e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 24, 2007
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 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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | 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 May 13, 2008, there were 9,035,355 shares of the registrants common stock issued and
outstanding.
Explanatory Statement
Restatement of previously issued financial statements
Environmental Tectonics Corporation (ETC or the Company) has restated its previously
issued financial statements for the fiscal year ended February 23, 2007 and the 13 and 39
week-periods ended November 24, 2006.
Settlement with U.S. Navy
History of the Claim Receivable
In May 2003, the Company filed a certified claim with the Department of the Navy (the
Government) seeking costs totaling in excess of $5.0 million in connection with a contract for
submarine rescue decompression chambers.
In accordance with accounting principles generally accepted in the United States of America,
recognizing revenue on contract claims and disputes related to customer caused delays, errors in
specifications and designs, and other unanticipated causes, and for amounts in excess of contract
value, is generally appropriate if it is probable that the claim will result in additional contract
revenue and if the Company can reliably estimate the amount of additional contract revenue the
Company may receive. However, revenue recorded on a contract claim cannot exceed the incurred
contract costs related to that claim. Since 2004, the Company had a claim receivable recorded for
$3,004,000. The Companys Form 10-K as originally filed for February 23, 2007 included this claim
receivable. This claim receivable was subsequently deemed to be impaired and reserved in full (see
below).
Litigation of the Certified Claim
On July 22, 2004, the Navys contracting officer issued a final decision denying the claim in
full. In July 2005, the Company converted this claim into a complaint which the Company filed in
the United States Court of Federal Claims. On June 14, 2007, the Government amended its filings to
add counterclaims pursuant to the anti-fraud provisions of the Contract Disputes Act, the False
Claims Act, and the forfeiture statute.
Settlement of Litigation and Subsequent Funding
On June 27, 2007, the Company and the Government filed a Joint Motion to Dismiss with
prejudice all of the Companys claims against the Government, which was granted on June 28, 2007.
Additionally, the Company agreed to pay to the Government $3.55 million to reimburse the Government
for estimated work to complete the chambers and for litigation expenses ($3.3 million recorded in
the first quarter of fiscal 2008 and $250,000 recorded in the second quarter of fiscal 2008) and
transfer the submarine rescue decompression chambers to the Navy. As of May 14, 2008, the Company
had made all payments required under this settlement agreement and had transferred the chambers to
the Government.
To partially fund the settlement, on August 23, 2007 the Company entered into the Series C
Preferred Stock Purchase Agreement with Lenfest, pursuant to which, among other things, ETC issued
and sold 3,300 shares of its newly-created class of Series C Cumulative Convertible Participating
Preferred Stock (the Series C Preferred Stock) to H.F. Lenfest (Lenfest), a member of ETCs
Board of Directors and a significant shareholder for $3,300,000. The proceeds from the issuance of
the Series C Preferred Stock were restricted solely for use to partially fund the settlement with
the Government.
Audit Committee Review and Regulatory Compliance Matters
In July 2007 the Companys Audit Committee retained independent counsel to review the
Government claim issue. While this review was being conducted, the Company could not file its
Quarterly Reports on Form 10-Q (Quarterly Reports), although preliminary financial results were
released and filed on Form 8-Ks for each of the fiscal quarters ended May 25, 2007, August 24,
2007 and November 23, 2007. Since the Company could not file its Quarterly Reports, the Company was
notified by the American Stock Exchange (AMEX) that it was not in compliance with AMEXs
continued listing standards and in August 2007 the Company submitted a plan to regain compliance.
On January 30, 2008, the Company was notified by AMEX that, due to continuing non-compliance with
listing standards, they were initiating delisting proceedings. The Company appealed that decision
and, on April 9, 2008 representatives of the Company participated in an appeal hearing. As a result
of that hearing, on April 16, 2008 the Company was granted a stay of delisting proceedings until
May 29, 2008.
As a result of the allegations made by the Department of Justice in connection with the Navy
matter, on October 12, 2007, pursuant to the Federal Acquisition Regulations, the Government placed
the Company on suspension, which barred the Company from soliciting contract work with any
Government agency. On December 12, 2007, the Company executed an Administrative Agreement, which
included a program of compliance reviews, audits and reports, and the Government lifted the
suspension.
2
Change in Independent Registered Public Accounting Firm
Following the independent counsels review, the Companys auditors, Grant Thornton LLP,
resigned from the Company and rescinded their audit opinion for the fiscal years 2003 through 2007.
On January 30, 2008, the Companys Audit Committee engaged Friedman LLP as the Companys registered
public accounting firm.
Restatement of Previously Filed Financial Statements
Settlement with U.S. Navy
In November 2007, the independent counsel completed its review. Subsequently, the Companys
Audit Committee, in conjunction with management, concluded that as of November 2006 the claim
receivable of $3,004,000 had been impaired.
On April 24, 2008, the Company announced that it was restating results for the 13 and 39
week-periods ended November 24, 2006 and the fiscal year ended February 23, 2007. This restatement
reflected the formal investigation which concluded that the carrying value of the $3,004,000 claim
receivable had been impaired during the third quarter of fiscal 2007. This impairment resulted from
certain allegations made by the Government during that period which resulted in the counterclaim
which was filed by the Government against the Company in June 2007.
The restatement for the 13 and 39 week-periods ended November 24, 2006 and the fiscal year
ended February 23, 2007 involves one change, namely the recording of a reserve against a claim
receivable for the full amount of the carrying value of $3,004,000 of the claim receivable. The
effect of this adjustment results in a corresponding reduction in accounts receivable, an increase
in net loss and a reduction in stockholders equity.
Preferred Stock
In connection with the restatement of the Companys previously issued financial statements for
the year ended February 23, 2007, the Company has reclassified the Series B and C Preferred Stock
(the instruments) from equity to mezzanine. The reclassification is due to the preferential
redemption feature of the instruments, which provides that a change in ownership would result in a
forced liquidation. A forced liquidation is considered outside the control of the Company.
Therefore, the preferential treatment upon an act outside the control of the Company precluded
equity treatment under the Securities and Exchange Commission Accounting Series Release (ASR) 268
and Topic D98. Prior years financial statements have been adjusted to reflect this change.
Due to the Companys accumulated deficit, all dividends accruing for the Series B and Series C
Preferred Stock have been recorded in the accompanying financial statements as a reduction in
additional paid-in capital.
For the discussion of the restatement adjustments, see Note 1 Restatement of Previously
Issued Financial Statements in the accompanying Notes to the Consolidated Financial Statements. All
amounts referenced in this Quarterly Report for the 13 and 39 week-periods ended November 24, 2006
and the fiscal year ended February 23, 2007 reflect the amounts on a restated basis.
Previously Filed Reports
The Company will not amend its Annual Report on Form 10-K for the fiscal year ended February
23, 2007 or its Quarterly Report on Form 10-Q for the quarterly period ended November 24, 2006. The
previously issued financial statements for the fiscal year ended February 23, 2007 and quarterly
period ended November 24, 2006 should no longer be relied upon.
Additional Matters Regarding H.F. Lenfest
Lenfest Acquisition Proposal
On February 20, 2008, ETC received a proposal from an affiliate of Lenfest to purchase all of
the publicly traded shares of the common stock of the Company not owned by Lenfest at the time the
acquisition is consummated. The Board of Directors of the Company has formed a committee (the
Transaction Committee) comprised of independent directors to evaluate the proposal. The
Transaction Committee has engaged a financial advisor to assist the Transaction Committee in
evaluating the proposal. The Transaction Committee is evaluating the proposal and will make a
recommendation with respect to the proposal to the Companys Board of Directors.
Lenfest Letter Agreement
On May 20, 2008, Lenfest agreed to fund all requests by ETC for funds to support its
operations through June 30, 2009, on terms and conditions to be mutually agreed upon by Lenfest and
ETC, provided that ETC may not request more than $10 million in the aggregate. All agreements will
be subject to any required approvals including the approval of ETCs shareholders and in accordance
with the rules and regulations of AMEX, if required. ETCs
3
objective will be to either replace or supplant any financing provided by Lenfest with third
party commitments on a best efforts basis.
4
Index
When used in this Quarterly Report on Form 10-Q, except where the context otherwise requires,
the terms we, us, our, ETC and the Company refer to Environmental Tectonics Corporation.
5
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Environmental Tectonics Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share information)
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Thirteen weeks ended |
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Twenty-six weeks ended |
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August 24, |
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August 25, |
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August 24, |
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August 25, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net sales |
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$ |
4,247 |
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$ |
4,329 |
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$ |
8,594 |
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$ |
8,904 |
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Cost of goods sold |
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3,704 |
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3,835 |
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7,156 |
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7,396 |
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Gross profit |
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543 |
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494 |
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1,438 |
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1,508 |
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Operating expenses: |
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Selling and administrative |
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2,635 |
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2,144 |
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5,434 |
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4,636 |
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Claim settlement costs |
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250 |
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3,639 |
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Research and development |
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237 |
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263 |
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291 |
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486 |
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3,122 |
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2,407 |
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9,364 |
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5,122 |
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Operating loss |
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(2,579 |
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(1,913 |
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(7,926 |
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(3,614 |
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Other expenses: |
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Interest expense |
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386 |
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284 |
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740 |
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566 |
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Other expense (income), net |
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11 |
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(43 |
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41 |
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7 |
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397 |
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241 |
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781 |
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573 |
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Loss before income taxes |
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(2,976 |
) |
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(2,154 |
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(8,707 |
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(4,187 |
) |
Provision for income taxes |
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4 |
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9 |
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Loss before minority interest |
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(2,976 |
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(2,158 |
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(8,707 |
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(4,196 |
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Loss attributable to minority interest |
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(6 |
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(10 |
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(12 |
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(17 |
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Net loss |
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$ |
(2,970 |
) |
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$ |
(2,148 |
) |
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$ |
(8,695 |
) |
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$ |
(4,179 |
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Preferred stock dividend |
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(90 |
) |
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(55 |
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(180 |
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(79 |
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Loss applicable to common shareholders |
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$ |
(3,060 |
) |
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$ |
(2,203 |
) |
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$ |
(8,875 |
) |
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$ |
(4,258 |
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Per share information: |
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Basic and diluted loss per share
applicable to common shareholders |
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$ |
(0.34 |
) |
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$ |
(0.24 |
) |
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$ |
(0.98 |
) |
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$ |
(0.47 |
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Basic and diluted weighted average
number of common shares |
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9,030,000 |
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9,029,000 |
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9,029,000 |
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9,033,000 |
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The accompanying notes are an integral part of the consolidated financial statements.
6
Environmental Tectonics Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share information)
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August 24, |
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February 23, |
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2007 |
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2007 |
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(unaudited) |
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(restated) |
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Assets |
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Current assets: |
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Cash |
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$ |
427 |
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$ |
2,215 |
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Restricted cash |
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3,322 |
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20 |
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Accounts receivable, net of allowance for bad debts of $385 and $3,372 |
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4,041 |
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2,094 |
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Costs and estimated earnings in excess of billings on uncompleted long-term
contracts |
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1,466 |
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2,816 |
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Inventories |
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5,471 |
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4,739 |
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Deferred tax asset |
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74 |
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71 |
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Prepaid expenses and other current assets |
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421 |
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213 |
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Total current assets |
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15,222 |
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12,168 |
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Property, plant and equipment, at cost, net of accumulated depreciation of
$13,120 and $12,760 |
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3,761 |
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4,054 |
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Construction in progress |
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11,176 |
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8,460 |
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Software development costs, net of accumulated amortization of $11,495 and $10,949 |
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2,047 |
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2,158 |
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Goodwill |
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455 |
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455 |
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Other assets |
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16 |
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30 |
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Total assets |
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$ |
32,677 |
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$ |
27,325 |
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Liabilities and Stockholders Deficiency |
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Liabilities |
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Current liabilities: |
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Accounts payable trade |
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2,210 |
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2,254 |
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Billings in excess of costs and estimated earnings on uncompleted long-term
contracts |
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1,251 |
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1,400 |
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Customer deposits |
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2,378 |
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794 |
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Accrued claim settlement costs |
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3,550 |
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Accrued interest and dividends |
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1,357 |
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668 |
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Accrued liabilities |
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1,510 |
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1,539 |
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Total current liabilities |
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12,256 |
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6,655 |
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Long-term obligations: |
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Credit facility payable to bank |
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5,000 |
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Subordinated convertible debt |
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9,087 |
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8,830 |
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14,087 |
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8,830 |
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Total liabilities |
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26,343 |
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|
15,485 |
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Commitments and contingencies |
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Minority interest |
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|
41 |
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53 |
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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 August 24, 2007
and February 23, 2007, respectively |
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6,000 |
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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 August 24, 2007 |
|
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3,300 |
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Stockholders Deficiency |
|
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Common stock; $.05 par value; 20,000,000 shares authorized; 9,028,459 shares issued and outstanding at August 24, 2007 and February 23, 2007,
respectively |
|
|
451 |
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|
451 |
|
Additional paid-in capital |
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|
16,539 |
|
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|
16,662 |
|
Accumulated other comprehensive loss |
|
|
(125 |
) |
|
|
(149 |
) |
Accumulated deficit |
|
|
(19,872 |
) |
|
|
(11,177 |
) |
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Total stockholders (deficiency) equity |
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(3,007 |
) |
|
|
5,787 |
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Total liabilities and stockholders deficiency |
|
$ |
32,677 |
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$ |
27,325 |
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The accompanying notes are an integral part of the consolidated financial statements.
7
Environmental Tectonics Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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Twenty-six weeks ended |
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August 24, |
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August 25, |
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2007 |
|
|
2006 |
|
|
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|
Cash flows from operating activities: |
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Net loss |
|
$ |
(8,695 |
) |
|
$ |
(4,179 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
|
|
906 |
|
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|
920 |
|
Accretion of debt discount |
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|
257 |
|
|
|
217 |
|
Increase (decrease) in allowance for accounts receivable and inventories |
|
|
433 |
|
|
|
(407 |
) |
Loss attributable to minority interest |
|
|
(12 |
) |
|
|
(17 |
) |
Stock
compensation expense |
|
|
57 |
|
|
|
274 |
|
Deferred income taxes |
|
|
(3 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,049 |
) |
|
|
1,353 |
|
Costs and estimated earnings in excess of billings on uncompleted
long-term contracts |
|
|
1,350 |
|
|
|
(2,256 |
) |
Inventories |
|
|
(1,063 |
) |
|
|
(1,376 |
) |
Prepaid expenses and other current assets |
|
|
(208 |
) |
|
|
236 |
|
Other assets |
|
|
14 |
|
|
|
(1 |
) |
Accounts payable |
|
|
(44 |
) |
|
|
(776 |
) |
Billings in excess of costs and estimated earnings on uncompleted
long-term contracts |
|
|
(149 |
) |
|
|
429 |
|
Customer deposits |
|
|
1,584 |
|
|
|
79 |
|
Accrued claim settlement costs |
|
|
3,550 |
|
|
|
|
|
Other accrued liabilities |
|
|
480 |
|
|
|
(380 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,592 |
) |
|
|
(5,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of equipment |
|
|
(67 |
) |
|
|
(158 |
) |
Capitalized software development costs |
|
|
(435 |
) |
|
|
(66 |
) |
Payments for construction in progress |
|
|
(2,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,218 |
) |
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings under line of credit |
|
|
5,000 |
|
|
|
|
|
Proceeds from notes payable, Lenfest |
|
|
4,000 |
|
|
|
|
|
Repayment of notes payable, Lenfest |
|
|
(4,000 |
) |
|
|
|
|
Proceeds from issuance of common stock / warrants |
|
|
|
|
|
|
3 |
|
Increase in restricted cash |
|
|
(3,302 |
) |
|
|
(2 |
) |
Proceeds from issuance of preferred stock |
|
|
3,300 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,998 |
|
|
|
6,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive losses |
|
|
24 |
|
|
|
61 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(1,788 |
) |
|
|
(46 |
) |
Cash at beginning of period |
|
|
2,215 |
|
|
|
3,566 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
427 |
|
|
$ |
3,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
|
113 |
|
|
|
207 |
|
Income taxes paid |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Supplemental information on non-cash operating and investing activities: |
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
8
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements
1.
Restatement of Previously Issued Financial Statements and Subsequent
Events
Environmental Tectonics Corporation (ETC or the Company) has restated its previously
issued financial statements for the fiscal year ended February 23, 2007 and the 13 and 39
week-periods ended November 24, 2006.
Settlement with U.S. Navy
History of the Claim Receivable
In May 2003, the Company filed a certified claim with the Department of the Navy (the
Government) seeking costs totaling in excess of $5.0 million in connection with a contract for
submarine rescue decompression chambers.
In accordance with accounting principles generally accepted in the United States of America,
recognizing revenue on contract claims and disputes related to customer caused delays, errors in
specifications and designs, and other unanticipated causes, and for amounts in excess of contract
value, is generally appropriate if it is probable that the claim will result in additional contract
revenue and if the Company can reliably estimate the amount of additional contract revenue the
Company may receive. However, revenue recorded on a contract claim cannot exceed the incurred
contract costs related to that claim. Since 2004, the Company had a claim receivable recorded for
$3,004,000. The Companys Form 10-K as originally filed for February 23, 2007 included this claim
receivable. This claim receivable was subsequently deemed to be impaired and reserved in full (see
below).
Litigation of the Certified Claim
On July 22, 2004, the Navys contracting officer issued a final decision denying the claim in
full. In July 2005, the Company converted this claim into a complaint which the Company filed in
the United States Court of Federal Claims. On June 14, 2007, the Government amended its filings to
add counterclaims pursuant to the anti-fraud provisions of the Contract Disputes Act, the False
Claims Act, and the forfeiture statute.
Settlement of Litigation and Subsequent Funding
On June 27, 2007, the Company and the Government filed a Joint Motion to Dismiss with
prejudice all of the Companys claims against the Government, which was granted on June 28, 2007.
Additionally, the Company agreed to pay to the Government $3.55 million to reimburse the Government
for estimated work to complete the chambers and for litigation expenses ($3.3 million recorded in
the first quarter of fiscal 2008 and $250,000 recorded in the second quarter of fiscal 2008) and
transfer the submarine rescue decompression chambers to the Navy. As of May 14, 2008, the Company
had made all payments required under this settlement agreement and had transferred the chambers to
the Government.
To partially fund the settlement, on August 23, 2007 the Company entered into the Series C
Preferred Stock Purchase Agreement with Lenfest, pursuant to which, among other things, ETC issued
and sold 3,300 shares of its newly-created class of Series C Cumulative Convertible Participating
Preferred Stock (the Series C Preferred Stock) to Lenfest for $3,300,000. The proceeds from the
issuance of the Series C Preferred Stock were restricted solely for use to partially fund the
settlement with the Government.
Audit Committee Review and Regulatory Compliance Matters
In July 2007 the Companys Audit Committee retained independent counsel to review the
Government claim issue. While this review was being conducted, the Company could not file its
Quarterly Reports on Form 10-Q (Quarterly Reports), although preliminary financial results were
released and filed on Form 8-Ks for each of the fiscal quarters ended May 25, 2007, August 24,
2007 and November 23, 2007. Since the Company could not file its Quarterly Reports, the Company was
notified by the American Stock Exchange (AMEX) that it was not in compliance with AMEXs
continued listing standards and in August 2007 the Company submitted a plan to regain compliance.
On January 30, 2008, the Company was notified by AMEX that, due to continuing non-compliance with
listing standards, they were initiating delisting proceedings. The Company appealed that decision
and, on April 9, 2008 representatives of the Company participated in an appeal hearing. As a result
of that hearing, on April 16, 2008 the Company was granted a stay of delisting proceedings until
May 29, 2008.
As a result of the allegations made by the Department of Justice in connection with the Navy
matter, on October 12, 2007, pursuant to the Federal Acquisition Regulations, the Government placed
the Company on suspension, which barred the Company from soliciting contract work with any
Government agency. On December 12, 2007, the Company executed an Administrative Agreement, which
included a program of compliance reviews, audits and reports, and the Government lifted the
suspension
9
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Change in Independent Registered Public Accounting Firm
Following the independent counsels review, the Companys auditors, Grant Thornton LLP,
resigned from the Company and rescinded their audit opinion for the fiscal years 2003 through 2007.
On January 30, 2008, the Companys Audit Committee engaged Friedman LLP as the Companys registered
public accounting firm.
Restatement of Previously Filed Financial Statements
Settlement with U.S. Navy
In November 2007, the independent counsel completed its review. Subsequently, the Companys
Audit Committee, in conjunction with management, concluded that as of November 2006 the claim
receivable of $3,004,000 had been impaired.
On April 24, 2008, the Company announced that it was restating results for the 13 and 39
week-periods ended November 24, 2006 and the fiscal year ended February 23, 2007. This restatement
reflected the formal investigation which concluded that the carrying value of the $3,004,000 claim
receivable had been impaired during the third quarter of fiscal 2007. This impairment resulted from
certain allegations made by the Government during that period which resulted in the counterclaim
which was filed by the Government against the Company in June 2007.
The restatement for the 13 and 39 week-periods ended November 24, 2006 and the fiscal year
ended February 23, 2007 involves one change, namely the recording of a reserve against a claim
receivable for the full amount of the carrying value of $3,004,000 of the claim receivable. The
effect of this adjustment results in a corresponding reduction in accounts receivable, an increase
in net loss and a reduction in stockholders equity.
Preferred Stock
In connection with the restatement of the Companys previously issued financial statements for
the year ended February 23, 2007, the Company has reclassified the Series B and C Preferred Stock
(the instruments) from equity to mezzanine. The reclassification is due to the preferential
redemption feature of the instruments, which provides that a change in ownership would result in a
forced liquidation. A forced liquidation is considered outside the control of the Company.
Therefore, the preferential treatment upon an act outside the control of the Company precluded
equity treatment under the Securities and Exchange Commission Accounting Series Release (ASR) 268
and Topic D98. Prior years financial statements have been adjusted to reflect this change.
Due to the Companys accumulated deficit, all dividends accruing for the Series B and Series C
Preferred Stock have been recorded in the accompanying financial statements as a reduction in
additional paid-in capital.
For the discussion of the restatement adjustments, see Note 1 Restatement of Previously
Issued Financial Statements in the accompanying Notes to the Consolidated Financial Statements. All
amounts referenced in this Annual Report for the 13 and 39 week-periods ended November 24, 2006 and
the fiscal year ended February 23, 2007 reflect the amounts on a restated basis.
Subsequent
Events
Additional Matters Regarding H.F. Lenfest
Lenfest Acquisition Proposal
On February 20, 2008, ETC received a proposal from an affiliate of Lenfest to purchase all of
the publicly traded shares of the common stock of the Company not owned by Lenfest at the time the
acquisition is consummated. The Board of Directors of the Company has formed a committee (the
Transaction Committee) comprised of independent directors to evaluate the proposal. The
Transaction Committee has engaged a financial advisor to assist the Transaction Committee in
evaluating the proposal. The Transaction Committee is evaluating the proposal and will make a
recommendation with respect to the proposal to the Companys Board of Directors.
Lenfest Letter Agreement
On May 20, 2008, Lenfest agreed to fund all requests by ETC for funds to support its
operations through June 30, 2009, on terms and conditions to be mutually agreed upon by Lenfest and
ETC, provided that ETC may not request more than $10 million in the aggregate. All agreements will
be subject to any required approvals including the approval of ETCs shareholders and in accordance
with the rules and regulations of AMEX, if required. ETCs objective will be to either replace or
supplant any financing provided by Lenfest with third party commitments on a best efforts basis.
10
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The following financial schedules reflect the impact of these restatements.
Restated Statements of Operations amounts:
The table below sets forth the effect of the adjustment on the Condensed Consolidated
Statement of Operations for the 13 week period ended November 24, 2006.
(unaudited)
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally |
|
|
Claim Receivable |
|
|
As |
|
|
|
Reported |
|
|
Impairment |
|
|
Restated |
|
|
|
|
Net sales |
|
$ |
4,718 |
|
|
$ |
|
|
|
$ |
4,718 |
|
Cost of goods sold |
|
|
3,688 |
|
|
|
|
|
|
|
3,688 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,030 |
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
2,568 |
|
|
|
|
|
|
|
2,568 |
|
Claim settlement costs |
|
|
|
|
|
|
3,004 |
|
|
|
3,004 |
|
Research and development |
|
|
43 |
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,611 |
|
|
|
3,004 |
|
|
|
5,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,581 |
) |
|
|
(3,004 |
) |
|
|
(4,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
291 |
|
|
|
|
|
|
|
291 |
|
Other income, net |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(1,829 |
) |
|
|
(3,004 |
) |
|
|
(4,833 |
) |
Provision for income taxes |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest |
|
|
(1,833 |
) |
|
|
(3,004 |
) |
|
|
(4,837 |
) |
Income attributable to minority interest |
|
|
33 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,866 |
) |
|
$ |
(3,004 |
) |
|
$ |
(4,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend |
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders |
|
$ |
(1,956 |
) |
|
$ |
(3,004 |
) |
|
$ |
(4,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
applicable to common shareholders |
|
$ |
(0.22 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.55 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of common shares |
|
|
9,027,000 |
|
|
|
9,027,000 |
|
|
|
9,027,000 |
|
|
|
|
|
|
|
|
|
|
|
11
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The table below sets forth the effect of the adjustment on the Condensed Consolidated
Statement of Operations for the 39 week period ended November 24, 2006
(unaudited)
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally |
|
|
Claim Receivable |
|
|
As |
|
|
|
Reported |
|
|
Impairment |
|
|
Restated |
|
|
|
|
Net sales |
|
$ |
13,622 |
|
|
$ |
|
|
|
$ |
13,622 |
|
Cost of goods sold |
|
|
11,084 |
|
|
|
|
|
|
|
11,084 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,538 |
|
|
|
|
|
|
|
2,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
7,204 |
|
|
|
|
|
|
|
7,204 |
|
Claim settlement costs |
|
|
|
|
|
|
3,004 |
|
|
|
3,004 |
|
Research and development |
|
|
529 |
|
|
|
|
|
|
|
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,733 |
|
|
|
3,004 |
|
|
|
10,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5,195 |
) |
|
|
(3,004 |
) |
|
|
(8,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
857 |
|
|
|
|
|
|
|
857 |
|
Other income, net |
|
|
(36 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(6,016 |
) |
|
|
(3,004 |
) |
|
|
(9,020 |
) |
Provision for income taxes |
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest |
|
|
(6,029 |
) |
|
|
(3,004 |
) |
|
|
(9,033 |
) |
Income attributable to minority interest |
|
|
16 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,045 |
) |
|
$ |
(3,004 |
) |
|
$ |
(9,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend |
|
|
(169 |
) |
|
|
|
|
|
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders |
|
$ |
(6,214 |
) |
|
$ |
(3,004 |
) |
|
$ |
(9,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
applicable to common shareholders |
|
$ |
(0.69 |
) |
|
$ |
(0.33 |
) |
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of common shares |
|
|
9,031,000 |
|
|
|
9,031,000 |
|
|
|
9,031,000 |
|
|
|
|
|
|
|
|
|
|
|
12
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The table below sets forth the effect of the adjustment on the Consolidated Statement of
Operations for the year ended February 23, 2007.
(unaudited)
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally |
|
|
Claim Receivable |
|
|
As |
|
|
|
Reported |
|
|
Impairment |
|
|
Restated |
|
|
|
|
Net sales |
|
$ |
17,419 |
|
|
$ |
|
|
|
$ |
17,419 |
|
Cost of goods sold |
|
|
15,348 |
|
|
|
|
|
|
|
15,348 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,071 |
|
|
|
|
|
|
|
2,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
9,434 |
|
|
|
|
|
|
|
9,434 |
|
Claim settlement costs |
|
|
|
|
|
|
3,004 |
|
|
|
3,004 |
|
Research and development |
|
|
569 |
|
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,003 |
|
|
|
3,004 |
|
|
|
13,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,932 |
) |
|
|
(3,004 |
) |
|
|
(10,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,151 |
|
|
|
|
|
|
|
1,151 |
|
Other income, net |
|
|
(58 |
) |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,025 |
) |
|
|
(3,004 |
) |
|
|
(12,029 |
) |
Benefit from income taxes |
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest |
|
|
(8,948 |
) |
|
|
(3,004 |
) |
|
|
(11,952 |
) |
Loss attributable to minority interest |
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,940 |
) |
|
$ |
(3,004 |
) |
|
$ |
(11,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend |
|
|
(259 |
) |
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders |
|
$ |
(9,199 |
) |
|
$ |
(3,004 |
) |
|
$ |
(12,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
applicable to common shareholders |
|
$ |
(1.02 |
) |
|
$ |
(0.33 |
) |
|
$ |
(1.35 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of common shares |
|
|
9,030,000 |
|
|
|
9,030,000 |
|
|
|
9,030,000 |
|
|
|
|
|
|
|
|
|
|
|
13
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Restated Balance Sheets amounts:
The table below sets forth the effect of the adjustment on the Condensed Consolidated Balance
Sheet as of November 24, 2006.
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally |
|
|
|
|
|
|
|
|
|
Reported |
|
|
|
|
|
|
|
|
|
adjusted for |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Claim |
|
|
|
|
|
|
Stock |
|
|
Receivable |
|
|
As |
|
|
|
Reclass |
|
|
Impairment |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
4,002 |
|
|
$ |
|
|
|
$ |
4,002 |
|
Restricted cash |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
Accounts receivable, net of allowance
for bad debts of $376 and $3,380 |
|
|
8,381 |
|
|
|
(3,004 |
) |
|
|
5,377 |
|
Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts |
|
|
4,679 |
|
|
|
|
|
|
|
4,679 |
|
Inventories |
|
|
12,782 |
|
|
|
|
|
|
|
12,782 |
|
Prepaid expenses and other current assets |
|
|
428 |
|
|
|
|
|
|
|
428 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
30,291 |
|
|
|
(3,004 |
) |
|
|
27,287 |
|
Property, plant and equipment, at cost, net of
accumulated depreciation of $12,643 |
|
|
4,099 |
|
|
|
|
|
|
|
4,099 |
|
Software development costs, net of accumulated
amortization of $10,773 |
|
|
2,008 |
|
|
|
|
|
|
|
2,008 |
|
Goodwill |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Other assets |
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
36,882 |
|
|
$ |
(3,004 |
) |
|
$ |
33,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
3,000 |
|
|
|
|
|
|
|
3,000 |
|
Accounts payable trade |
|
|
1,818 |
|
|
|
|
|
|
|
1,818 |
|
Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts |
|
|
2,035 |
|
|
|
|
|
|
|
2,035 |
|
Customer deposits |
|
|
1,401 |
|
|
|
|
|
|
|
1,401 |
|
Accrued liabilities |
|
|
2,134 |
|
|
|
|
|
|
|
2,134 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,388 |
|
|
|
|
|
|
|
10,388 |
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt |
|
|
8,709 |
|
|
|
|
|
|
|
8,709 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
19,097 |
|
|
|
|
|
|
|
19,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding |
|
|
6,000 |
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; $.05 par value; 20,000,000
shares authorized; 9,026,958 issued and
outstanding |
|
|
451 |
|
|
|
|
|
|
|
451 |
|
Additional paid-in capital |
|
|
16,455 |
|
|
|
|
|
|
|
16,455 |
|
Accumulated other comprehensive loss |
|
|
(179 |
) |
|
|
|
|
|
|
(179 |
) |
Accumulated deficit |
|
|
(5,019 |
) |
|
|
(3,004 |
) |
|
|
(8,023 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
11,708 |
|
|
|
(3,004 |
) |
|
|
8,704 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
36,882 |
|
|
$ |
(3,004 |
) |
|
$ |
33,878 |
|
|
|
|
|
|
|
|
|
|
|
14
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The table below sets forth the effect of the adjustment on the Consolidated Balance Sheet as
of February 23, 2007.
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally |
|
|
|
|
|
|
|
|
|
Reported |
|
|
|
|
|
|
|
|
|
adjusted for |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Claim |
|
|
|
|
|
|
Stock |
|
|
Receivable |
|
|
As |
|
|
|
Reclass |
|
|
Impairment |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,215 |
|
|
$ |
|
|
|
$ |
2,215 |
|
Restricted cash |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
Accounts receivable, net of allowance
for bad debts of $368 and $3,372 |
|
|
5,098 |
|
|
|
(3,004 |
) |
|
|
2,094 |
|
Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts |
|
|
2,816 |
|
|
|
|
|
|
|
2,816 |
|
Inventories |
|
|
4,739 |
|
|
|
|
|
|
|
4,739 |
|
Deferred tax asset |
|
|
71 |
|
|
|
|
|
|
|
71 |
|
Prepaid expenses and other current assets |
|
|
213 |
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
15,172 |
|
|
|
(3,004 |
) |
|
|
12,168 |
|
Property, plant and equipment, at cost, net of
accumulated depreciation of $12,760 |
|
|
4,054 |
|
|
|
|
|
|
|
4,054 |
|
Construction in progress |
|
|
8,460 |
|
|
|
|
|
|
|
8,460 |
|
Software development costs, net of accumulated
amortization of $10,949 |
|
|
2,158 |
|
|
|
|
|
|
|
2,158 |
|
Goodwill |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Other assets |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,329 |
|
|
$ |
(3,004 |
) |
|
$ |
27,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable trade |
|
|
2,254 |
|
|
|
|
|
|
|
2,254 |
|
Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts |
|
|
1,400 |
|
|
|
|
|
|
|
1,400 |
|
Customer deposits |
|
|
794 |
|
|
|
|
|
|
|
794 |
|
Accrued liabilities |
|
|
2,207 |
|
|
|
|
|
|
|
2,207 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,655 |
|
|
|
|
|
|
|
6,655 |
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt |
|
|
8,830 |
|
|
|
|
|
|
|
8,830 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
15,485 |
|
|
|
|
|
|
|
15,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
53 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding |
|
|
6,000 |
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; $.05 par value; 20,000,000
shares authorized; 9,028,459 issued and
outstanding |
|
|
451 |
|
|
|
|
|
|
|
451 |
|
Additional paid-in capital |
|
|
16,662 |
|
|
|
|
|
|
|
16,662 |
|
Accumulated other comprehensive loss |
|
|
(149 |
) |
|
|
|
|
|
|
(149 |
) |
Accumulated deficit |
|
|
(8,173 |
) |
|
|
(3,004 |
) |
|
|
(11,177 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
8,791 |
|
|
|
(3,004 |
) |
|
|
5,787 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
30,329 |
|
|
$ |
(3,004 |
) |
|
$ |
27,325 |
|
|
|
|
|
|
|
|
|
|
|
15
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements include the accounts of
Environmental Tectonics Corporation (ETC, we, us our 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 accompanying condensed consolidated financial statements have been prepared by ETC,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC), and reflect all adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. All such adjustments are of a
normal recurring nature.
Certain information in footnote disclosures normally included in financial statements prepared
in conformity with accounting principles generally accepted in the United States of America has
been condensed or omitted pursuant to such rules and regulations and the financial results for the
periods presented may not be indicative of the full years results, although the Company believes
the disclosures are adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and the notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended February 29, 2008,
which is being filed contemporaneously with this report. The Consolidated Statement of Operations,
Consolidated Balance Sheet and Consolidated Statement of Cash Flows previously filed for the fiscal
year ended February 23, 2007 have been restated in the annual report on Form 10-K for the fiscal
year ended February 29, 2008. The Condensed Consolidated Statement of Operations, Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows previously filed for
the quarter ended November 24, 2006 have been restated in this quarterly report on Form 10-Q for
the quarter ended November 23, 2007.
References to fiscal second quarter 2008 are references to the 13-week period ended August 24,
2007. Reference to the first half of fiscal 2008 are references to the 26-week period ended August
24, 2007. Certain amounts from prior consolidated financial statements have been reclassified to
conform to the presentation in fiscal 2008.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories
Inventories are valued at the lower of cost or market using the first in, first out (FIFO)
method and consist of the following (net of reserves of $1,330,000 at
August 24, 2007 and $999,000
at February 23, 2007):
|
|
|
|
|
|
|
|
|
|
|
August 24, |
|
|
February 23, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
93 |
|
|
$ |
95 |
|
Work in process |
|
|
4,726 |
|
|
|
3,820 |
|
Finished goods |
|
|
652 |
|
|
|
824 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,471 |
|
|
$ |
4,739 |
|
|
|
|
|
|
|
|
16
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Revenue Recognition
On long-term contracts, with a contract value over $250,000 and a minimum completion period of
six months, the percentage-of-completion (POC) method is applied based on costs incurred as a
percentage of estimated total costs. This percentage is multiplied by the total estimated revenue
under a contract to calculate the amount of revenue recognized in an accounting period. Revenue
recognized on uncompleted long-term contracts in excess of amounts billed to customers is reflected
as an asset. Amounts billed to customers in excess of revenue recognized on uncompleted long-term
contracts are reflected as a liability. When it is estimated that a contract will result in a loss,
the entire amount of the loss is accrued. The effect of revisions in cost and profit estimates for
long-term contracts is reflected in the accounting period in which the Company learns the facts
which require it to revise the cost and profit estimates. Contract progress billings are based
upon contract provisions for customer advance payments, contract costs incurred, and completion of
specified contract milestones. Contracts may provide for customer retainage of a portion of amounts
billed until contract completion. Retainage is generally due within one year of completion of the
contract.
Revenue for contracts under $250,000, or to be completed in less than six months, and where
there are no post-shipment services included in the contract, is recognized on the date that the
finished product is shipped to the customer.
Revenue derived from the sale of parts and services is also recognized on the date that the
finished product is shipped to the customer. Revenue on contracts under $250,000, or to be
completed in less than six months, and where post-shipment services (such as installation and
customer acceptance) are required, is recognized following customer acceptance. Revenue for service
contracts is recognized ratably over the life of the contract with related material costs expensed
as incurred.
In accordance with accounting principles generally accepted in the United States of America,
recognizing revenue on contract claims and disputes related to customer caused delays, errors in
specifications and designs, and other unanticipated causes, and for amounts in excess of contract
value, is generally appropriate if it is probable that the claim will result in additional contract
revenue and if the Company can reliably estimate the amount of additional contract revenue the
Company may receive. However, revenue recorded on a contract claim cannot exceed the incurred
contract costs related to that claim. Claims are subject to negotiation, arbitration and audit by
the customer or governmental agency.
Net loss per common share
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per Share, requires
presentation of basic and diluted earnings per share together with disclosure describing the
computation of the per share amounts. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised and converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity. Potentially dilutive common shares are not included in the computation of diluted earnings
per common share if they are anti-dilutive.
Share-Based Compensation
The Company adopted SFAS No. 123(R) effective February 25, 2006. SFAS No. 123(R) requires the
Company to recognize expense related to the fair value of stock-based compensation awards,
including employee stock options. Prior to the adoption of SFAS No. 123(R), the Company accounted
for stock options using the intrinsic value method of APB Opinion No. 25, and it did not recognize
compensation expense in its income statement for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant. The Company also provided
certain pro forma disclosures for stock option awards as if the fair value-based approach of SFAS
No. 123 had been applied.
The Company has elected to use the modified prospective transition method as permitted by SFAS
No. 123(R) and therefore has not restated its financial results for prior periods. Under this
transition method, the Company will apply the provisions of SFAS No. 123(R) to new awards and to
awards modified, repurchased or cancelled after February 24, 2006. Additionally, for unvested
awards granted prior to the effective date of the Companys adoption of SFAS No. 123(R) which have
not been fully expensed in prior years, either in the Companys income statement or in pro forma
disclosures in the notes thereto, the Company will recognize compensation expense in the same
manner as was used in its income statement or for pro forma disclosures prior to the effective date
of its adoption SFAS No. 123(R).
17
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
The cost for stock option compensation was $29,000 and $7,000 for the thirteen weeks ended
August 24, 2007 and August 25, 2006, respectively, and $57,000 and $274,000 for the six months
ended August 24, 2007 and August 25, 2006, respectively.
As of August 24, 2007, the remaining prospective pre-tax cost of unvested stock option
employee compensation was $77,000 which will be expensed on a pro-rata basis going forward.
There were no grants of stock options during the thirteen weeks periods ended August 24, 2007
or August 25, 2006.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and operating loss and tax credit carry forwards
and are measured using the enacted tax rates and laws that will be in effect when the differences
and carry forwards are expected to be recovered or settled. In accordance with SFAS No. 109,
Accounting for Income Taxes, a valuation allowance for deferred tax assets is provided when we
estimate that it is more likely than not that all or a portion of the deferred tax assets may not
be realized through future operations. This assessment is based upon consideration of available
positive and negative evidence, which includes, among other things, our most recent results of
operations and expected profitability. During the current fiscal quarter, no offsetting income tax
benefit and corresponding deferred tax receivable was recorded. The tax accrual of $5,000 in the
prior fiscal period reflected tax liability in our Polish subsidiary. Realization is entirely
dependent upon future earnings in specific tax jurisdictions. Reflecting the Companys losses in
the current and prior fiscal years, the Company has approximately $20.5 million of federal net loss
carry forwards available to offset future income and resulting income tax liabilities, beginning to
expire in 2025.
3. Accounts Receivable:
The components of accounts receivable at August 24, 2007 and February 23, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 24, |
|
|
February 23, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
(restated) |
|
|
|
(in thousands) |
|
U.S. government receivables billed and
unbilled contract costs
subject to negotiation |
|
$ |
211 |
|
|
$ |
3,135 |
|
U.S. commercial receivables billed |
|
|
1,611 |
|
|
|
1,525 |
|
International receivables billed |
|
|
2,604 |
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
4,426 |
|
|
|
5,466 |
|
Less: allowance for doubtful accounts |
|
|
(385 |
) |
|
|
(3,372 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,041 |
|
|
$ |
2,094 |
|
|
|
|
|
|
|
|
The allowance for doubtful accounts as of February 23, 2007 includes $3,004,000 as an
impairment reserve against an equivalent amount for a U.S. Navy claim receivable included in the
U.S. government receivables billed and unbilled contract costs subject to negotiation. (See Note 1
Subsequent Events in the accompanying Notes to the Consolidated Financial Statements).
18
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
4. Stockholders Deficiency
The components of stockholders deficiency at August 24, 2007 (unaudited) and February 23,
2007 (restated) were as follows (in thousands, except share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
deficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 23,
2007* |
|
|
9,028,459 |
|
|
$ |
451 |
|
|
$ |
16,662 |
|
|
$ |
(149 |
) |
|
$ |
(11,177 |
) |
|
$ |
5,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,695 |
) |
|
|
(8,695 |
) |
Interest hedge valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,671 |
) |
Stock compensation
expense |
|
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
57 |
|
Dividends payable on
preferred stock |
|
|
|
|
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 24, 2007 |
|
|
9,028,459 |
|
|
$ |
451 |
|
|
$ |
16,539 |
|
|
$ |
(125 |
) |
|
$ |
(19,872 |
) |
|
$ |
(3,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
restated for reserve of claim receivable. See Note 1 Subsequent Events in the accompanying
notes. |
5. Long-Term Obligations and Credit Arrangements:
Bank Credit and Facility
On July 31, 2007, the Company entered into a revolving credit agreement (the Credit
Agreement) in order to refinance its indebtedness with PNC Bank, National Association (PNC) in
the aggregate amount of up to $15,000,000. This Credit Agreement is a replacement of a credit
facility originally entered into with PNC in February 2003.
Borrowings are to be used for ETCs working capital or other general business purposes and for
issuances of letters of credit. Amounts borrowed under the Credit Agreement may be borrowed, repaid
and reborrowed from time to time until June 30, 2009. Borrowings made pursuant to the Credit
Agreement will bear interest at either the prime rate (as described in the Note) minus 1.00% or the
London Interbank Offered Rate (LIBOR) (as described in the Note) plus 0.90%. Additionally, ETC is
obligated to pay a fee of 0.125% per annum for unused available funds.
The Credit Agreement contains affirmative and negative covenants, including limitations with
respect to indebtedness, liens, investments, distributions, dispositions of assets, change of
business and transactions with affiliates. The Credit Agreement requires ETC to maintain a minimum
Consolidated Tangible Net Worth of $9,000,000 at the end of each fiscal quarter.
ETCs obligations under the Credit Agreement are secured by a personal guarantee from Lenfest,
under a Restated Guaranty, dated July 31, 2007, made by Lenfest in favor of PNC. ETC is required to
pay Lenfest an annual cash fee of 1% of the loan commitment for his guarantee. On July 31, 2007, as
a stipulation for Lenfests guarantee, ETC repaid $4,000,000 owed to Lenfest under unsecured
promissory notes. See below.
In connection with entering into the Credit Agreement, ETC entered into an Amended and
Restated Reimbursement Agreement with PNC (the Reimbursement Agreement), and an Amended and
Restated Subordination and Intercreditor Agreement with PNC and Lenfest (the Subordination
Agreement). The Reimbursement Agreement governs letters of credit issued pursuant to the Credit
Agreement. Under the Subordination Agreement, Lenfest agreed to continue to subordinate his rights
in connection with a convertible promissory note executed by ETC in favor of Lenfest in the
original aggregate principal amount of $10,000,000, dated February 18, 2003, to the rights of PNC
in connection with the Line of Credit.
For the purpose of reducing the risk associated with variable interest rates, ETC has entered
into an interest rate swap agreement (Swap Agreement) with PNC which provides for a fixed rate
through June 30, 2009, the maturity date of the Swap Agreement, for the borrowings during the first
quarter of fiscal 2008. If the Swap Agreement is terminated prior to maturity, an additional
payment to PNC 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 FAS No. 133
Accounting for Derivative and Instruments and Hedging Activities.
19
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
At August 24, 2007, ETC recorded a Comprehensive Loss of $32,000 in the accompanying
Consolidated Balance Sheets reflecting the relative value of the interest rate hedges at the
reporting date.
At August 24, 2007, the Company had $4,923,000 available under the line of credit.
Long-term obligations at August 24, 2007 and February 23, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
August 24, |
|
February 23, |
|
|
2007 |
|
2007 |
|
|
(unaudited) |
|
|
|
|
|
Note payable to bank |
|
$ |
5,000 |
|
|
$ |
|
|
Subordinated convertible debt, net
of unamortized discount of $913 and $1,170 |
|
|
9,087 |
|
|
|
8,830 |
|
|
|
|
|
|
$ |
14,087 |
|
|
$ |
8,830 |
|
|
|
|
The amounts of future long-term obligations maturing in each of the next five fiscal years are
as follows:
|
|
|
|
|
|
|
(in thousands): |
|
2008 |
|
$ |
|
|
2009 |
|
|
14,087 |
|
2010 |
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
2012 and thereafter |
|
|
|
|
|
|
|
|
Total future obligations |
|
$ |
14,087 |
|
|
|
|
|
The interest rate in the Companys subordinated debt agreement is 10% per annum. However,
Lenfest reduced the interest rate to 8% per annum for the period December 1, 2004 through November
30, 2007.
Equity Line
On April 7, 2006, the Company entered into a Preferred Stock Purchase Agreement (the Lenfest
Equity Agreement) with Lenfest. The Lenfest Equity Agreement permitted ETC to unilaterally draw
down up to $15 million in exchange for shares of the Companys Series B Cumulative Convertible
Participating Preferred Stock (Series B Preferred Stock). The Series B Preferred Stock provides
for a dividend equal to 6% per annum. On August 23, 2007, the dividend was amended to 10% per
annum, effective from August 23, 2007. The Series B Preferred Stock is convertible, at Lenfests
request, into ETC common shares at a conversion price (the Conversion Price) which was set on the
day of each draw down. The Conversion Price was equal to the closing price of the Companys common
stock on the trading day immediately preceding the day in which the draw down occurs, subject to a
floor price of $4.95 per common share. Drawdowns were not permitted on any day when the Conversion
Price was less than this floor price. On the sixth anniversary of the Lenfest Equity Agreement, any
issued and outstanding Series B Preferred Stock will be mandatorily converted into ETC common stock
at each set Conversion Price. The Series B Preferred Stock will vote with the ETC common stock on
an as converted basis. In connection with the execution of the Lenfest Equity Agreement, the
Company drew down $3 million by issuing 3,000 shares of Series B Preferred Stock with a Conversion
Price equal to $4.95 per share. Additionally, on July 31, 2006, the Company drew down an additional
$3 million by issuing 3,000 shares of Series B Preferred Stock at a conversion price equal to $6.68
per common share. The Lenfest Equity Agreement was terminated on July 31, 2007 upon execution of
the PNC Credit Agreement.
Preferred Stock
On August 23, 2007, ETC entered into the Series C Preferred Stock Purchase Agreement (the
Series C Purchase Agreement) with Lenfest, pursuant to which, among other things, ETC issued and
sold 3,300 shares of its newly-created class of Series C Cumulative Convertible Participating
Preferred Stock (the Series C Preferred Stock) to Lenfest for $3,300,000. The Series C
Preferred Stock is convertible into shares of ETCs common stock at a conversion price of $3.03 per
share based on the closing price for ETCs common stock on August 22, 2007, the trading day
immediately prior to the transaction. The Series C Preferred Stock is convertible into 1,089,108
shares of ETC common stock. The Series C Preferred Stock provides for a dividend equal to 10% per
annum. The Series C Preferred Stock is immediately convertible, at Lenfests request, into shares
of ETC common stock at a conversion price equal to $3.03 per share. On the fifth anniversary of
the Series C Purchase Agreement, any issued and outstanding Series C Preferred Stock will be
mandatorily converted into ETC common stock at $3.03 per share. The Series C Preferred Stock is
entitled to vote with the ETC common stock on an as converted basis.
20
I Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
In connection with Lenfests investment in the Series C Preferred Stock, ETC agreed to amend
the terms of ETCs Series B Cumulative Convertible Preferred Stock to (i) increase the annual
dividend rate to 10%, (ii) provide for immediate conversion into common stock at the option of
Lenfest, and (iii) to remove ETCs right to redeem the Series B Preferred Stock.
Lenfest has agreed to allow the Company to defer until maturity, or earlier if demanded, the
payment of accruing dividends on all his preferred stock. As a part of the Companys restatement
of previously filed financial reports, the Series B and Series C Preferred Stock were reclassified
from equity to mezzanine financing.
In connection with the restatement of the Companys previously issued financial statements for
the year ended February 23, 2007, the Company has reclassified the Series B and C Preferred Stock
(the instruments) from equity to mezzanine. The reclassification is due to the preferential
redemption feature of the instruments, which provides that a change in ownership would result in a
forced liquidation. A forced liquidation is considered outside the control of the Company.
Therefore, the preferential treatment upon an act outside the control of the Company precluded
equity treatment under the Securities and Exchange Commission Accounting Series Release (ASR) 268
and Topic D98. Prior years financial statements have been adjusted to reflect this change.
Due to the Companys accumulated deficit, all dividends accruing for the Series B and Series C
Preferred Stock have been recorded in the accompanying financial statements as a reduction in
additional paid-in capital.
Subordinated Convertible Debt
In connection with the financing provided by PNC on February 19, 2003, the Company entered
into a Convertible Note and Warrant Purchase Agreement with Lenfest, pursuant to which the Company
issued to Lenfest (i) a senior subordinated convertible promissory note in the original principal
amount of $10,000,000 and (ii) warrants to purchase 803,048 shares of the Companys common stock.
Upon the occurrence of certain events, the Company will be obligated to issue additional warrants
to Lenfest. The Subordinated Note accrues interest at the rate of 10% per annum (Lenfest reduced
the rate to 8% per annum for the period December 1, 2004 through November 30, 2007) and matures on
February 18, 2009. At the Companys option, the quarterly interest payments may be deferred and
added to the outstanding principal. The Subordinated Note entitles Lenfest to convert all or a
portion of the outstanding principal of, and accrued and unpaid interest on, the note into shares
of ETC common stock at a conversion price of $6.05 per share. The warrants may be exercised into
shares of ETC common stock at an exercise price equal to the lesser of $4.00 per share or
two-thirds of the average of the high and low sale prices of the ETC common stock for the 25
consecutive trading days immediately preceding the date of exercise.
The obligations of the Company to Lenfest under the Subordinated Note are secured by a second
lien on all of the assets of the Company, junior in rights to the lien in favor of PNC, including
all real property owned by the Company.
As part of the Companys subordinated debt agreement, at the end of each fiscal quarter and
fiscal year, the Company must meet three financial covenants: (a) a maximum Leverage Ratio (defined
as the ratio of total debt to annualized earnings before interest, taxes, depreciation and
amortization (EBITDA) of 4.03 times; (b) a minimum Fixed Charge Ratio (defined as the ratio of
the annualized sum of EBITDA minus expenditures for capital equipment and capitalized software to
annualized fixed charges (interest payments, income taxes paid, and any cash dividends) of 1.06
times, and (c) a minimum Tangible Net Worth Ratio, which adjusts quarterly, based on net income and
common stock proceeds.
At August 24, 2007, the Company failed to meet the covenants contained in the subordinated
debt agreement but has obtained a waiver of such violations from the subordinated lender. This
waiver applies to all periods through August 24, 2008. Except as specified, the waiver does not
constitute a modification or alteration of any other terms or conditions in the respective
agreements, or a release of any of the lenders rights or remedies, all of which are reserved, nor
does it release the Company or any guarantor from any of its duties, obligations, covenants or
agreements including the consequences of any event of default, except
as specified.
Subordinated Convertible Debt Discount
During fiscal 2003, the Company had recorded $2,609,000 in additional paid-in capital
representing an allocation of the proceeds from the convertible debt element of its financing with
PNC and Lenfest. This allocation represents the value assigned to the beneficial conversion option
of the promissory note executed in favor of Lenfest and the value of the associated warrants issued
in connection with the refinancing. Such values were derived pursuant to an independent appraisal
of these financial instruments obtained by the Company.
21
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
Unsecured Promissory Notes
In addition to the Subordinated convertible debt, on November 16, 2006, the Company executed
an Unsecured Promissory Note (the Lenfest Note) in favor of Lenfest in the aggregate principal
amount of $3,000,000. Pursuant to the terms of the Lenfest Note, ETC was entitled to borrow up to
$3,000,000, in increments of $1,000,000, prior to the maturity date of October 6, 2007. As of May
25, 2007, ETC owed $2,000,000 under the Lenfest Note. In June 2007, the Company drew down the
remaining $1,000,000 available under the Lenfest Note. On June 28, 2007, the Company executed and
borrowed under an additional Unsecured Promissory Note in favor of Lenfest in the aggregate
principal amount of $1,000,000. These promissory notes were repaid in connection with the Bank
Credit and Facility (see above).
The following table summarizes the subordinated convertible debt as of August 24, 2007 (unaudited):
|
|
|
|
|
|
|
(in thousands) |
|
Face Value |
|
$ |
10,000 |
|
Less value of conversion feature |
|
|
(1,400 |
) |
Less value of warrants |
|
|
(1,209 |
) |
|
|
|
|
|
|
|
7,391 |
|
Accretion 2008, through August 24, 2007 |
|
|
257 |
|
Accretion 2007 |
|
|
454 |
|
Accretion prior years |
|
|
985 |
|
|
|
|
|
Carrying value at August 24, 2007 |
|
$ |
9,087 |
|
|
|
|
|
Interest expense recorded for this note was $400,000 for the first half of both fiscal 2008
and 2007, respectively.
Fair Value
The carrying value of these financial instruments approximates their fair values at August 24,
2007.
Liquidity
On May 20, 2008, Lenfest agreed to fund all requests by ETC for funds to support its
operations through June 30, 2009, on terms and conditions to be mutually agreed upon by Lenfest and
ETC, provided that ETC may not request more than $10 million in the aggregate (the Lenfest Letter
Agreement). All agreements will be subject to any required approvals including the approval of
ETCs shareholders and in accordance with the rules and regulations of AMEX, if required. ETCs
objective will be to either replace or supplant any financing provided by Lenfest with third party
commitments on a best efforts basis.
On February 20, 2008, ETC received a proposal from an affiliate of Lenfest to purchase all of
the publicly traded shares of the common stock of the Company not owned by Lenfest at the time the
acquisition is consummated. The Board of Directors of the Company has formed a committee (the
Transaction Committee) comprised of independent directors to evaluate the proposal. The
Transaction Committee has engaged a financial advisor to assist the Transaction Committee in
evaluating the proposal. The Transaction Committee is evaluating the proposal and will make a
recommendation with respect to the proposal to the Companys Board of Directors.
We believe that existing cash balances at August 24, 2007, cash generated from operating
activities, future availability under the PNC Credit Agreement and the Lenfest Letter Agreement
will be adequate to meet our future obligations through at least June 30, 2009.
22
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
6. 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 weeks ended and as of August
24, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,862 |
|
|
$ |
2,385 |
|
|
$ |
4,247 |
|
Interest expense |
|
|
313 |
|
|
|
72 |
|
|
|
385 |
|
Depreciation and amortization |
|
|
120 |
|
|
|
334 |
|
|
|
454 |
|
Operating loss |
|
|
(830 |
) |
|
|
(1,346 |
) |
|
|
(2,176 |
) |
Income tax |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangibles |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Identifiable assets |
|
|
7,551 |
|
|
|
5,016 |
|
|
|
12,567 |
|
Expenditures for segment assets |
|
|
242 |
|
|
|
170 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended and as of August
25, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,985 |
|
|
$ |
1,344 |
|
|
$ |
4,329 |
|
Interest expense |
|
|
212 |
|
|
|
72 |
|
|
|
284 |
|
Depreciation and amortization |
|
|
289 |
|
|
|
168 |
|
|
|
457 |
|
Operating loss |
|
|
(509 |
) |
|
|
(1,202 |
) |
|
|
(1,711 |
) |
Income tax |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Goodwill and intangibles |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Identifiable assets |
|
|
18,551 |
|
|
|
6,672 |
|
|
|
25,223 |
|
Expenditures for segment assets |
|
|
55 |
|
|
|
20 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
Reconciliation to consolidated amounts |
|
2007 |
|
|
2006 |
|
Segment assets |
|
$ |
12,567 |
|
|
$ |
25,223 |
|
Corporate assets |
|
|
20,110 |
|
|
|
10,155 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
32,677 |
|
|
$ |
35,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss |
|
$ |
(2,176 |
) |
|
$ |
(1,711 |
) |
Interest expense |
|
|
386 |
|
|
|
284 |
|
Income tax expense |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss for segments |
|
|
(2,562 |
) |
|
|
(1,999 |
) |
|
|
|
|
|
|
|
|
|
Corporate home office expenses |
|
|
403 |
|
|
|
202 |
|
Other expenses, net |
|
|
11 |
|
|
|
(43 |
) |
Minority interest |
|
|
(6 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,970 |
) |
|
$ |
(2,148 |
) |
|
|
|
|
|
|
|
23
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
TSG |
|
CSG |
|
Total |
|
|
|
Twenty-six weeks ended and as of
August 24, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,131 |
|
|
$ |
5,463 |
|
|
$ |
8,594 |
|
Interest expense |
|
|
548 |
|
|
|
192 |
|
|
|
740 |
|
Depreciation and amortization |
|
|
257 |
|
|
|
649 |
|
|
|
906 |
|
Operating loss |
|
|
(1,793 |
) |
|
|
(5,492 |
) |
|
|
(7,285 |
) |
Income tax |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangibles |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Identifiable assets |
|
|
7,551 |
|
|
|
5,016 |
|
|
|
12,567 |
|
Expenditures for segment assets |
|
|
377 |
|
|
|
125 |
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended and as of
August 25, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
5,418 |
|
|
$ |
3,486 |
|
|
$ |
8,904 |
|
Interest expense |
|
|
418 |
|
|
|
148 |
|
|
|
566 |
|
Depreciation and amortization |
|
|
534 |
|
|
|
386 |
|
|
|
920 |
|
Operating loss |
|
|
(1,630 |
) |
|
|
(1,277 |
) |
|
|
(2,907 |
) |
Income tax |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Goodwill and intangibles |
|
|
455 |
|
|
|
|
|
|
|
455 |
|
Identifiable assets |
|
|
18,551 |
|
|
|
6,672 |
|
|
|
25,223 |
|
Expenditures for segment assets |
|
|
116 |
|
|
|
42 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
Reconciliation to consolidated amounts |
|
2007 |
|
|
2006 |
|
Segment assets |
|
$ |
12,567 |
|
|
$ |
25,223 |
|
Corporate assets |
|
|
20,110 |
|
|
|
10,155 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
32,677 |
|
|
$ |
35,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss |
|
$ |
(7,285 |
) |
|
$ |
(2,907 |
) |
Interest expense |
|
|
740 |
|
|
|
566 |
|
Income tax expense |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss for segments |
|
|
(8,025 |
) |
|
|
(3,482 |
) |
|
|
|
|
|
|
|
|
|
Corporate home office expenses |
|
|
641 |
|
|
|
707 |
|
Other expenses, net |
|
|
41 |
|
|
|
7 |
|
Minority interest |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,695 |
) |
|
$ |
(4,179 |
) |
|
|
|
|
|
|
|
Segment operating income consists of net sales less applicable costs and expenses relating to
these revenues. Included in the CSG segment operating losses are claims settlement costs of
$250,000 and $3,639,000 for the three and six month periods ended August 24, 2007, respectively.
These costs consist of an accounts receivable write-off and a reserve for a tentative payment to
reimburse the U.S. Navy for legal and other costs (See Note 1. Subsequent Events). Unallocated
general corporate expenses and other expenses such as letter of credit fees have been excluded from
the determination of the total profit/loss for segments. Corporate home office expenses are
primarily central administrative office expenses. Other expenses include banking and letter of
credit fees. Property, plant and equipment are not identified with specific business segments, as
these are common resources shared by all segments.
Approximately 21% of sales totaling $906,000 in the thirteen weeks ended August 24, 2007 were
made to one international customer in the TSG segment. Approximately 37% of sales totaling
$1,590,000 in the thirteen weeks ended August 25, 2006 were made to one international customer in
the TSG segment.
Approximately 12% of sales totaling $1,042,000 in the twenty-six weeks ended August 24, 2007
were made to one international customer in the TSG segment. Approximately 40% of sales totaling
$3,518,000 in the twenty-six weeks ended August 25, 2006 were made to one international customer in
the TSG segment and one domestic customer in the industrial segment.
Included in the segment information for the thirteen weeks ended August 24, 2007 are export
sales (which includes sales of the Companys foreign subsidiaries) of $1,768,000. Of this amount,
there are sales of 10% or more
24
Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
to or relating to governments or commercial accounts in Indonesia ($906,000). Sales to the U.S.
Government and its agencies were $79,000 for the period.
Included in the segment information for the thirteen weeks ended August 25, 2006 are export
sales (which includes sales of the Companys foreign subsidiaries) of $2,726,000. Of this amount,
there are sales of 10% or more to or relating to governments or commercial accounts in Japan
($1,590,000) and Nigeria ($303,000). Sales to the U.S. Government and its agencies were $152,000
for the period.
Included in the segment information for the twenty-six weeks ended August 24, 2007 are export
sales (which includes sales of the Companys foreign subsidiaries) of $3,105,000. Of this amount,
there are sales to or relating to commercial accounts in Indonesia of $1,042,000. Sales to the U.S.
Government and its agencies aggregated $648,000 for the period.
Included in the segment information for the twenty-six weeks ended August 25, 2006 are export
sales (which includes sales of the Companys foreign subsidiaries) of $5,270,000. Of this amount,
there are sales to or relating to commercial accounts in Japan of $2,512,000. Sales to the U.S.
Government and its agencies aggregated $418,000 for the period.
7. Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures related to derivative and hedging
activities, and thereby seeks to improve the transparency of financial reporting. Under SFAS 161,
entities are required to provide enhanced disclosures relating to a) how and why an entity uses
derivative instruments; b) how derivatives instruments and related hedge items are accounted for
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and
its related interpretations; and c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement shall be effective for the Company beginning
November 29, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS
161 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures its financial statements, the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. This statement shall be effective for the Company beginning November 29,
2008. The Company is currently evaluating the potential impact of the adoption of SFAS 141 on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of the consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also
established disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. This statement shall be effective for
the Company beginning November 29, 2008. The Company is currently evaluating the potential impact
of the adoption of SFAS 160 on its consolidated financial statements.
25
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
FORWARD-LOOKING STATEMENTS
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 the Companys current
expectations and projections about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about the Company 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 such 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) the proposed acquisition of the Company by H.F. Lenfest
(Lenfest), a member of ETCs Board of Directors and a significant shareholder, (ii) the potential
delisting of the Companys common stock from the American Stock Exchange as a result of the
Companys failure to comply with the AMEX listing standards, (iii) 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, (iv)
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, (v) statements of future economic performance,
(vi) statements of assumptions and other statements about the Company or its business, (vii)
statements made about the possible outcomes of litigation involving the Company, including our
outstanding litigation with Disney; (viii) statements regarding the Companys ability to obtain
financing to support its operations and other expenses, and (ix) 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 the Companys Annual Report on Form
10-K, 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.
References to fiscal second quarter 2008 are references to the 13-week period ended August 24,
2007. References to the first half of fiscal 2008 are references to the 26-week period ended August
24, 2007.
Overview
We are principally engaged in the design, manufacture and sale of software driven products and
services used to recreate and monitor the physiological effects of motion on humans and equipment
and to control, modify, simulate and measure environmental conditions. These products include
aircrew training systems (aeromedical, tactical combat and general), disaster management systems
and services, entertainment products, sterilizers (steam and gas), environmental testing products
and hyperbaric chambers and other products that involve similar manufacturing techniques and
engineering technologies. We operate in two primary business segments, the Training Services Group
(TSG) and the Control Systems Group (CSG).
The following factors had an adverse impact on our performance for the fiscal quarter ended
August 24, 2007:
|
|
|
continued unfavorable global economic and political conditions for our
aeromedical products |
|
|
|
|
the cost of development and marketing efforts for our Authentic Tactical
Fighting Systems (ATFS) |
|
|
|
|
spending to modify our main facility in Southampton, Pa., and to build equipment
for the National Aerospace Training and Research (NASTAR) Center |
|
|
|
|
claim settlement costs and expenses related to litigation |
Claims settlement costs associated with a proposed settlement with the U. S. Navy on a
contract for submarine rescue chambers consist of a write off of claims and accounts receivables
($89,000) and a reserve for a
26
payment to the Government of $3,300,000, both reflected in the first
quarter of fiscal 2008, and an additional payment reserve of $250,000 reflected in the second
quarter of fiscal 2008. (See Note 1 Subsequent Events in the accompanying Notes to the
Consolidated Financial Statements.)
|
|
|
continued development of software for our Advanced Disaster Management Scenario
product line; |
|
|
|
|
spending to investigate and evaluate the best way to offer disaster training
services; |
|
|
|
|
limited revenue generation coupled with high development costs in our low-end
entertainment products; |
|
|
|
|
higher costs of capital and amortization of deferred finance charges; |
|
|
|
|
cash flow; |
On July 31, 2007, we completed a refinancing of our indebtedness with PNC Bank, National
Association (PNC) in the aggregate amount of up to $15,000,000. This Credit Agreement is a
replacement of a credit facility originally entered into with PNC in February 2003.
Pursuant to the terms of a Credit Agreement, dated as of July 31, 2007, between us and PNC
(the Credit Agreement), we established a revolving line of credit with PNC in the maximum,
aggregate principal amount of $15,000,000 to be used for our working capital or other general
business purposes and for issuances of letters of credit. Pursuant to the terms of the Credit
Agreement, we executed a promissory note (the Note) in favor of PNC, in the maximum principal
amount of $15,000,000, to evidence our obligation to repay the line of credit. Amounts borrowed
under the Credit Agreement may be borrowed, repaid and reborrowed from time to time until June 30,
2009.
As a stipulation for Lenfests guarantee, we repaid $4,000,000 owed to Lenfest pursuant to
certain unsecured promissory notes. (See Note 5 Long-Term Obligations and Credit Arrangements in
the accompanying Notes to the Consolidated Financial Statements.)
On August 23, 2007, the Company entered into the Series C Preferred Stock Purchase Agreement
(the Series C Purchase Agreement) with Lenfest pursuant to which, among other things, ETC issued
and sold 3,300 shares of its newly-created class of Series C Cumulative Convertible Participating
Preferred Stock to Lenfest for $3,300,000. The proceeds from the issuance of the Series C Preferred
Stock are restricted solely for use to partially fund the tentative settlement with the US Navy.
(See Note 1 Subsequent Events in the accompanying Notes to the Consolidated Financial
Statements).
We have recently experienced renewed customer interest in some significant international
aeromedical proposals. Although these contracts may require significant bonds and letter of
credits, these proposals have favorable payment terms including down payments. Although it cannot
be predicted when and if any of these contracts might actually be awarded, they are another
potential source of operating funds.
Given our low beginning sales backlog and ongoing difficulty in obtaining new contracts, we
may need to obtain additional sources of capital in order to continue growing and operating our
business. Because we have established businesses in many markets, own significant fixed assets
including a building, and other business assets which can be used for security, we believe that we
will be able to locate such additional sources of capital, although there is no assuredness that we
will be successful in this endeavor.
Critical Accounting Policies
The discussion and analysis of the Companys financial condition and results of operation are
based upon the Companys 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 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 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. 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 29, 2008,
which is being filed contemporaneously with this report.
There have been no changes to our critical accounting policies since fiscal 2007 year-end. The
reader is referred to the Companys Annual Report on Form 10-K for the fiscal year ended February
29, 2008 in the section entitled Critical Accounting Policies under the Managements Discussion and Analysis of
Financial Condition and Results of Operations.
27
Results of Operations
Thirteen weeks ended August 24, 2007 compared to thirteen weeks ended August 25, 2006
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 |
|
|
|
|
August 24, |
|
August 25,
|
|
Variance |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(amounts in thousands except share and per share information) |
|
|
( ) = Unfavorable |
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
2,400 |
|
|
$ |
1,451 |
|
|
$ |
949 |
|
|
|
65.4 |
% |
US Government |
|
|
79 |
|
|
|
152 |
|
|
|
(73 |
) |
|
|
(48.0 |
) |
International |
|
|
1,768 |
|
|
|
2,726 |
|
|
|
(958 |
) |
|
|
(35.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
4,247 |
|
|
|
4,329 |
|
|
|
(82 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
543 |
|
|
|
494 |
|
|
|
49 |
|
|
|
9.9 |
|
Selling, general and administrative |
|
|
2,635 |
|
|
|
2,144 |
|
|
|
(491 |
) |
|
|
(22.9 |
) |
Claim settlement costs |
|
|
250 |
|
|
|
|
|
|
|
(250 |
) |
|
Na |
Research and development |
|
|
237 |
|
|
|
263 |
|
|
|
26 |
|
|
|
9.9 |
|
|
|
|
Operating loss |
|
|
(2,579 |
) |
|
|
(1,913 |
) |
|
|
(666 |
) |
|
|
(26.9 |
) |
Interest expense, net |
|
|
386 |
|
|
|
284 |
|
|
|
(102 |
) |
|
|
(35.9 |
) |
Other expense (income), net |
|
|
11 |
|
|
|
(43 |
) |
|
|
(54 |
) |
|
|
(125.6 |
) |
Income taxes |
|
|
0 |
|
|
|
4 |
|
|
|
4 |
|
|
|
100.0 |
|
Minority interest |
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(4 |
) |
|
|
(40.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
($2,970 |
) |
|
|
($2,148 |
) |
|
|
($822 |
) |
|
|
(38.3 |
)% |
Net loss per common share |
|
|
($0.34 |
) |
|
|
($0.24 |
) |
|
|
($0.10 |
) |
|
|
(41.7 |
)% |
|
|
|
Net Loss
The Company had a net loss of $2,970,000, or $0.34 per share (basic and diluted), during the
second quarter of fiscal 2008 compared to a net loss of $2,148,000, or $0.24 per share (basic and
diluted), for the second quarter of fiscal 2007, representing an increase in net loss of $822,000
or 38.3%. This increase in net loss was due primarily to an increase in the current period in
selling, general and administrative expense of $491,000 or 22.9% and a $250,000 charge related to a
tentative settlement of the Navy claim.
Sales
Sales for the second quarter of fiscal 2008 were $4,247,000 as compared to $4,329,000 for the
second quarter of fiscal 2007, a slight decrease of $82,000 or 1.9%. The sales decrease primarily
reflected an $934,000 or 38.7% decrease in international pilot training systems (PTS) sales
(including sales of our foreign subsidiaries), offset in part by an increase in domestic sterilizer
equipment sales (up $717,000 or 159.7%). The market for aeromedical pilot training equipment has
been adversely affected by worldwide budgetary pressures and the redirecting of training funds to
support military actions and basic support services.
Domestic Sales
Overall, domestic sales in the second quarter of fiscal 2008 were $2,400,000 as compared to
$1,451,000 in the second quarter of fiscal 2007, an increase of $949,000 or 65.4%, primarily
reflecting the aforementioned increase in sterilizer equipment. Domestic sales represented 56.5% of
the Companys total sales in the second quarter of fiscal 2008, up from 33.5% for the second
quarter of fiscal 2007. U.S. Government sales in the second quarter of fiscal 2008 were $79,000 as
compared to $152,000 in the second quarter of fiscal 2007 and represented 1.9% of total sales in
the second quarter of fiscal 2008 versus 3.5% for the second quarter of fiscal 2007.
28
International Sales
International sales for the second quarter of fiscal 2008 were $1,768,000 as compared to
$2,726,000 in the second quarter of fiscal 2007, a decrease of $958,000 or 35.1%, and represented
41.6% of total sales, as compared to 63.0% in the second quarter of fiscal 2007. The decrease
primarily reflected the aforementioned decrease in international PTS sales. PTS sales in the prior
period included significant POC revenue for a simulator for a customer in Japan and installation
and spare parts sales for an aero medical project in Africa. Throughout the Companys history, most
of the sales for PTS have been made to international customers. In the second quarter of fiscal
2008 are export sales (which includes sales of the Companys
foreign subsidiaries) of $1,768,000. Of this amount, there are sales of 10% or more to or relating to governments or commercial accounts
in Indonesia ($906,000) and Pakistan ($191,000). Included in the segment information for the
thirteen weeks ended August 25, 2006 are export sales (which includes sales of the Companys
foreign subsidiaries) of $2,726,000. Of this amount, there are sales of 10% or more to or relating
to governments or commercial accounts in Japan ($1,590,000) and Nigeria ($303,000).
Fluctuations in sales to international countries from year to year primarily reflect POC
revenue recognition on the level and stage of development and production on multi-year long-term
contracts.
Gross Profit
Gross profit for the second quarter of fiscal 2008 was $543,000 as compared to $494,000 in the
second quarter of fiscal 2007, an increase of $49,000 or 9.9%. This increase reflected an
improvement in gross profit rate as a percentage of sales of 12.8% compared to 11.4% last year.
Improved gross profit rates were evidenced in all product categories except parts and service.
Selling and Administrative Expenses
Selling and administrative expenses for the second quarter of fiscal 2008 were $2,635,000 as
compared to $2,144,000 in the second quarter of fiscal 2007, an increase of $491,000 or 22.9%. This
increase was primarily the result of higher legal costs and selling department salaries for
additional sales and sales support personnel.
Claim Settlement Costs
Claims settlement costs consist of an accrual for a payment of $250,000 to the U. S.
Government under a proposed settlement related to the Navy Submarine rescue contract. (See Note 1.
Subsequent Events in the accompanying Notes to the Consolidated Financial Statements.)
Research and Development Expenses
Research and development expenses, which are charged to operations as incurred, were $237,000
for the second quarter of fiscal 2008 as compared to $263,000 for the second quarter of fiscal
2007. 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 second quarter of fiscal 2008 was $386,000 as compared to $284,000
for the second quarter of fiscal 2007, representing an increase of $102,000 or 35.9%. The increase
reflected higher interest expense reflecting new borrowings and higher amortization expense related
to the beneficial feature of the Companys subordinated debt and the value assigned to warrants
which were issued with the subordinated debt as part of the Companys February 2003 Refinancing.
Other Income/Expense, Net
Other income/expense, net, was a net expense of $11,000 for the second quarter of fiscal 2008
versus a net expense of $43,000 for the second quarter of fiscal 2007, a decrease of $54,000. This
increase primarily reflected reduced foreign exchange loss in our Polish subsidiary and higher
miscellaneous income in ETC Corporate.
29
Results of Operations
Twenty-six weeks ended August 24, 2007 compared to twenty-six weeks ended August 25, 2006
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 |
|
|
|
Twenty-six weeks ended |
|
|
Variance |
|
|
|
August 24, |
|
|
August 25, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
(amounts in thousands except share and per share information) |
|
|
|
( ) = Unfavorable |
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
4,841 |
|
|
$ |
3,216 |
|
|
$ |
1,625 |
|
|
|
50.5 |
% |
US Government |
|
|
648 |
|
|
|
418 |
|
|
|
230 |
|
|
|
55.0 |
|
International |
|
|
3,105 |
|
|
|
5,270 |
|
|
|
(2,165 |
) |
|
|
(41.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
8,594 |
|
|
|
8,904 |
|
|
|
(310 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
1,438 |
|
|
|
1,508 |
|
|
|
(70 |
) |
|
|
(4.6 |
) |
Selling, general and administrative |
|
|
5,434 |
|
|
|
4,636 |
|
|
|
(798 |
) |
|
|
(17.2 |
) |
Claim settlement costs |
|
|
3,639 |
|
|
|
|
|
|
|
(3,639 |
) |
|
Na |
Research and development |
|
|
291 |
|
|
|
486 |
|
|
|
195 |
|
|
|
40.1 |
|
|
|
|
Operating loss |
|
|
(7,926 |
) |
|
|
(3,614 |
) |
|
|
(4,312 |
) |
|
|
(119.3 |
) |
Interest expense, net |
|
|
740 |
|
|
|
566 |
|
|
|
(174 |
) |
|
|
(30.7 |
) |
Other expense, net |
|
|
41 |
|
|
|
7 |
|
|
|
(34 |
) |
|
|
(485.7 |
) |
Income taxes |
|
|
0 |
|
|
|
9 |
|
|
|
9 |
|
|
|
100.0 |
|
Minority interest |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
(5 |
) |
|
|
(29.4 |
) |
|
|
|
|
Net loss |
|
|
($8,695 |
) |
|
|
($4,179 |
) |
|
|
($4,516 |
) |
|
|
(108.1 |
)% |
Net loss per common share |
|
|
($0.98 |
) |
|
|
($0.47 |
) |
|
|
($0.51 |
) |
|
|
(108.5 |
)% |
|
|
|
Net Loss
The Company had a net loss of $8,695,000, or $0.98 per share (basic and diluted), during the
first half of fiscal 2008 compared to a net loss of $4,179,000, or $0.47 per share (basic and
diluted), for the first half of fiscal 2007, representing an increase in net loss of $4,516,000.
This increase in net loss was due primarily to claims costs associated with a tentative settlement
with the U.S. Navy under a contract for submarine rescue chambers coupled with a decrease in sales,
corresponding gross profit, sales, general and administrative expenses and interest expense. Acting
as a partially offset was lower research and development expenses. (See Note 1. Subsequent Events
in the accompanying Notes to the Consolidated Financial Statements.)
Sales
Sales for the first half of fiscal 2008 were $8,594,000 as compared to $8,904,000 for the
first half of fiscal 2007, a decrease of $310,000 or 3.5%. The sales decrease primarily reflected a
significant decrease in international Pilot Training Systems sales (down $1,880,000, 47.2%),
international Hyperbaric sales (down $398,000, 99.7%) and domestic simulation sales (down $346,000,
91.5%). Acting as partial offsets were increases in most other domestic product areas (Sterilizers
up $948,000 or 71.2%; Environmental up $325,000 or 70.3% and Hyperbaric up $579,000 or 252.9%) and
U.S. government hyperbaric sales (reflecting the aforementioned tentative settlement of the U.S.
Navy claims). The market for aeromedical pilot training equipment has been adversely affected by
worldwide budgetary pressures and the redirecting of training funds to support military actions and
basic support services.
Domestic Sales
Overall, domestic sales in the first half of fiscal 2008 were $4,841,000 as compared to
$3,216,000 in the first half of fiscal 2007, an increase of $1,625,000 or 50.5%, reflecting the
aforementioned increases in most product areas. Domestic sales represented 56.3% of the Companys
total sales in the first half of fiscal 2008, up from 36.1% for the first half of fiscal 2007. U.S.
Government sales in the first half of fiscal 2008 were $648,000 as compared to
30
$418,000 in the first half of fiscal 2007 and represented 7.5% of total sales in the first
half of fiscal 2008 versus 4.7% for the first half of fiscal 2007.
International Sales
International sales for the first half of fiscal 2008 were $3,105,000 as compared to
$5,270,000 in the first half of fiscal 2007, a decrease of $2,165,000 or 41.1%, and represented
36.2% of total sales, as compared to 59.2% in the first half of fiscal 2007. Throughout the
Companys history, most of the sales for PTS have been made to international customers. During the
first half of fiscal 2008, there were sales to or relating to governments or commercial accounts in
Indonesia ($1,042,000) and Malaysia ($245,000). Included in the segment information for the first half
of fiscal 2007 are export sales of $5,270,000. Of this amount, there are sales to or relating to
governments or commercial accounts in Japan ($2,512,000) and Pakistan ($457,000). Fluctuations in
sales to international countries from year to year primarily reflect POC revenue recognition on the
level and stage of development and production on multi-year long-term contracts.
Gross Profit
Gross profit for the first half of fiscal 2008 was $1,438,000 as compared to $1,508,000 in the
first half of fiscal 2007, a decrease of $70,000 or 4.6%. This decrease primarily reflected the
aforementioned reduced sales level.
Selling and Administrative Expenses
Selling and administrative expenses for the first half of fiscal 2008 were $5,434,000 as
compared to $4,636,000 in the first half of fiscal 2007, an increase of $798,000 or 17.2%. The
increase reflected higher non-U.S. Government claim and legal costs and selling department salaries
for additional sales and sales support personnel.
Claim Settlement Costs
Claims settlement costs consist of a write off of contract accounts receivables of $89,000 and
a reserve for a tentative payment to the Government of $3,550,000. (See Note 1. Subsequent Events
in the accompanying Notes to the Consolidated Financial Statements.)
Research and Development Expenses
Research and development expenses, which are charged to operations as incurred, were $291,000,
which is net of monies due under a NASA grant of $232,000, for the first half of fiscal 2008 as
compared to $486,000 for the first half of fiscal 2007. 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 half of fiscal 2008 was $740,000 as compared to $566,000 for
the first half of fiscal 2007, representing an increase of $174,000 or 30.7%. The increase
reflected higher interest expense reflecting new borrowings and higher amortization expense related
to the beneficial feature of the Companys subordinated debt and the value assigned to warrants
which were issued with the subordinated debt as part of the Companys February 2003 Refinancing.
Other Income/Expense, Net
Other income/expense, net, was a net expense of $41,000 for the first half of fiscal 2008
versus a net expense of $7,000 for the first half of fiscal 2007, an increase of $34,000. This
increase primarily reflected increased foreign exchange loss in our Polish subsidiary and higher
miscellaneous expense in ETC Corporate.
Liquidity and Capital Resources
The Company has historically financed operations through a combination of cash generated from
operations, equity offerings, subordinated borrowings and bank debt.
On July 31, 2007, we completed a refinancing of our indebtedness with PNC in the aggregate
amount of up to $15,000,000. This refinancing is a replacement of a credit facility originally
entered into with PNC in February 2003.
Pursuant to the terms of a Credit Agreement with PNC (the Credit Agreement), ETC established
a revolving line of credit with PNC in the maximum, aggregate principal amount of $15,000,000 to be
used for ETCs
working capital or other general business purposes and for issuances of letters of credit.
Pursuant to the terms of the
31
Credit Agreement, ETC executed a Note in favor of PNC, in the maximum
principal amount of $15,000,000, to evidence ETCs obligation to repay the line of credit. Amounts
borrowed under the Credit Agreement may be borrowed, repaid and reborrowed from time to time until
June 30, 2009.
As a stipulation for Lenfests guarantee, we repaid $4,000,000 owed to Lenfest pursuant to
certain unsecured promissory notes. At August 24, 2007, the Company had $4,923,000 available under
the line of credit.
On August 23, 2007, the Company entered into the Series C Preferred Stock Purchase Agreement
(the Series C Purchase Agreement) with Lenfest pursuant to which, among other things, ETC issued
and sold 3,300 shares of its newly-created class of Series C Cumulative Convertible Participating
Preferred Stock to Lenfest for $3,300,000. The proceeds from the issuance of the Series C Preferred
Stock are restricted solely for use to partially fund the tentative settlement with the US Navy.
(See Note 1 Subsequent Events in the accompanying Notes to the Consolidated Financial
Statements).
Lenfest has agreed to allow the Company to defer until maturity, or earlier if demanded, the
payment of accruing dividends on all his preferred stock.
We believe that existing cash balances at August 24, 2007, cash generated from operating
activities, future availability under the Credit Agreement and/or other arrangements with other
lenders or investors will be adequate to meet our future obligations through at least August 25,
2008.
During the twenty-six weeks ended August 24, 2007, operating activities required $3,560,000 of
our cash versus $5,884,000 for the corresponding prior period. The operating activities in this
period includes a decrease in costs and estimated earnings in excess of billings on uncompleted
long-term contracts, a reduction in accounts receivable and increases in customer deposits and in
accrued expenses primarily related to the proposed claim settlement with the government offset in
part by an increase in the net loss. (See Note 1. Subsequent Events in the accompanying Notes to
the Consolidated Financial Statements.)
Our investing activities required $3,218,000 during the twenty-six weeks ended August 24,
2007, consisting primarily of the continued construction of our NASTAR center.
Our financing activities generated $4,998,000 during the twenty-six weeks ended August 24,
2007 primarily reflecting the borrowing of $5,000,000 under the PNC Line of Credit (See Note 5.
Long-Term Debt and Credit Obligations in the accompanying Notes to the Consolidated Financial
Statements.) Additionally, although the Company received $3,300,000 from the issuance to Lenfest of
the Series C Preferred Stock, these proceeds were restricted solely for use to partially fund the
tentative settlement with the U. S. Navy.
Subsequent Events
On May 20, 2008, Lenfest agreed to fund all requests by ETC for funds to support its
operations through June 30, 2009, on terms and conditions to be mutually agreed upon by Lenfest and
ETC, provided that ETC shall not request more than $10 million in the aggregate (the Lenfest
Letter Agreement). All agreements will be subject to any required approvals including the approval
of ETCs shareholders and in accordance with the rules and regulations of AMEX, if required. ETCs
objective will be to either replace or supplant any financing provided by Lenfest with third party
commitments on a best efforts basis.
On February 20, 2008, ETC received a proposal from an affiliate of Lenfest to purchase all of
the publicly traded shares of the common stock of the Company not owned by Lenfest at the time the
acquisition is consummated. The Board of Directors of the Company has formed a committee (the
Transaction Committee) comprised of independent directors to evaluate the proposal. The
Transaction Committee has engaged a financial advisor to assist the Transaction Committee in
evaluating the proposal. The Transaction Committee is evaluating the proposal and will make a
recommendation with respect to the proposal to the Companys Board of Directors.
Backlog
Our sales backlog at August 24, 2007 and February 23, 2007, for work to be performed and
revenue to be recognized under written agreements after such dates,
was $20,967,000 and
$13,564,000, respectively. In addition, our training, maintenance and upgrade contracts backlog at
August 24, 2007 and February 23, 2007, for work to be performed and revenue to be recognized after
such dates under written agreements was $604,000 and $1,276,000, respectively. Of the August 24,
2007 sales backlog, we have contracts totaling approximately $6,217,000 for environmental systems
including $4,162,000 for one domestic automotive customer and $2,193,000 for a customer in Japan.
Our order flow does not follow any seasonal pattern as we receive orders in each fiscal
quarter of our fiscal year.
32
Item 4. Controls and Procedures
(a) 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 not effective solely
due to the fact there was a material weakness in our internal control over financial reporting
(which is a subset of disclosure controls and procedures) as described below. 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.
(b) Managements Assessment of ETCs Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under
the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal over financial reporting based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control Integrated Framework, our management
concluded that our internal control over financial reporting was not effective as of August 24,
2007 and we do not expect to have all of our material weaknesses
corrected until August 29, 2008,
which is the end of the Companys second quarter of fiscal 2009,
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of the Companys annual or interim financial statements will not be prevented or detected in a
timely basis. Management identified the following material weaknesses in the Companys internal
control over financial reporting:
|
|
|
The Company did not file its Quarterly Reports on Form 10-Q for the quarters
ended May 23, 2007, August 24, 2007 and November 23, 2007 on a timely basis. |
|
|
|
|
Management had a lack of expertise in accounting for complex transactions. |
|
|
|
|
The Company lacked an independent review of the accounting records. |
|
|
|
|
Management exhibited a lack of training in compliance with government contracts. |
Remediation of Material Weaknesses
On December 12, 2007 the Company entered into an Administrative Agreement with the Department
of the Navy. This agreement includes a program of compliance reviews, audits and reports. As part
of the agreement, key personnel will receive training in acceptable government contracting
practices and procedures.
On February 22, 2008, the Company and the U.S. Navy finalized a settlement agreement which
concluded all open matters related to the Companys claim with the U.S. Navy.
On May 29, 2008 the Company filed contemporaneously with the Annual Report on Form 10-
K the previously unfilled Quarterly Reports on Form 10-Q for the fiscal quarters ended May
23, 2007, August 24, 2007 and November 23, 2007.
Additional highly skilled staff has been hired in the Companys accounting department.
Should additional control deficiencies or material weaknesses be
identified, they may have an adverse impact on our business and results of operations or our
ability to timely make required SEC filings in the future.
(c) Changes in Internal Control Over Financial Reporting.
33
Other than to address the material weaknesses discussed above, 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 to materially affect, our internal control over financial reporting.
34
PART II OTHER INFORMATION
Item 1. Legal Proceedings
U.S. Navy See Note 1 Subsequent Events in the accompanying Notes to the Condensed
Consolidated Financial Statements.
Walt Disney World Co.
In June 2003, Entertainment Technology Corporation (EnTCo), our wholly owned subsidiary,
filed suit against Walt Disney World Co. and other entities (Disney) in the United States
District Court for the Eastern District of Pennsylvania, alleging breach of contract for, among
other things, failure to pay all amounts due under a contract for the design and production of the
amusement park ride Mission: Space located in Disneys Epcot Center. In response, in August
2003, Disney filed counterclaims against both EnTCo and ETC (under a guarantee) for, among other
things, alleged failures in performance and design in the contract. Disney alleges damages ranging
from $36 million to $65 million plus punitive damages (collectively, the 2003 Litigation). In
December 2005, EnTCo filed a second lawsuit against Disney, alleging breach of confidentiality and
unfair trade practices (the 2005 Litigation). The 2003 Litigation has been stayed until the 2005
Litigation is ready for trial. We believe that we have valid defenses to the
counterclaims asserted by Disney in the 2003 Litigation. We are not able to predict
the outcome of the 2003 Litigation. On March 26, 2008, the Court granted summary judgment in favor
of Disney and against the Company and dismissed the Companys claim in the 2005 Litigation. On
April 7, 2008, the Company filed a motion for reconsideration asking the Court to reconsider its
March 2008 decision in the 2005 Litigation. The motion for reconsideration had not been decided as
of the filing date of this Quarterly Report on Form 10-Q.
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 matters, 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.
35
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
|
|
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. |
|
|
|
3.2
|
|
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 May 29, 2008 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. |
|
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31.2
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Certification dated May 29, 2008 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. |
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32
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Certification dated May 29, 2008 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. |
36
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)
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Date: May 29, 2008 |
By: |
/s/ William F. Mitchell
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William F. Mitchell |
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President and Chief
Executive Officer
(Principal Executive Officer) |
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Date: May 29, 2008 |
By: |
/s/ Duane Deaner
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Duane Deaner, |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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