corresp
March 30, 2011
Via EDGAR
Mr. Brian Cascio
Accounting Branch Chief
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549
|
Re: |
|
Environmental Tectonics Corporation
Form 10-K/A for the fiscal year ended February 26, 2010
Filed March 15, 2011
File No. 001-10655 |
Dear Mr. Cascio:
On behalf of Environmental Tectonics Corporation (ETC), this letter responds to the comments
of the Staff of the Division of Corporation Finance of the Securities and Exchange Commission
(SEC) contained in your letter dated March 17, 2011 (the Comment Letter) regarding the
above-referenced filing.
In the following response, ETC is also sometimes referred to as we or the Company. In
addition, the term our filing refers to ETCs Form 10-K/A for the fiscal year ended February 26,
2010, filed March 15, 2011.
Form 10-K/A for the fiscal year ended February 26, 2010
Note 2. Summary of Significant Accounting Policies, page 19
Earnings Per Common Share (restated), page 26
SEC Comment 1
|
1. |
|
We refer to your restated earnings per share calculation for 2009 on page 28. We see
in 2009 the company reported a net loss as opposed to net income. Please tell us how you
considered FASB ASC 260-10-45-68 in determining whether the convertible |
Mr. Brian Cascio
March 30, 2011
|
|
|
participating securities should share in the net loss when calculating the undistributed
earnings per share for that year. |
Company response:
ETC respectfully acknowledges the SECs Comment and agrees that FASB ASC
260-10-45-68 can be interpreted so as to require (or not require) convertible
participating securities to share in the net loss when calculating undistributed
earnings per share (EPS).
Per the referenced ASC, [a] convertible participating security should be included
in the computation of basic EPS in periods of net loss if, based on its contractual
terms, the convertible participating security has the contractual obligation to
share in the losses of the issuing entity on a basis that is objectively
determinable. The referenced ASC also provides that . . . an entity should not
automatically exclude a convertible participating security from the computation of
basic EPS if an entity has a net loss from continuing operations. Determination . .
.. shall be made on a period-by-period basis . . . .
The literature cites two conditions where the holder of a participating security
would have the contractual obligation to share in the losses:
|
1. |
|
The holder is obligated to fund the losses of the
issuing entity; or |
|
|
2. |
|
The contractual principal or mandatory redemption
amount of the participating security is reduced as a result of losses
incurred by the issuing entity. |
We relied on the second condition to determine that the losses should be allocated
to the preferred stock and we believe that significant qualitative and quantitative
evidence supports our position.
In addition to the quantitative and qualitative factors set forth in the Companys
January 18, 2011 response to SEC Comment 12, we considered the following factors in
deciding to allocate a portion of our net losses to the participating preferred
securities.
By way of background, we note that for a five-year period, beginning in fiscal 2004
(ended February 27, 2004) and continuing through fiscal 2009 (ended February 27,
2009), the Company experienced consecutive annual net operating losses. At a point
in time during this five-year period, in late-2006, our primary lender, PNC Bank
(PNC), cancelled our operating line of credit. Additionally, PNC required that
our international letter of credit
2
Mr. Brian Cascio
March 30, 2011
facility be personally guaranteed by H. F. Lenfest (Lenfest), a significant
investor, stockholder and member of ETCs Board of Directors.
In order to allow us to continue operations, Lenfest agreed to supply funding to the
Company in the form of unsecured notes and an equity line of credit. In exchange
for borrowings under the equity line, we issued to Lenfest shares of Series B and C
Preferred Stock. This Preferred Stock remained on ETCs balance sheet through the
end of fiscal 2009 (i.e., February 27, 2009).
In agreeing to loan ETC funds under the unsecured notes and the equity line of
credit, Lenfest effectively funded our operating losses prior to February 27, 2009.
Without his support, we doubt that the Company would have been able to obtain an
alternate source of funds and remain a going concern.
Because of ETCs extremely poor financial position prior to February 27, 2009, and
our lack of operating funds, we did not pay Lenfest interest on his outstanding
loans or dividends on his Series B and C Preferred Stock between September 2006 and
the end of fiscal 2009 (i.e., February 27, 2009). Instead, in July 2009, the unpaid
interest and dividends owed to Lenfest were, with his consent, exchanged for an
equivalent amount of Series E Preferred Stock.
We acknowledge that the accounting literature stipulates that, under the two class
method of earning per share presentation, specific contractual provisions are
required to allocate losses to a participating security. Although no such provisions
were included in the Series B and C Preferred Stock Agreements, the Company
allocated losses to the participating securities because the financial transactions
during this period were consistent with condition two above. That is, for all
practical purposes, Lenfest had to provide additional funds to the Company both to
assure that accruing interest and dividends would be paid (or settled in some
fashion) at some time in the future and to protect his principal investment. Had
Lenfest not provided ETC additional funds, it is highly likely both his original
principal and accrued interest and dividends would have settled for less than face
value.
- continued on the next page -
3
Mr. Brian Cascio
March 30, 2011
The following table provides a comparison between the EPS as stated in our filing
and the alternative interpretation which would not allocate any of the losses to the
convertible participating securities
|
|
|
|
|
|
|
|
|
|
|
Fiscal year |
|
|
Fiscal year |
|
|
|
ended February |
|
|
ended February |
|
|
|
27, 2009 |
|
|
27, 2009 (as |
|
|
|
(revised) |
|
|
stated) |
|
|
|
(amounts in thousands except |
|
|
|
share and per share information) |
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Net income attributable to ETC |
|
$ |
(1,974 |
) |
|
$ |
(1,974 |
) |
Less preferred stock dividends |
|
|
(927 |
) |
|
|
(927 |
) |
|
|
|
|
|
|
|
Basic earnings available to common shareholders |
|
$ |
(2,901 |
) |
|
$ |
(2,901 |
) |
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Common weighted average number of shares |
|
|
9,037,000 |
|
|
|
9,037,000 |
|
Participating preferred weighted average
number of common shares |
|
|
2,145,000 |
|
|
|
2,145,000 |
|
|
|
|
|
|
|
|
Total weighted average number of shares |
|
|
11,182,000 |
|
|
|
11,182,000 |
|
|
|
|
|
|
|
|
Distributed earnings/(loss) per share: |
|
|
|
|
|
|
|
|
Common |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Preferred |
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
Undistributed loss per share: |
|
|
|
|
|
|
|
|
Common |
|
$ |
(0.32 |
) |
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
Preferred |
|
$ |
|
|
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
(0.32 |
) |
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
4
Mr. Brian Cascio
March 30, 2011
We provide this revised presentation on a proforma basis in response to your
inquiry. However, for the reasons set forth above and the additional reasons below,
we believe that the impact of an alternative presentation of EPS for fiscal 2009 is
neither appropriate nor material:
|
|
|
Qualitatively, the difference in undistributed loss per share to common
stockholders is $0.11. However, the revised undistributed loss per share
is unchanged at $0.32 per share, as presented in our filing. |
|
|
|
|
Any second amended restatement of EPS would apply only to fiscal 2009.
This period (fiscal 2009) will not be reported in the current Form 10-K
(currently being prepared), which is due to be filed on May 26, 2011. |
|
|
|
|
The Series B and Series C Preferred Stock was cancelled on July 2, 2009.
Thus, these securities have no future impact and are not included in any
current EPS calculations. |
|
|
|
|
Since the fourth quarter of fiscal 2009, the Companys performance and
potential has increased dramatically, reporting continuous quarterly
profits. We believe that ETCs investors weigh this recent performance
over two fiscal years more significantly than the EPS in fiscal 2009
because we have received no investor inquiries have been received since the
Company filed, on March 15, 2011, an amended Form 10-K/A for the period
ended February 26, 2010 and amended Form 10-Q/As for the fiscal quarters
ended May 28, 2010 and August 27, 2010. |
For the above reasons, and under these circumstances, we do not believe that a second
amendment to the Companys Annual Report on Form 10-K for fiscal 2009 is required. After your
review of our response, please feel free to contact me directly at 215- 355-9100 (ext. 1203) should
additional information be required.
|
|
|
|
|
|
Sincerely,
|
|
|
/s/ Duane D. Deaner
|
|
|
Duane D. Deaner |
|
|
Chief Financial Officer
Environmental Tectonics Corporation |
|
|
5