
462 |
|
Depreciation |
|
|
2,660 |
|
|
|
1,888 |
|
|
|
|
|
|
|
|
|
Total non-current deferred tax liability |
|
|
3,003 |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,680 |
|
|
$ |
81 |
|
|
|
|
|
|
|
|
14
Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
8. Commitments and Contingencies
Mends International, Ltd.
On May 29, 2008, a Request for Arbitration was filed against the Company with the Secretariat
of the International Court of Arbitration by Mends International Ltd. (Mends). Mends Request
for Arbitration arose out of a February 3, 1999 contract between the Company and Mends wherein
Mends purchased aeromedical equipment for sale to the Nigerian Air Force. Mends asserted a claim
for breach of contract and demanded $797,486, plus interest and costs. On September 16, 2008,
Mends filed an Amended Request for Arbitration, adding tort claims for conversion and breach of
fiduciary duty and seeking punitive damages. In response, the Company asserted a counterclaim
seeking damages for other disputes with Mends that have arisen under the contract that Mends has
put at issue in this arbitration. On April 27, 2009 the Company participated in an arbitration
hearing in the United Kingdom on this matter. As of the filing date of this Quarterly Report on
Form 10-Q, a decision had not been determined in this matter, although one is expected by the end
of the Companys fiscal year in February 2010. The Company is contesting this arbitration case
vigorously; however, the Company has recorded a reserve in this matter.
Administrative Agreement with U.S. Navy.
In 2007, the Company entered into a settlement agreement with the Department of the Navy to
resolve litigation filed by the Company in May 2003 in connection with a contract for submarine
rescue decompression chambers. As of May 14, 2008, the Company made all payments required under
this settlement agreement and transferred the chambers to the Department of the Navy. From October
2, 2007 through December 12, 2007, the Company was suspended by the Department of the Navy from
soliciting work for the federal government pursuant to the Federal Acquisition Regulation.
However, effective December 12, 2007, the Department of the Navy lifted the Companys suspension
pursuant to the execution by the Company and the Department of the Navy of an Administrative
Agreement. In accordance with the Administrative Agreement, the Company has established and
implemented a program of compliance reviews, audits, and reports.
9. Stock Exchange Listing
Delisting from NYSE AMEX LLC
On April 23, 2009, ETCs Board of Directors decided to voluntarily delist its common stock
from NYSE AMEX LLC (AMEX) and notified AMEX of its decision. On May 20, 2009, the Company filed
with the SEC and AMEX a Form 25 relating to the delisting of its common stock, and the delisting of
its common stock became effective ten days thereafter. Accordingly, the last day of trading of its
common stock on AMEX was May 29, 2009. The Companys common stock is currently quoted for trading
on the Over-the-Counter Bulletin Board.
The Board of Directors decision to voluntarily delist its common stock from AMEX resulted
from a compliance issue related to certain terms and conditions of the Lenfest Financing
Transaction. ETC was not able to secure the Lenfest Financing Transaction on terms that would allow
ETC to comply with the AMEX listing rules.
15
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
10. Segment Information (unaudited):
The Company primarily manufactures, under contract, various types of high-technology equipment
which it has designed and developed. The Company considers its business activities to be divided
into two segments: Training Services Group (TSG) and the Control Systems Group (CSG). Product
categories included in TSG are pilot training and flight simulators, disaster management systems
and entertainment applications. CSG includes sterilizers, environmental control devices, hyperbaric
chambers along with parts and service support. The following segment information reflects the
accrual basis of accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
TSG |
|
CSG |
|
Total |
Thirteen week period ended and as of November 27, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
5,720 |
|
|
$ |
5,254 |
|
|
$ |
10,974 |
|
Interest expense (income) |
|
|
252 |
|
|
|
(88 |
) |
|
|
164 |
|
Depreciation and amortization |
|
|
178 |
|
|
|
261 |
|
|
|
439 |
|
Operating profit |
|
|
1,123 |
|
|
|
938 |
|
|
|
2,061 |
|
Identifiable assets |
|
|
11,797 |
|
|
|
6,094 |
|
|
|
17,891 |
|
Expenditures for segment assets |
|
|
460 |
|
|
|
179 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen week period ended and as of November 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
5,552 |
|
|
$ |
3,154 |
|
|
$ |
8,706 |
|
Interest expense |
|
|
309 |
|
|
|
108 |
|
|
|
417 |
|
Depreciation and amortization |
|
|
162 |
|
|
|
393 |
|
|
|
555 |
|
Operating profit (loss) |
|
|
917 |
|
|
|
(373 |
) |
|
|
544 |
|
Identifiable assets |
|
|
6,105 |
|
|
|
5,139 |
|
|
|
11,244 |
|
Expenditures for segment assets |
|
|
100 |
|
|
|
299 |
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Reconciliation to consolidated amounts |
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
17,891 |
|
|
$ |
11,244 |
|
Corporate assets |
|
|
29,125 |
|
|
|
19,231 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
47,016 |
|
|
$ |
30,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit |
|
$ |
2,061 |
|
|
$ |
544 |
|
Interest expense |
|
|
164 |
|
|
|
417 |
|
|
|
|
|
|
Total profit for segments |
|
|
1,897 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
Corporate home office expenses |
|
|
321 |
|
|
|
268 |
|
Loss on extinguishment of debt |
|
|
91 |
|
|
|
|
|
Other expenses, net |
|
|
121 |
|
|
|
(27 |
) |
Income tax benefit |
|
|
(2,606 |
) |
|
|
|
|
Noncontrolling interest |
|
|
(8 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Net profit (loss) |
|
$ |
3,978 |
|
|
$ |
(113 |
) |
|
|
|
|
|
|
|
16
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSG |
|
|
CSG |
|
|
Total |
|
Thirty-nine week period ended and as of November 27, 2009: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
19,026 |
|
|
$ |
11,389 |
|
|
$ |
30,415 |
|
Interest expense |
|
|
679 |
|
|
|
351 |
|
|
|
1,030 |
|
Depreciation and amortization |
|
|
710 |
|
|
|
748 |
|
|
|
1,458 |
|
Operating profit |
|
|
4,955 |
|
|
|
1,084 |
|
|
|
6,039 |
|
Identifiable assets |
|
|
11,797 |
|
|
|
6,094 |
|
|
|
17,891 |
|
Expenditures for segment assets |
|
|
871 |
|
|
|
466 |
|
|
|
1,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine week period ended and as of November 28,
2008: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
14,051 |
|
|
$ |
13,354 |
|
|
$ |
27,405 |
|
Interest expense |
|
|
952 |
|
|
|
335 |
|
|
|
1,287 |
|
Depreciation and amortization |
|
|
467 |
|
|
|
1,201 |
|
|
|
1,668 |
|
Operating loss |
|
|
(691 |
) |
|
|
(239 |
) |
|
|
(930 |
) |
Identifiable assets |
|
|
6,105 |
|
|
|
5,139 |
|
|
|
11,244 |
|
Expenditures for segment assets |
|
|
1,232 |
|
|
|
358 |
|
|
|
1,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to consolidated amounts |
|
|
2009 |
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
17,891 |
|
|
$ |
11,244 |
|
|
|
|
|
Corporate assets |
|
|
29,125 |
|
|
|
19,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
47,016 |
|
|
$ |
30,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
$ |
6,039 |
|
|
$ |
(930 |
) |
|
|
|
|
Interest expense |
|
|
1,030 |
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total profit (loss) for segments |
|
|
5,009 |
|
|
|
(2,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate home office expenses |
|
|
1,065 |
|
|
|
1,024 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
315 |
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
242 |
|
|
|
(38 |
) |
|
|
|
|
Income tax benefit |
|
|
(2,606 |
) |
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
|
$ |
5,997 |
|
|
$ |
(3,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended November 27, 2009
Concentration of sales greater than 10% included approximately 36% of sales totaling $3,911,00
in the thirteen weeks ended November 27, 2009 to three customers: one domestic sterilizer customer,
the U.S. Government for an ATS product, and one international simulation customer. In the thirteen
weeks ended November 28, 2008, two customers in the international pilot training product line
accounted for approximately 36% of sales totaling $3,177,000.
Included in the segment information for the thirteen weeks ended November 27, 2009 are export
sales (which includes sales made by the Companys foreign subsidiaries) of $4,261,000. Of this
amount, there are sales to or relating to governments or commercial accounts in Saudi Arabia of
$1,864,000 and Korea of $948,000. Included in the segment information for the thirteen weeks ended
November 27, 2008 are export sales of $5,637,000. Of this amount, there are sales to or relating to
governments or commercial accounts in Saudi Arabia of $2,185,000 and Turkey of $992,000. Sales to
the U.S. Government and its agencies were $2,321,000 for the current fiscal quarter and $367,000
for the third fiscal quarter in 2009.
Thirty-nine weeks ended November 27, 2009
Approximately 39% of sales totaling $11,782,000 in the thirty-nine weeks ended November 27,
2009 were made to a U.S. Government and two international customers, one in the pilot training
product line and one in the simulation line. There was no concentration to any one customer of
sales greater than 10% of the total sales in the thirty-nine weeks ended November 28, 2008.
Included in the segment information for the thirty-nine weeks ended November 27, 2009 are
export sales of $15,354,000. Of this amount there are sales to or relating to governments or
commercial accounts in Saudi Arabia of $8,530,000. Included in the segment information for the
thirty-nine weeks ended November 28, 2008 are export sales of $13,315,000. Of this amount, there
are sales to or relating to commercial accounts in Saudi Arabia of $4,705,000 and in Turkey of
$2,521,000. Sales to the U.S. Government and its agencies aggregated $5,833,000 in the current
period and $1,742,000 in the prior period.
17
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
11. Sales Backlog
The Companys sales backlog at November 27, 2009 and February 27, 2009, for work to be
performed and revenue to be recognized under written agreements after such dates, was $105,647,000
and $44,324,000, respectively. Of the November 27, 2009 sales backlog, the Company had contracts
totaling approximately $41,165,000 for contracts in Korea and two contracts totaling $50,026,000
for the U.S. Government.
The Companys order flow does not follow any seasonal pattern as the Company receives orders
in each fiscal quarter of its fiscal year.
18
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on ETCs current expectations
and projections about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about ETCs and its subsidiaries that may cause actual
results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
These forward-looking statements include statements with respect to the Companys vision,
mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and business of the
company, including but not limited to, (i) projections of revenues, costs of materials, income or
loss, earnings or loss per share, capital expenditures, growth prospects, dividends, capital
structure, other financial items and the effects of currency fluctuations, (ii) statements of our
plans and objectives of the Company or its management or Board of Directors, including the
introduction of new products, or estimates or predictions of actions of customers, suppliers,
competitors or regulatory authorities, (iii) statements of future economic performance, (iv)
statements of assumptions and other statements about the Company or its business, (v) statements
made about the possible outcomes of litigation involving the Company, (vi) statements regarding the
Companys ability to obtain financing to support its operations and other expenses, and (vii)
statements preceded by, followed by or that include the words, may, could, should, looking
forward, would, believe, expect, anticipate, estimate, intend, plan, or the negative
of such terms or similar expressions. These forward-looking statements involve risks and
uncertainties which are subject to change based on various important factors. Some of these risks
and uncertainties, in whole or in part, are beyond the Companys control. Factors that might cause
or contribute to such a material difference include, but are not limited to, those discussed in our
Annual Report on Form 10-K for the fiscal year ended February 27, 2009, in the section entitled
Risks Particular to Our Business. Shareholders are urged to review these risks carefully prior
to making an investment in the Companys common stock.
The Company cautions that the foregoing list of important factors is not exclusive. Except as
required by federal securities law, the Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on behalf of the
Company.
In this report all references to ETC, the Company, we, us, or our, mean
Environmental Tectonics Corporation and our subsidiaries.
References to fiscal third quarter 2010 and the nine months of fiscal 2010 are references to
the thirteen and thirty-nine week periods ended November 27, 2009, respectively. References to
fiscal third quarter 2009 and the first nine months of fiscal 2009 are references to the thirteen
and thirty-nine week periods ended November 28, 2008.
Overview
We were incorporated in 1969 in Pennsylvania and are principally engaged in the design,
manufacture and sale of (1) software driven products and services used to create and monitor the
physiological effects of flight; (2) high performance jet tactical flight simulation; (3) steam and
gas sterilization; (4) testing and simulation devices for the automotive industry; (5) hyperbaric
and hypobaric chambers; and (6) driving and disaster simulation systems. The Company considers its
business activities to operate in two segments: the Training Services Group (TSG) and the Control
Systems Group (CSG). Product categories included in TSG are pilot training and flight simulators,
disaster management systems and entertainment applications. CSG includes sterilizers, environmental
control devices and hyperbaric chambers along with parts and service support.
The following factors had an adverse impact on our performance (operating results and/or cash
flow) for the fiscal quarter ended November 27, 2009:
|
|
|
|
high bid and proposal activity which utilized engineering resources which otherwise
would have been applied to existing contract requirements, resulting in delayed revenue recognition
on long-term contracts; |
|
|
|
|
the continuing cost of development and marketing efforts for our Authentic Tactical
Fighting Systems (ATFS); |
|
|
|
|
continued technology to advance equipment for the National Aerospace Training and
Research (NASTAR) Center; |
In response to the ongoing domestic market budgetary constraints for G-force, aeromedical
training and spatial disorientation, and as a potential alternative to high cost high risk air
combat training, in 2004 we began incorporating tactical combat flight capabilities into our human
centrifuge technology. Dubbed the Authentic Tactical Fighting System (ATFS), this product was the
first fully flyable centrifuge-based tactical maneuvering ground based simulator. This technology
allows a fighter pilot to practice tactical air combat maneuvers such as dodging enemy missiles,
ground fire and aircraft obstacles while experiencing the real life environment of a high G-force
fighter aircraft. These flight trainers provide a low cost and extremely less risky alternative to
actual air flight. This technology is in constant evolution as additional functionality in the form
of multiple fighter jet cockpit applications (e.g., F-16, F-35, etc.) are developed.
Spending continues in fiscal 2010 to market tactical flight simulation to the worlds defense
agencies. Our goal is to validate the use of ground-based simulation as an alternative method to
actual in-flight training to teach jet pilots tactical flight and combat
19
skills. We are hopeful that previous year awards of research contracts from the U. S. Navy and
the U.S. Air Force to develop Tactical Aircraft Configuration Modules (TacModules) will lead to
additional funds to continue the development and validation of this important technology.
Our National Aerospace Training and Research (NASTAR) Center, which opened in fiscal 2008, is
an integrated pilot training center offering a complete range of aviation training and research
support for military jet pilots and civil aviation as well as space travel and tourism. The NASTAR
Center houses state of the art equipment including the ATFS-400, a GYROLAB GL-2000 Advanced Spatial
Disorientation Trainer, a Hypobaric Chamber, an Ejection Seat Trainer, and a Night Vision and Night
Vision Goggle Training System. These products represent 37 years of pioneering development and
training solutions for the most rigorous stresses encountered during high performance aircraft
flight including the effects of altitude exposure, High G-force exposure, spatial disorientation
and escape from a disabled aircraft.
Spending on expanding functionality and applications primarily on the ATFS-400 continued
through the current period, albeit at a reduced pace.
|
|
|
continued development of software for our Advanced Disaster Management Scenario
(ADMS) product line; |
This product requires a continuous flow of funds for software development. The market demands
extremely high fidelity, realistic graphics, seamless interactivity and connectivity of objects and
additional disaster scenarios. A constant goal is to make the hardware configuration more user
friendly.
Funding the cash requirements of our large, long-term multi-year projects, the costs of
technological and software development, costs associated with the NASTAR Center, the significant
cost of preparing technical proposal submittals, and the continuing cost to market our ATFS
technology to the U.S. government and international government defense agencies requires flexible
sources of funds which may be over-or-under utilized throughout the year. Although most of our
long-term contracts incorporate milestone or progress payments, the cash flows associated with
production and material requirements tend to vary significantly over time. These projects tend to
be cash positive in the early stages of engineering and design and cash negative during the
material purchase and production phase. Under the terms and conditions of the Lenfest Financing
Transaction, which was approved by the Companys shareholders on July 2, 2009, the Company has
access to an additional $5 million under its bank credit agreement and up to $7.5 million from
Lenfest to finance U.S. Government projects.
Critical Accounting Policies
The discussion and analysis of the Companys financial condition and results of operation are
based upon the Companys condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements requires the Company to make
estimates and judgments that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at the date of the Companys
condensed financial statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that reflect significant judgments and
uncertainties, and potentially result in materially different results under different assumptions
and conditions.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes as well as the valuation of net
loss carryforwards. Valuation allowances are reviewed each fiscal period to determine whether there
is sufficient positive or negative evidence to support a change in judgment about the realizability
of the related deferred tax asset.
We believe adequate provision has been made for all outstanding issues for all open years.
Significant judgments and estimates are required in determining the provision for taxes, including
judgments and estimates regarding the realization of deferred tax assets and the ultimate outcomes
of tax-related contingencies. During the normal course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We either recognize a
liability, including interest, or reduce a tax asset, for the anticipated outcome of tax audits. We
adjust these amounts in light of changing facts and circumstances.
For a detailed discussion on the application of these and other accounting policies, see Note
3 to the Consolidated Financial Statements, Summary of Significant Accounting Policies in the
Companys Annual Report on Form 10-K for the fiscal year ended February 27, 2009.
20
Results of Operations
Thirteen weeks ended November 27, 2009 compared to thirteen weeks ended November 28, 2008
We have historically experienced significant variability in our quarterly revenue, earnings
and other operating results, and our performance may fluctuate significantly in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Table of Results |
|
|
|
|
Thirteen weeks ended: |
|
Variance |
|
Variance |
|
|
November 27, 2009 |
|
November 28, 2008 |
|
$ |
|
% |
|
|
(amounts in thousands) |
|
( )=Unfavorable |
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
4,392 |
|
|
$ |
2,702 |
|
|
$ |
1,690 |
|
|
|
62.6 |
% |
US Government |
|
|
2,321 |
|
|
|
367 |
|
|
|
1,954 |
|
|
|
532.4 |
% |
International |
|
|
4,261 |
|
|
|
5,637 |
|
|
|
(1,376 |
) |
|
|
(24.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
10,974 |
|
|
|
8,706 |
|
|
|
2,268 |
|
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
4,444 |
|
|
|
2,957 |
|
|
|
1,487 |
|
|
|
50.3 |
% |
Selling, general and administrative |
|
|
2,905 |
|
|
|
2,434 |
|
|
|
(471 |
) |
|
|
(19.4 |
)% |
Research and development |
|
|
(201 |
) |
|
|
247 |
|
|
|
448 |
|
|
|
181.4 |
% |
|
|
|
Operating profit |
|
|
1,740 |
|
|
|
276 |
|
|
|
1,464 |
|
|
|
530.4 |
% |
Interest expense, net |
|
|
164 |
|
|
|
417 |
|
|
|
253 |
|
|
|
60.7 |
% |
Other expense, net |
|
|
121 |
|
|
|
(27 |
) |
|
|
(148 |
) |
|
|
548.2 |
% |
Loss on extinguishment of debt |
|
|
91 |
|
|
|
|
|
|
|
(91 |
) |
|
|
n/a |
|
Income tax benefit |
|
|
(2,606 |
) |
|
|
|
|
|
|
2,606 |
|
|
|
n/a |
|
Minority interest |
|
|
(8 |
) |
|
|
(1 |
) |
|
|
7 |
|
|
|
700.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,978 |
|
|
$ |
(113 |
) |
|
$ |
4,091 |
|
|
|
3,620.4 |
% |
Net income (loss) per common share (basic) |
|
$ |
0.37 |
|
|
$ |
(0.04 |
) |
|
$ |
0.41 |
|
|
|
1,025.0 |
% |
Net income (loss) per common share (diluted) |
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
0.23 |
|
|
|
575.0 |
% |
|
|
|
Net Income
The Company had a net income of $3,978,000 or $0.37(basic) and $.19 (diluted) per share during
the third quarter of fiscal 2010 compared to a net loss of $(113,000), or ($0.04) per share (basic
and diluted), for the third quarter of fiscal 2009, representing an improvement of $4,091,000 in
net income. The improvement reflected an increase in sales and corresponding increase in gross
profit (both in dollars and in the rate as a percentage of sales) coupled with lower research and
development and interest expenses. Additionally, the Company recorded an income tax benefit of
$2,606,000 during the period. Acting as partial offsets were higher selling, general and
administrative expenses and a loss on extinguishment of debt of $91,000. (See Note 2 Long-term
Obligations and Credit Arrangements and Note 7- Income Taxes in the accompanying Notes to the
Condensed Consolidated Financial Statements.)
Sales
Sales for the third quarter of fiscal 2010 were $10,974,000 as compared to $8,706,000 for the
third quarter of fiscal 2009, an increase of $2,268,000 or 26.1%. As the table above indicates,
significant increases were realized in the U.S. Government and Domestic areas which were partially
offset by a decline in international sales.
Domestic Sales
Domestic sales in the third quarter of fiscal 2010 were $4,392,000 as compared to $2,702,000
in the third quarter of fiscal 2009, an increase of $1,690,000 or 62.6%, reflecting a significant
increase in sterilizers (up $1,854,000 or 287.9%) and an increase in hyperbaric (up $222,000 or
29.2%). These increases were partially offset by a decline in environmental sales (down $525,000 or
78.7%) which in the prior period benefited from significant work on a large domestic automotive
contract basically completed by the prior fiscal year end. Domestic sales represented 40.0% of the
Companys total sales in the third quarter of fiscal 2010, as compared to 31.1% for the third
quarter of fiscal 2009.
U.S. Government Sales
U.S. Government sales in the third quarter of fiscal 2010 were $2,321,000 as compared to
$367,000 in the third quarter of fiscal 2009, an increase of $1,954,000 or 532.4%, and represented
21.2% of total sales in the third quarter of fiscal 2010 versus 4.2%
21
for the third quarter of
fiscal 2009. Significant increases were evidenced in aircrew training systems sales reflecting
three contracts with three different U.S. defense agencies. Given the existing U.S. Government
sales contracts in the Companys backlog and the potential for significant awards in the future,
the Company anticipates this increase in the concentration of sales with the U.S. Government will
continue.
International Sales
International sales, which includes sales in the Companys Polish subsidiary, were $4,261,000
for the third quarter of fiscal 2010 as compared to $5,637,000 in the third quarter of fiscal 2009,
a decrease of $1,376,000 or 24.4%, and represented 38.8% of total sales, as compared to 64.7% in
the third quarter of fiscal 2009. The unfavorable international performance reflected lower aircrew
training systems sales (down $1,872,000 or 51.4% in ETC Southampton), offset in part by higher
simulation sales (up $980,000 or 426.1%), both primarily for contracts in the Middle East. Included
in the segment information for the thirteen weeks ended November 27, 2009 are sales to or relating
to governments or commercial accounts in Saudi Arabia of $1,864,000 and Korea of $948,000.
Fluctuations in sales to international countries from year to year primarily reflect
percentage of completion (POC) revenue recognition on the level and stage of development and
production on major multi-year long-term contracts.
Gross Profit
Gross profit for the third quarter of fiscal 2010 was $4,444,000 as compared to $2,957,000 in
the third quarter of fiscal 2009, an increase of $1,487,000 or 50.3%. The favorable performance
reflected the sales increase coupled with a 6.5 percentage point increase in the rate as a
percentage of sales. The gross margin dollar increase primarily reflected sales and corresponding
gross margin increases in sterilizers and simulation products, while favorable gross profit rates
as a percentage of sales were evidenced in environmental, simulation and hyperbaric products. Gross
profit as a percentage of sales was 40.5% for the third quarter of fiscal 2010 as compared to
34.0% for the prior period. Geographically, favorable gross profit rates were evidenced
significantly in U.S. Government and to a lesser extent in the domestic area.
Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of fiscal 2010 were $2,905,000 as
compared to $2,434,000 in the third quarter of fiscal 2009, an increase of $471,000 or 19.4%.
Consistent with the increased contract awards, additional spending occurred for advertising and
trade shows, bid and proposal expenses and travel.
Research and Development Expenses
Research and development expenses include spending for potential new products and technologies
and work performed under government grant program, both U.S. and foreign. This spending, net of
grant payments from the U.S., Polish and Turkish governments, was a net credit $201,000 for the
third quarter of fiscal 2010 as compared to a $247,000 expense for the third quarter of fiscal
2009, a decrease of $448,000 or 181.4%. Gross spending for the periods was $951,000 and $332,000,
respectively, which amounts were offset by reimbursements of $1,152,000 and $85,000 respectively.
The current period included government grant funds in ETC Southampton, ETC-PZL, and our Turkish
operation.
Most of the Companys research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific contracts, as well as
research for feasibility and technology updates.
Interest Expense
Interest expense for the third quarter of fiscal 2010 was $164,000 as compared to $417,000 for
the third quarter of fiscal 2009, representing a decrease of $253,000 or 60.7%. The decrease
reflected reduced interest expense on the Companys subordinated debt which was exchanged for
preferred stock under the Lenfest Financing Transaction completed in July 2009. Given this
exchange and the potential ability to issue additional Series D Preferred Stock as payment for any
interest on borrowings under the Lenfest Credit Facility, it is anticipated that interest expense
will continue to remain at reduced levels.
Other Income/Expense
Other income/expense, net, was a net expense of $121,000 for the third quarter of fiscal 2010
versus a net income of $27,000 for the third quarter of fiscal 2009. Both periods reflected the
impact of foreign currency fluxuations.
Loss on Extinguishment of Debt
During the third fiscal quarter of 2010 the Company recorded a loss on extinguishment of debt
of $91,000 representing the unamortized portion of a debt discount on a $2 million loan which was
repaid on September 1, 2009. See Note 2 Long-term Obligations and Credit Arrangements in the
accompanying Notes to the Condensed Consolidated Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes as well
22
as the valuation of net
loss carryforwards. Valuation allowances are reviewed each fiscal period to determine whether there
is sufficient positive or negative evidence to support a change in judgment about the realizability
of the related deferred tax asset.
Valuation allowances had been recorded against the entire deferred tax asset as of February
27, 2009 due an uncertainty of sustaining an appropriate level of profitability in future periods.
As of November 27, 2009, the Company has reviewed the components of its deferred tax asset and has
determined, based upon all available information, that its current and expected future operating
income will more likely than not result in the realization of a portion of its deferred tax assets
relating primarily to its net operating loss carryforwards. As of November 27, 2009, the Company
has approximately $36.8 million of federal net loss carry forwards available to offset future
income tax liabilities, beginning to expire in 2025. In addition, the Company has the ability to
offset deferred tax assets against deferred tax liabilities created for such items as depreciation
and amortization. As a result of the Companys analysis, an income tax benefit of $2,606,000 has
been recorded in the thirteen week period ended November 27, 2009.
Thirty-nine weeks ended November 27, 2009 compared to thirty-nine weeks ended November 28, 2008
We have historically experienced significant variability in our revenue, earnings and other
operating results, and our performance may fluctuate significantly in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Table of Results |
|
|
|
|
Thirty-nine weeks ended: |
|
Variance |
|
Variance |
|
|
November 27, 2009 |
|
November 28, 2008 |
|
$ |
|
% |
|
|
(amounts in thousands) |
|
( ) =Unfavorable |
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
9,228 |
|
|
$ |
12,348 |
|
|
$ |
(3,120 |
) |
|
|
(25.3 |
)% |
US Government |
|
|
5,833 |
|
|
|
1,742 |
|
|
|
4,091 |
|
|
|
234.9 |
% |
International |
|
|
15,354 |
|
|
|
13,315 |
|
|
|
2,039 |
|
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
30,415 |
|
|
|
27,405 |
|
|
|
3,010 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
13,827 |
|
|
|
7,494 |
|
|
|
6,333 |
|
|
|
84.5 |
% |
Selling, general and administrative |
|
|
8,599 |
|
|
|
8,502 |
|
|
|
(97 |
) |
|
|
(1.1 |
)% |
Research and development |
|
|
254 |
|
|
|
946 |
|
|
|
692 |
|
|
|
73.2 |
% |
|
|
|
Operating profit (loss) |
|
|
4,974 |
|
|
|
(1,954 |
) |
|
|
6,928 |
|
|
|
354.6 |
% |
Interest expense, net |
|
|
1,030 |
|
|
|
1,287 |
|
|
|
257 |
|
|
|
20.0 |
% |
Other expense, net |
|
|
242 |
|
|
|
(38 |
) |
|
|
(280 |
) |
|
|
(736.8 |
)% |
Loss on extinguishment of debt |
|
|
315 |
|
|
|
|
|
|
|
(315 |
) |
|
|
n/a |
|
Income tax benefit |
|
|
(2,606 |
) |
|
|
|
|
|
|
2,606 |
|
|
|
n/a |
|
Minority interest |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
(33.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,997 |
|
|
$ |
(3,197 |
) |
|
$ |
9,194 |
|
|
|
287.6 |
% |
Net income (loss) per common share (basic) |
|
$ |
0.52 |
|
|
$ |
(0.43 |
) |
|
$ |
0.95 |
|
|
|
220.9 |
% |
Net income (loss) per common share (diluted) |
|
$ |
0.28 |
|
|
$ |
(0.43 |
) |
|
$ |
0.71 |
|
|
|
165.1 |
% |
|
|
|
Net Income
The Company had a net income of $5,997,000 or $0.52 (basic) and $0.28 (diluted) per share
during the first nine months of fiscal 2010 compared to a net loss of ($3,197,000), or ($0.43) per
share (basic and diluted), for the first nine months of fiscal 2009, representing an improvement of
$9,194,000 or 287.6% in net income. The improvement reflected an increase in sales and
corresponding increase in gross profit (both in dollars and in the rate as a percentage of sales)
coupled with lower research and development and interest expenses. Additionally, the Company
recorded income tax benefit of $2,606,000 during the period. Acting as partial offsets were
slightly higher selling, general and administrative expenses, other expenses and a loss on
extinguishment of debt of $315,000. (See Note 2 Long-term Obligations and Credit Arrangements and
Note 7- Income Taxes in the accompanying Notes to the Condensed Consolidated Financial Statements.)
Sales
Sales for the first nine months of fiscal 2010 were $30,415,000 as compared to $27,405,000 for
the first nine months of fiscal 2009, an increase of $3,010,000 or 11.0%. As the table indicates,
significant increases were realized in the U.S. Government and International areas which were
partially offset by a decline in domestic sales.
23
Domestic Sales
Domestic sales in the first nine months of fiscal 2010 were $9,228,000 as compared to
$12,348,000 in the first nine months of fiscal 2009, a decrease of $3,120,000 or 25.3%, primarily
reflecting significant decreases in environmental products and hyperbaric products (down a combined
$4,325,000, 61.1%) offset in part by an increase in sterilizer products (up $1,003,000, 30.6%).
Environmental products in the prior period benefited from significant work on a large domestic
automotive contract basically completed by the prior fiscal year end. Additionally, given that the
environmental products domestic commercial market is primarily automotive, this product line has
suffered in the current period from the severe contraction of the three major U.S. car
manufacturers. Hyperbaric products reduced activity reflected the impact of the current economic
downturn. Domestic sales represented 30.3% of the Companys total sales in the first nine months of
fiscal 2010 as compared to 45.1% for the first nine months of fiscal 2009.
U.S. Government Sales
U.S. Government sales in the first nine months of fiscal 2010 were $5,833,000 as compared to
$1,742,000 in the first nine months of fiscal 2009, an increase of $4,091,000 or 234.9%, and
represented 19.2% of total sales in the first nine months of fiscal 2010 versus 6.4% for the first
nine months of fiscal 2009. Significant increases were evidenced in aircrew training systems sales
reflecting three contracts with three different U.S. defense agencies. Given the existing U.S.
Government sales contracts in the Companys backlog and the potential for significant awards in the
future, the Company anticipates this increase in the concentration of sales with the U.S.
Government to continue.
International Sales
International sales, which include sales in the Companys Polish subsidiary were $15,354,000
in the first nine months of fiscal 2010 as compared to $13,315,000 in the first nine months of
fiscal 2009, an increase of $2,039,000 or 15.3%, and represented 50.5% of total sales, as compared
to 48.5% in the first nine months of fiscal 2009. The favorable international performance primarily
reflected higher simulation sales (up $3,553,000), offset in part by a decrease in aircrew training
systems sales (down $887,000 or 10.5%), representing performance on contracts in the Middle East
and Korea, respectively. Included in the segment information for the thirty-nine weeks ended
November 27, 2009 are sales to or relating to governments or commercial accounts in Saudi Arabia of
$8,530,000.
Fluctuations in sales to international countries from year to year primarily reflect
percentage of completion (POC) revenue recognition on the level and stage of development and
production on major multi-year long-term contracts.
Gross Profit
Gross profit for the first nine months of fiscal 2010 was $13,827,000 as compared to
$7,494,000 in the first nine months of fiscal 2009, an increase of $6,333,000 or 84.5%. The
favorable performance reflected the sales increase coupled with a significant 18.1 percentage point
increase in the rate as a percentage of sales. As a percentage of sales, gross profits were 45.5%
for the current period compared to 27.4% for the same period a year ago. The gross margin dollar
increase primarily reflected sales and corresponding gross margin increases in simulation and ATS
products, while favorable gross profit rates as a percentage of sales were evidenced in all product
areas. Geographically, favorable gross profit rates were evidenced significantly in the U.S.
Government area.
Selling and Administrative Expenses
Selling and administrative expenses for the first nine months of fiscal 2010 were $8,599,000
as compared to $8,502,000 in the first nine months of fiscal 2009, representing a slight increase
of $97,000 or 1.1%. As a percent of sales, selling, general and administrative expenses decreased
2.7 percentage points between the periods. The increase in spending in the current period reflected
higher bid and proposal costs as well as increased commissions on the higher sales level and mix of
contracts. These costs were partially offset by reduced legal fees.
Research and Development Expenses
Research and development expenses include spending for potential new products and technologies
and work performed under government grant program, both U.S. and foreign. This spending, net of
grant payments from the U.S., Polish and Turkish governments, totaled $254,000 in the first nine
months of fiscal 2010 as compared to $946,000 for the first nine months of fiscal 2009, a decrease
of $692,000 or 73.2%. Gross spending for the periods was $1,406,000 and $1,031,000, respectively,
which amounts were offset by reimbursements of $1,152,000 and $85,000, respectively. The current
period included government grant funds in ETC Southampton, ETC-PZL, and our Turkish operartion.
Most of the Companys research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific contracts, as well as
research for feasibility and technology updates.
Interest Expense
Interest expense for the first nine months of fiscal 2010 was $1,030,000 as compared to
$1,287,000 for the first nine months of fiscal 2009, a decrease of $257,000 or 20.0%. The current
period expense reflected a $5,054,000 million increase in borrowings which was partially offset by
reduced interest expense on the Companys subordinated debt. This debt was exchanged for preferred
24
stock under the Lenfest Financing Transaction which was completed in July 2009. Given the
exchange of this subordinated debt for equity under the Lenfest Financing Transaction and the
potential ability to issue additional Series D Preferred Stock as payment for any interest on
borrowings under the Lenfest Credit Facility, it is anticipated that interest expense will continue
to remain at reduced levels.
Other Income/Expense, Net
Other income/expense, net, was a net expense of $242,000 for the first nine months of fiscal
2010 versus a net income of $38,000 for the first nine months of fiscal 2009. The current period
consisted primarily of foreign currency exchange losses whereas the prior period included proceeds
from a property damage claim.
Loss on Extinguishment of Debt
During the first nine months of 2010 the Company recorded a loss on extinguishment of debt
representing two transactions. In July 2009 the Companys Subordinated Note was exchanged for
preferred stock under the Lenfest Financing Transaction, resulting in a charge of $224,000, which
represented the unamortized portion of the debt discount that was recorded at the issuance of this
instrument. Additionally, a charge of $91,000 resulted from the unamortized portion of the debt
discount on a $2 million note which was repayed on September 1, 2009. See Note 2 Long-term
Obligations and Credit Arrangements in the accompanying Notes to the Condensed Consolidated
Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes as well as the valuation of net
loss carryforwards. Valuation allowances are reviewed each fiscal period to determine whether there
is sufficient positive or negative evidence to support a change in judgment about the realizability
of the related deferred tax asset.
Valuation allowances had been recorded against the entire deferred tax asset as of February
27, 2009 due an uncertainty of sustaining an appropriate level of profitability in future periods.
As of November 27, 2009, the Company has reviewed the components of its deferred tax asset and has
determined, based upon all available information, that its current and expected future operating
income will more likely than not result in the realization of a portion of its deferred tax assets
relating primarily to its net operating loss carryforwards. As of November 27, 2009, the Company
has approximately $36.8 million of federal net loss carry forwards available to offset future
income tax liabilities, beginning to expire in 2025. In addition, the Company has the ability to
offset deferred tax assets against deferred tax liabilities created for such items as depreciation
and amortization. As a result of the Companys analysis, an income tax benefit of $2,606,000 has
been recorded in the thirteen week period ended November 27, 2009.
Liquidity and Capital Resources
We have historically financed operations through a combination of cash generated from
operations, equity offerings, subordinated borrowings and bank debt.
On April 24, 2009, the Company entered into the Lenfest Financing Transaction with Lenfest
that provided for the following: (i) a $7,500,000 credit facility provided by Lenfest to ETC; (ii)
exchange of the Subordinated Note held by Lenfest, together with all accrued interest and warrants
issuable under the Subordinated Note, and all Series B and Series C Preferred Stock held by
Lenfest, together with all accrued dividends thereon, for a new class of preferred stock, Series E
Preferred Stock, of the Company; and (iii) the guarantee by Lenfest of all of ETCs obligations to
PNC Bank, National Association in connection with an increase of the Companys existing $15,000,000
revolving line of credit with PNC Bank to $20,000,000, and in connection with this guarantee, the
pledge by Lenfest to PNC Bank of $10,000,000 in marketable securities. This additional capital
will enable the Company to continue to bid on, and potentially win, a number of significant U.S.
and foreign government during fiscal 2010 as well as to continue to operate its business.
On July 2, 2009, the Company held its 2009 Annual Meeting of Shareholders, at which time the
Company obtained the Shareholder Approvals for the Lenfest Financing Transaction and certain other
matters.
During the thirty-nine weeks ended November 27, 2009, operating activities generated
$1,165,000 of cash versus $397,000 for the corresponding prior period. This improvement primarily
reflected a $9,194,000 improvement in net income offset by increases in accounts receivable, costs
and estimated earnings in excess of billings on uncompleted long-term contracts and deferred tax
assets.
The Companys investing activities required $1,616,000 during the thirty-nine weeks ended
November 27, 2009, comparable to the $1,590,000 for the prior period.
The Companys financing activities generated $2,536,000 during the thirty-nine weeks ended
November 27, 2009 consisting primarily of borrowing under the Companys line of credit and a
reduction in restricted cash in the Companys Turkish operations.
We believe that existing cash balances at November 27, 2009, cash generated from operating
activities, and funding under the Lenfest Financing Transaction (See Note 2 Long-term
Obligations and Credit Arrangements in the accompanying Notes to the Condensed Consolidated
Financial Statements) will be adequate to meet our future obligations through at least November 28,
2010.
25
Should the Company generate available funds above that required to sustain operations, they
will first be utilized to fund the additional $2,711,000 required under our August 19, 2010
Dedicated Line of Credit Agreement with PNC and then to repay bank debt.
Backlog
The Companys sales backlog at November 27, 2009 and February 27, 2009, for work to be
performed and revenue to be recognized under written agreements after such dates, was $105,647,000
and $44,324,000, respectively. Of the November 27, 2009 sales backlog, the Company had contracts
totaling approximately $41,165,000 for contracts in Korea and two contracts totaling $50,026,000
for the U.S. Government.
The Companys order flow does not follow any seasonal pattern as the Company receives orders
in each fiscal quarter of its fiscal year.
26
Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
As of the end of the period covered by this report, the Companys management conducted an
evaluation, under the supervision and with the participation of the principal executive officer and
principal financial officer, of the Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period
covered by this report, the Companys disclosure controls and procedures were functioning
effectively and provide reasonable assurance that the information required to be disclosed by the
Company in its periodic reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Notwithstanding the foregoing, a control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that it
will detect or uncover failures within the Company to disclose material information otherwise
required to be set forth in the Companys periodic reports.
Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Mends International, Ltd.
On May 29, 2008, a Request for Arbitration was filed against the Company with the Secretariat
of the International Court of Arbitration by Mends International Ltd. (Mends). Mends Request
for Arbitration arises out of a February 3, 1999 contract between the Company and Mends wherein
Mends purchased aeromedical equipment for sale to the Nigerian Air Force. Mends asserted a claim
for breach of contract and demanded $797,486, plus interest and costs. On September 16, 2008,
Mends filed an Amended Request for Arbitration, adding tort claims for conversion and breach of
fiduciary duty and seeking punitive damages. In response, the Company has asserted a counterclaim
seeking damages for other disputes with Mends that have arisen under the contract that Mends has
put at issue in this arbitration. On April 27, 2009 the Company participated in an arbitration
hearing in the United Kingdom on this matter. As of the filing date of this Quarterly Report on
Form 10-Q, a decision had not been determined in this matter, although one is expected by the end
of the Companys fiscal year in February 2010. The Company is contesting this arbitration case
vigorously; however, the Company has recorded a reserve in this matter.
Administrative Agreement with U.S. Navy
In 2007, the Company entered into a settlement agreement with the Department of the Navy to
resolve litigation filed by the Company in May 2003 in connection with a contract for submarine
rescue decompression chambers. As of May 14, 2008, the Company had made all payments required
under this settlement agreement and had transferred the chambers to the Department of the Navy.
From October 2, 2007 through December 12, 2007, the Company was suspended by the Department of the
Navy from soliciting work for the federal government pursuant to the Federal Acquisition
Regulation. However, effective December 12, 2007, the Department of the Navy lifted the Companys
suspension pursuant to the execution by the Company and the Department of the Navy of an
Administrative Agreement. In accordance with the Administrative Agreement, the Company has
established and implemented a program of compliance reviews, audits, and reports.
Other Matters
Certain other claims, suits, and complaints arising in the ordinary course of business have
been filed or are pending against us. In our opinion, after consultation with legal counsel
handling these specific maters, all such matters are reserved for or adequately covered by
insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as
would not have a significant effect on our financial position or results of operations if disposed
of unfavorably.
27
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
Number |
|
Item |
3.1(a)
|
|
Registrants Articles of Incorporation, as amended, were filed as
Exhibit 3.1 to Registrants Form 10-K for the year ended February
28, 1997 and are incorporated herein by reference. |
|
|
|
3.1(b)
|
|
Series D Preferred Stock Agreement, dated as of April 24, 2009,
between the Registrant and H.F. Lenfest, was file on April 27, 2009
as Exhibit 10.1 to Form 8-K and is incorporated herein by
reference. |
|
|
|
3.1(c)
|
|
Series E Preferred Stock Agreement, dated as of July 2, 2009,
between the Registrant and H.F. Lenfest ,was filed on July 9, 2009
as Exhibit 3.1 to Form 8-K and is incorporated herein by reference. |
|
|
|
3.2
|
|
Registrants amended and restated By-Laws were filed as Exhibit 3.2
to Registrants Form 8-K dated May 25, 2005, and are incorporated
herein by reference. |
|
|
|
31.1
|
|
Certification dated January 11, 2010 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 made by William F. Mitchell, Chief Executive Officer. |
|
|
|
31.2
|
|
Certification dated January 11, 2010 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 made by Duane D. Deaner, Chief Financial Officer. |
|
|
|
32
|
|
Certification dated January 11, 2010 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 made by William F. Mitchell, Chief Executive Officer, and
Duane D. Deaner, Chief Financial Officer. |
28
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.
ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)
|
|
|
|
|
|
Date: January 11, 2010
|
|
|
|
|
|
By:
|
/s/ William F. Mitchell
|
|
|
|
|
William F. Mitchell |
|
|
|
|
President and Chief |
|
|
|
|
Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
Date: January 11, 2010
|
|
|
|
|
|
By:
|
/s/ Duane Deaner
|
|
|
|
|
Duane Deaner, |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
29